How to Fund a Small Business

You may have an inspiring idea for entrepreneurship, which means you’ll need capital to get your small business up and running, expand your reach and grow. With funding, you can transform your startup into a thriving, successful business that provides quality products and services to your community. While you know you need cash flow, it can be challenging to pull together the information needed to discuss financing options with lenders. Let’s look at some potential funding resources for startups and how you can narrow down your options.

Small Business Funding Options

If you’re looking to fund or grow a small business, you might need help understanding where to start. Very few people have sufficient capital set aside, so they must get some extra help. Once you have cash, you can start running your business and working to turn a profit. Here are some potential choices that might be available to you.

Bootstrapping

Also called “self-funding,” bootstrapping is when you raise all the money you need to start your business, including your savings and any other assets you have available to leverage. Most people aren’t in a position where they can afford to self-fund — if this is the case for you, you’ll have to look for other sources of capital.

Friends and Family

While you might not be able to completely self-fund, you could ask loved ones to help you out. Asking people close to you if they are willing to loan you startup capital can alleviate your worries about doing it all on your own. However, this funding approach could become complicated if your business doesn’t work out or if you don’t lay out all necessary ownership and compensation expectations ahead of time. When you communicate well and your business succeeds, you could come out with a stronger bond.

Crowdfunding

The rise of online crowdfunding sites has made it more accessible than ever to raise money for a startup. While it’s less common than other funding methods, it’s quickly gaining popularity, thanks to increasing online accessibility. Crowdfunding involves asking people online to invest in your business so they can buy from you once it’s gotten off the ground. The communal aspect makes it more practical for small businesses. It’s easier for a local startup to raise a modest amount of money than it is to raise massive sums online.

Crowdfunding can be an excellent way to generate buzz and publicity, but it is time-consuming to promote your product and keep everyone updated on your funding status. You’ll have to do lots of online promotion across platforms to get enough visibility to cover your costs. It takes legwork to reach enough people for your business without other investments. Many crowdfunding efforts fail to meet their goals, but you can meet your goals if you are diligent about spreading the word about your mission online.

Remember, many crowdfunding sites will take a portion of the money you collect. Additionally, some only let you keep the money if you meet your goal, so always read the fine print.

Small Business Loan

If you can’t get the funding through the goodwill of loved ones and people online, you can discuss options for small business financing with your local economic development agency. There are several programs available for securing funding. Bank loans are another option, though they often have higher interest rates than economic development loans. Keep in mind, that while economic development loans have lower interest rates and fixed interest, they often have job creation and other requirements. Small business loans from economic development agencies typically provide about 50% of the total project cost requiring the business to get funding from other sources mentioned above. If you are located or looking to relocate to Cumberland County, reach out to CAEDC to discuss possible loan options.

Venture Capital

Venture capitalists will take equity in your business in exchange for their funding, which means you’ll have to give up some ownership and control to those investing. However, venture capital usually operates in high-growth areas and is more open to risk, so they might not be interested in your business if you don’t meet their preferences.

Federal and State Grants

You might be able to get a federal or state grant if your business helps the community in a specific way. Grants are available to encourage local improvement initiatives to better the community. Additionally, you might qualify for small business financing programs that could significantly help you out.

Factors to Consider

If you’re exploring funding for small business startup options, you’ll want to lay out your goals and specific targets to better pinpoint the right choice for you. Here are some factors you should consider when deciding how to raise the needed funds.

Your Goal

Where do you want your business to go? How large do you expect it to get, and where do you want to take it? Investors and lenders want to know your vision for the company and how you plan to succeed. Someone without set goals and concrete plans won’t be considered a reliable investment. To narrow down your best loan options, lay out all your current objectives, expenses and other figures to provide a detailed summary of what your business will do, what it needs to succeed and how you plan to get there.

Target Market

Who is your business targeting as customers? How are you planning to reach them to generate revenue? You also need to identify your forecasted market share, your market growth and your current market size. Investors and lenders need to know people want and need what you’re offering.

Control

How much oversight do you want to have over your business? If you want total control, avoid angel investors and venture capitalists, who will take some ownership in exchange for their funding. You’ll need to look at other loan options to keep 100% authority over your business. On the other hand, you might prefer to give up some control in exchange for reliable funding and experience.

Paying Back Funding

How do you plan to pay back your investment? If you have an informal arrangement with family and friends, what steps will you take to help them recoup their money? If you’re getting any loans or other financing, you need to let investors know the schedule for payment and what you’ll use as collateral. You need to establish yourself as a trustworthy person, and your funding source will want to see how you will secure their investment.

How Much You Need

Any small business owner looking for funding can only start asking for loans if you know how much money you need. Figure out any startup costs — including one-time and recurring expenses — plus your personal equity and monthly bills. Put all these figures together and work out the amount you need to secure to get off the ground. Only then can you start looking at loan options.

Build Your Small Business With CAEDC

Cumberland Area Economic Development Corporation partners with and invests in small businesses to better the Cumberland Valley region. We want to help you make a difference in our community and will work to generate growth opportunities for you.

If you’re interested in working with CAEDC and joining the Cumberland Valley Alliance, explore our investment levels information and fill out your pledge form online. Together, we can build a better community and foster success and innovation right at home.