How often do clients ask me for help getting funding for their business? At least once a week. And it’s my pleasure to help. Today, I’ll take you through the dos and don’ts of how to get funding for your small business.
Is it a comprehensive article? Of course not. But look at the ideas. Take notice of the risks, and think deeply about the opportunities. Today is an introduction to starting or maintaining a business, and that requires capital. Fortunately, there are options.
The most widely available sources for growth-stage businesses looking to raise capital are the following:
- Friends & Family Loans
- Business Loans
- Angel Investors
- New Partners, New Capital
When I say “growth-stage businesses,” I’m talking about those with annual revenues from $500,000 to $10 million, although if you’re a little bigger or smaller than that, you’ll find the information in this article useful.
Start talking about capitalization now
According to a study from the Federal Reserve, 85% of small businesses experienced financial difficulties in 2021.¹ That’s why it’s usually best to start looking for funding, i.e. capital, before you’ve opened your business or launched your product or service.
Nail down your financing first; then, you can ensure you’ve enough capital to cover your initial expenses.
However, there are always situations where businesses that are already up and running need to raise cash. So every business owner should have a sense of what’s available to them.
Self-funding, also called bootstrapping, involves using personal savings or assets to finance your business.
While this approach may be less common for businesses in the higher revenue range, it’s viable for entrepreneurs with existing personal wealth.
Self-funding offers benefits: You maintain complete control over the business and avoid debt obligations.
However, it does come with risks. You might need more savings. And at a certain point, you’ll need to find another source of capital; otherwise, you’ll limit your growth potential.
2. Friends & Family Loans
Turning to family members for financial support is a common option for startups and small businesses.
Family loans can offer more flexible repayment terms. Remember—it’s crucial to approach these transactions with clarity. Get everything in writing. That way, you’ll avoid potential conflicts.
3. Business Loans
Business loans offer capital as a lump sum or as a credit. You repay the money over time, plus interest and fees. Take a look at my article about choosing a business bank account for more information on banking options for small businesses.
a) Traditional Bank Loans
If you’ve got an established revenue and credit history, a traditional bank loan is a great option.
To secure a bank loan, you’ll need to present a detailed business plan. (I explain how to make a business plan in this article.) You’ll also need financial statements and collateral to guarantee the loan.
Interest rates and repayment terms can vary depending on the lender’s assessment of your business, so make sure you’re getting a good deal.
b) Consider US Small Business Administration (SBA) Loans
SBA loans come with more favorable terms, lower down payments, and a different set of requirements than loans from private banks. Here’s an overview of three different loans offered by the SBA.
- 7(a) Loan
- 504 Loan
The last one, micro-loans, are for up to $50,000 only, so I’ll focus on the other two, which are for up to $5 million. Both 7(a) and 504 loans have specific use cases that are important to remember.
c) Count on 7 (a) loans as a good source of working capital
The 7(a) is the SBA’s most common loan, and it’s best for general business financing. It could be right for you if you need money for working capital or assets, like inventory or supplies. Pretty simple.
d) Choose 504 loans for fixed assets, e.g., real estate and equipment
Whether your business manufactures products, conducts R&D, or offers a niche service that requires, for example, a specific type of real estate, 504 loans may be the best deal around today.
I’m talking about long-term financing at fixed rates. That makes 504 loans a straight, good deal. Because a 504’s definition of “fixed asset” is an asset that “significant,” the 504 loan is great option to get a large-scale fabrication, manufacturing, or B2B sales model up and running. (I keep coming back to this. The IRS genuinely wants to see innovation and risk-taking.)
Apply for 504 loans if your business requires one or more of the following physical assets:
- existing commercial buildings or other real estate;
- cquiring and augmenting a new facility; or
- investing in new machinery and equipment³.
Not sure about your 504 loan eligibility? Ask yourself if your loan will help your business in research, development, or manufacturing, or will be used to sell a product that requires investment in fixed assets.
SBA loans come with a list of requirements
To get a 7(a) or 504 loan, you must do the following:
- Qualify as a small business — check out their terms here
- Be a for-profit business
- Do business in the US
- Be creditworthy
- Exhaust financing options⁴
4. Angel Investors
Angel investors are high-net-worth individuals who provide capital to startups and growing businesses in exchange for ownership equity. Besides money, they can offer guidance and networking opportunities.
A quality business plan will also be necessary when meeting with angel investors. Ensure you’ve got a well-defined growth strategy — they’ll want to know how they can make back their money.
Tip for Investors: under-promise and over-deliver
You might be tempted to make bold claims when meeting with angel investors. I recommend being realistic in your expectations and communicating that to everyone you’re interested in working with. Remember, you’re building long-term relationships.
Ryan Cohen, who built Chewy.com from a small business into the largest e-commerce acquisition of all time, gave this advice: “I approached every subsequent round of financing in a similar way—by underpromising and overdelivering on sales.”²
5. New Partners, New Capital
Let’s approach the question of how to get funding for your business from another angle: Bringing in a new partner with access to capital.
You might be hesitant to bring in someone new, especially if you feel a strong emotional connection to your business and don’t want to lose control of it.
It’s a valid, serious, existential concern. Partners come with money, and money comes with strings attached. They may want a significant stake in the business as well as involvement in decision-making processes.
Consider the compatibility of your goals and values with potential partners before proceeding with this option.
Do you understand what you’re agreeing to?
Be careful about taking on a loan or investment with complex, possibly dangerous terms. It’s easy to get in over your head. The SBA’s conditions, in particular, can feel like a labyrinth.
A CPA will be able to advise you on the process. Check-in with an expert before you sign on the dotted line.
Don’t give up too much too soon
Unchecked, the consequences of acquiring funding can catch up to the promise of growth. For example, an angel investor typically asks for 20 or 25% of your business. Some investors ask for even more.⁵
As a CPA who’s been doing this for a while, here’s my rule: Try not to allow investors to own more than 45% of your company.
Find the right capital source for your business
Each funding source has pros and cons. You’ll have to assess your financial needs, risk tolerance, and growth plans before deciding on the best choice for your business.
I’m an experienced Fort Worth-based CPA that can advise you on funding and financing—whether you’re just beginning your journey or looking to expand beyond $10 million in revenue.
Schedule a discovery call with me today.
Jeremy A. Johnson, CPA
- Treece K. Small business loan statistics and trends 2023 [Internet]. Forbes. 2023 [cited 2023 Jul 28]. Available from: https://www.forbes.com/advisor/business-loans/small-business-loan-statistics/
- Cohen R. The founder of Chewy.com on finding the financing to achieve scale. Harvard business review. 2020 Jan 1; Available from: https://hbr.org/2020/01/the-founder-of-chewy-com-on-finding-the-financing-to-achieve-scale
- 504 loans. Sba.gov. 2023. Available from: https://www.sba.gov/funding-programs/loans/504-loans
- Loans. Sba.gov. 2023. Available from: https://www.sba.gov/funding-programs/loans
- Milano S. Can an angel investor help your business?. Small Business – Chron.com. Chron.com; 2012. Available from: https://smallbusiness.chron.com/can-angel-investor-business-58540.html