How to Finance a Small Business

Finance is critical for a small business. Without sufficient start-up capital, you won’t be able to pay for your business license, purchase equipment, or hire employees. Fortunately, financing is available from many different sources. You might obtain a loan from a bank or dip into your savings. You could also use a credit card or seek funding from investors.

Method 1

Method 1 of 4:

Obtaining a Loan

1
Draft a business plan. Most banks will want to see a business plan. A business plan is an outline of your goals and your plans for achieving those goals.^{[1]XExpert SourceHelena Ronis
Business AdvisorExpert Interview. 23 January 2019.} Your plan should include the following sections:^{[2]XResearch source}
- Executive summary. Summarize your business and describe what you want—funding.
- Description of your business. Describe your industry briefly and identify any new developments that will impact your business.
- Marketing. Analyze your market and identify a target market.
- Competitive analysis. Identify the strengths and weaknesses of your competitors, as well as strategies that will give you an edge.^{[3]XExpert SourceHelena Ronis
  Business AdvisorExpert Interview. 23 January 2019.}
- Development plan. If you are developing a product, then describe the different stages and where you are in its development. Also create a development budget.
- Management and Operations. Identify the key players in the business, such as the management team, and their tasks in the business.
- Expected Use of Funds. Include a description of how the financing will be used. For example, you should detail your organizational expenses, working capital, equipment purchases, etc.
- Financial analysis. You should include financial statements for the business. Also include a funding request. Remember not to underestimate the amount you need. If you do, you could face problems later if you run out of money. Be careful also not to overestimate.^{[4]XResearch source} If you need to buy equipment or inventory, then get estimates from suppliers.
2
Identify the type of loan you need. There are different types of loans to choose from including a revolving, term, or installment based on need and use. If you need more than one type of loan, then apply for more than one.^{[5]XExpert SourceHelena Ronis
Business AdvisorExpert Interview. 23 January 2019.} Consider the following types:^{[6]XResearch source}
- Working-capital loans. Working capital loans are typically AR and Inventory loans that remain in place according to contract terms, even the amounts of each loan varies according to the level of AR and inventory.
- Equipment loans. You can get a loan to purchase or lease office equipment as well as vehicles, machinery, or tools.
- Lines of credit. These loans are like working-capital loans and provide money for daily cash flow. They can have short repayment periods, such as 90 days. With a line of credit, you only use the money you need and pay interest only on that amount. For example, a bank might extend a $10,000 line of credit. You can borrow $2,500 and pay interest on that amount.
3
Identify collateral to secure the loan. Collateral provides the bank with protection in case you default. If you can’t make payment, then the bank can foreclose on the assets used as collateral. If you don’t have business assets, then you’ll need to pledge personal assets, like your home.^{[7]XResearch source}
- If you are seeking a loan to buy equipment, then you’ll probably secure the loan with the equipment itself. The same is true of real estate.
4
Gather the typical documents necessary for a loan. You will need to provide the bank with extensive financial information. Talk to the lending officer ahead of time so that you can gather what you need. Depending on the bank, you may need to provide the following:^{[8]XResearch source}
- Copy of your business plan.
- Information about accounts receivable and accounts payable. Provide sales and payment history as well as credit references.
- Audited or reviewed financial statements.
- Insurance information.
- Your personal financial information. The bank wants to see information about your personal assets and liabilities, including investments. If your business has multiple owners, then personal financial information will be required from all significant owners.
- Prior tax returns.
5
Analyze your credit score. Getting a business loan isn’t easy. To be competitive, you will need a credit score over 650 and preferably above 700.^{[9]XResearch source} The bank will also need to look at your credit history and confirm that you are current on loans.
- Before applying, you should pull your credit report and check for errors. Remember to look at both your personal credit history and your business’ credit history.
- If you find errors, then you can contact the Credit Reporting Agency whose report contains the error. Generally, you can report errors online or by writing a letter. The agency should report back within 45 to 60 days.
6
Apply for the loan. Gather all required information and go to the bank to apply. Before signing on the dotted line, you should review the loan’s details, such as repayment period and interest rate. If the details are acceptable, then complete the loan package application.^{[10]XResearch source}
- You generally will need to wait two to four weeks before hearing back from the bank.
7
Contact banks about loans. You can approach any commercial bank and ask for a business loan. However, you might be more successful if you approach local banks or credit unions. As a small business, you probably aren’t a good risk for large national banks unless you have a history of successful businesses behind you.
- Contact banks or credit unions you do business with. Tell them you are looking for a business loan and ask them about the process.
- You can also ask other small business owners where they have gone for loans. If they recommend a bank, then call the bank and ask to speak to a lending officer.
8
Consider an SBA loan. The U.S. Small Business Administration guarantees loans for small businesses. You still apply for the loan with a bank, but the SBA will guarantee to pay the loan should you default. You will need to provide much of the same information for an SBA loan as you would for a regular bank loan.
- The SBA offers several kinds of loans. For example, their 7(a) Loan Program provides flexible loans you can use for working capital or to purchase equipment or land. Loan terms are 10 years for working capital and 25 years for fixed assets. You can borrow a maximum of $5 million.^{[11]XResearch source}
- Microloans are also available. The average microloan is for $13,000 but can be up to $50,000. You can use these loans for anything except paying current debts or buying real estate.
- There are also special loans for disaster recovery and for purchasing real estate and equipment.
9
Research online loans. Online lending is a booming industry. You can apply for your loan quickly and receive a decision within a few days.^{[12]XResearch source} Online loans are ideal if you didn’t qualify for an SBA loan or if you need the money fast. You can find lenders by searching the net. Some of the more popular lenders include Kabbage, Prosper, Fundbox, and BlueVine.
- To obtain a loan, your business probably must be at least a year old. Younger businesses should use other financing options.
- Thoroughly research the interest rates, fees, and the repayment period. For example, some online lenders can charge up to 29.99% annual interest and have repayment periods from 12 weeks to several years.^{[13]XResearch source}
- Also be on the lookout for scams. A legitimate lender should have an address and phone number listed on their website. Also avoid loans that require advance insurance fees before you get your loan.^{[14]XResearch source}
It might feel awkward to ask people you know for a loan. However, you can agree to pay interest and draw up a loan agreement, which makes it official. Sometimes borrowing from friends or family is the best option, especially if you can’t qualify for bank loans.^{[15]XExpert SourceHelena Ronis
Business AdvisorExpert Interview. 23 January 2019.}
11
Make timely loan payments. Whichever loan you obtain, you should make timely payments. Pay the amount due in full before the deadline so that you don’t accrue late charges or penalties.
- Consult with a business or bankruptcy attorney if you think your business is going under. They can advise you about your options.
- Don’t keep piling up debt. When you find yourself taking out new debt to cover old debt, you should consider shutting down the business.
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Method 2

Method 2 of 4:

Tapping Your Personal Finances

1
Use your savings. You might want to avoid using your savings, especially if you have earmarked that money for your retirement or your children’s educational expenses. However, you can always pay that money back into your savings account later.
- If you use personal savings, then remember not to clear out your savings accounts. Instead, try to leave at least $5,000 in the bank.^{[16]XResearch source}
2
Consider a home equity loan. You can typically withdraw equity by taking out a loan in either a lump sum or as a line of credit. Generally, you can get 75-80% of the home’s value minus your mortgage amount. If your home is worth $300,000, then you might qualify for $240,000. Deduct the $150,000 remaining on your mortgage, and you qualify for a $90,000 home equity loan.^{[17]XResearch source}
- Home equity loans are not risk free. For example, the bank could foreclose on your home if you default.
- Tapping home equity is usually better in a strong economy with low interest rates.^{[18]XResearch source} If the economy is tanking, then your home is probably declining in value.
3
Withdraw money from a retirement account. You can fund a business by setting up a C corporation with a retirement plan. You then roll over money from your retirement account into the corporation’s retirement plan.^{[19]XResearch source}
- Because this is legally complicated, you will need to hire someone experienced in this type of transaction. If done properly, you won’t owe a prepayment penalty for rolling over your retirement account.
- Consider the risks. If your business fails, then your retirement account has disappeared. You won’t be getting that money back.
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Method 3

Method 3 of 4:

Using a Credit Card

1
Obtain a business credit card. You should get a card in your business’ name. Shop around and compare interest rates, annual fees, and reward programs. Also ask what business products the issuer might provide. You will need to provide the following information when you apply:^{[20]XResearch source}
- your business name
- years you have been in business
- name you want on the card
- business contact information
- number of employees
- line of business and occupation
- annual revenue
2
Sign a personal guarantee. Although the credit card will be in your business name, the issuer will probably ask you to sign a personal guarantee. With this guarantee, you legally promise to pay the debts if your business can’t.
- Think carefully before using a credit card to finance your business. If you can’t make payments, then your personal credit score will suffer.^{[21]XResearch source}
3
Use the card exclusively for business purchases. You should keep personal and business purchases separate. This will make it easier to keep track of business purchases. You also could get into legal trouble if you commingle your personal and business assets.
- You might have a corporation or an LLC. As a result, you are shielded from personal liability for your business debts. However, when you mingle personal and business funds, a judge could find that your business is a sham entity. Consequently, you will become responsible for your business debts.^{[22]XResearch source}
You can basically get an interest-free loan if you take out a second credit card. Often, issuers will offer a low introductory rate, such as 0% interest for 12-18 months. You can then transfer the balance from your first card to your second card. You will have a year or more to pay off the debt.^{[23]XResearch source}
5
Make timely payments. You should always pay your balance in full at the end of the interest-free period. By paying off your balance, you save money and build your credit score.
- If you do accrue interest, then you can deduct the interest on your taxes at the end of the year.^{[24]XResearch source}
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Method 4

Method 4 of 4:

Finding Other Sources of Revenue

1
Research angel investors. These investors invest in startup or newer companies. As a return, they get a 20-25% increase on their investment.^{[25]XResearch source} Angel investors usually invest around $600,000.
- Angel investing is ideal for a young (but not new) business that needs a cash infusion to develop a new product or service.^{[26]XResearch source}
- You can find angel investing groups by visiting the Angel Capital Association website, which maintains a list of angel group members. You can also check out MicroVentures and AngelList.
2
Find venture capitalists. Venture capital is a lot like angel investors. These firms invest in high-risk businesses that have growth potential.^{[27]XResearch source} You can find venture capital firms online. They tend to invest in only certain types of businesses, so thoroughly research them before initiating contact.
- The website thefunded.com contains information on different venture capital firms. The information is provided by entrepreneurs who worked with them.
3
Consider crowdfunding. The websites Indiegogo and Kickstarter allow you to seek small investments from many people online.^{[28]XResearch source} You create a profile and then set a fundraising goal, such as $5,000 over 30 days.
- Crowdfunding is not appropriate as a long-term funding method. Instead, it’s good for one-off type business ventures, like funding the creation of a movie or music video.^{[29]XResearch source}
4
Research grant opportunities. Government grants are available for certain industries, such as those focused on research or science. The SBA runs several grants programs, such as the following:^{[30]XResearch source}
- Small Business Innovation Research (SBIR). To qualify for this grant, your business cannot have more than 500 employees, and it must be majority owned by one or more individuals who are U.S. citizens or resident aliens.^{[31]XResearch source}
- Small Business Technology Transfer (STTR). This program has similar requirements to SBIR. However, the company receiving the grant partners with a non-profit research institution, which receives at least 30% of the funds.
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Expert Q&A

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Question
How is a startup company financed?
Helena Ronis
Business Advisor
Helena Ronis is Co-founder and CEO of AllFactors, a unified web analytics software to drive company's marketing and business growth. She has worked in product and marketing in the tech industry for over 8 years, and studied Digital Marketing & Analytics at the MIT Sloan School of Management Executive Program.
Helena Ronis
Business Advisor
Expert Answer
Seed money for a startup company can come from a variety of places. The most common way to finance a startup is to get a business loan or a credit line. You can also reach out to friends and family members to see if they're interested in investing, or team up with a wealthy business partner to split the company. Cold calling and emailing investors is another option, but this isn't always an efficient option. Lastly, you can always use your personal savings.
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