The financing resources that are available to a business will vary quite a bit depending on the nature of the business, length of time in business, profitability and other factors. The most common sources of funding include:
Self funding. More than half of all startups are funded largely by the founder’s savings and credit. Many businesses rely solely on personal contributions. This reflects the reality that many financing options are simply out of reach for many businesses, leading owners to tap their savings or retirement accounts to meet business expenses.
Bank loans. Many businesses approach banks for business loans, and large businesses find it relatively easy to borrow from banks. It’s a different story for small businesses: According to recent reports, big banks approve fewer than one out of five small business loan applications. Smaller banks are somewhat friendlier to small business, but even community banks still reject nearly half of all small business loan applications.
SBA-backed loans. The Small Business Administration does not loan money directly to businesses. Instead, the SBA guarantees a portion of the loans made by approved lenders.
Alternative lending. As conventional bank lending to small business has declined, the void has been filled to a large degree by alternative funding options. These options typically base lending decision on the cash flow and overall strength of the business rather than the owners’ personal credit score. Examples of alternative financing include revenue-based financing, merchant cash advance and invoice factoring.
Business credit card. Many small businesses rely on credit cards to finance business expenses. In practical terms, a small business credit card is simply a personal credit card with the business name on it; approval and credit limits are based on the business owner’ personal credit history.
Venture capital. Venture capitalists are usually wealthy investors, investment banks or groups that pool funds specifically for the purpose of investing in businesses with the potential for high returns. In addition to an ownership stake, VC funding usually gives the new investors a say in major decisions that affect the business. Availability of venture capital is limited; with Forbes.com reporting that less than one-tenth of one percent of all startups receive VC funding.
Angel investors. Angel investors are typically wealthy entrepreneurs who make early-stage investments in startup companies that have a special appeal to the investor. Angel investors may make equity investments in which they provide funding in return for ownership in the company, or they may structure their investment as debt. It is not easy for most businesses to access potential angel investors.
Other funding sources. Additional funding sources for small businesses include friends and family, grants, crowd-funding and peer-to-peer lending.
