4 Ways to Fund Your Business

by Alex Feldman

June 3, 2017

Sixty-one percent of employer firms faced financing challenges over the past year, according to the latest Federal Reserve data. Only 69 percent of small businesses are able to secure adequate financing, the National Small Business Association reports. One reason business often don’t obtain financing is because they look in the wrong places and go about it the wrong ways. Here’s a look at four major sources of business financing, along with some tips on how to use them effectively.

Personal Financial Resources

While most entrepreneurs turn to loans first, personal financial resources can be far easier to tap. Fifty-eight percent of business owners are successful at financing their business through personal credit cards, according to Pepperdine University data cited by Charles Green in the Coleman Report. Seventy-one percent are successful at obtaining loans from family and friends.

Using personal credit cards effectively for financing requires maintaining a good credit rating. To keep your credit rating high, pay your bills on time and pay down high balances, advises myFICO. Keep balances within 20 percent of your limits. A credit builder loan can help you establish good payment history.

If you request a loan from a family member or friend, treat it professionally. Create a written contract outlining repayment terms and schedules.

Business Financing Resources

You can also fund your business through business financing resources. One way to do this is starting a part-time business that doesn’t require a large up-front investment in order to start generating profit. For instance, becoming an independent business owner for Amway lets you start earning income immediately from sales you generate. You can save your earnings to finance your other business ventures, or to pay down credit card balances so you can qualify for credit card financing.

Another relatively easy way to secure financing is through a trade credit arrangement, which is where you negotiate a deal with your suppliers to purchase goods or services on account instead of paying up-front. This allows you extra time to make sales before you pay expenses, alleviating cash-flow issues. As long as you are able to meet the terms of your agreement, this type of financing is easy to maintain.

Another option is to apply for a business credit card. Your business doesn’t necessarily need to be generating income yet for you to qualify for a business credit card. However, you do generally need a good personal credit rating to apply, so make sure you have a good credit rating before applying. Also, check the terms of your agreement before signing, because penalties for late payments can be substantially higher than for personal credit cards.

Loans

Business loans are easier to get after you’ve been in business for at least a year, advises NerdWallet, which provides an online tool to help you select your best loan option. Seek a bank loan if you have good credit and collateral and aren’t pressed for time. If you’re short on collateral and time, try an online lender. If you’re too small for a traditional loan, try a microlender. No matter which loan option you pursue, you’ll need to assemble your company’s financials, including income statements, balance sheets and cash-flow statements projected out three to five years.

Another option is a revenue-based loan, where you agree to split a revenue percentage with your investor in return for financing. You’ll find it easiest to secure this type of loan if you can demonstrate sales revenue.

Investors

Attracting investors will require you to put together the same paperwork as you would for a loan. Attracting traditional venture capital can be challenging for startups, but if you can demonstrate your business is scalable, you may be able to attract an angel investor. The Angel Capital Association provides an online directory of angel investors, along with a knowledge center offering tips and resources for attracting investors.

Another investing option is crowdfunding. You stand the best chance of securing crowdfunding if you can offer some type of financial incentive to investors, although depending on the nature of your business, you may also be able to appeal to other motives, such as a shared passion or a desire to contribute to the greater good. Different crowdfunding sites specialize in funding different types of companies. Eric Markowitz provides a step-by-step guide for finding the right crowdfunding source.