How do small businesses get funding? Your questions answered

Growing, managing, and evolving your business is a learning curve – and funding your small business is no different. Finding the right funding program for you begins with understanding what’s out there. Next, it’s all about research; depending on your circumstances, the most appropriate business funding solution will vary. In this article, we run you through some small businesses funding FAQs, including when you should apply, how much to ask for, and a few different options available to you.


When should I start looking for small business funding?

Generally speaking, it should be pretty clear when your company needs a cash injection. Usually, it’ll be because you're having issues with capacity in financial or human resources. Therefore, it’s likely you’ll want to think about looking for funding when you need to:


• Hire new employees
• Open a new location
• Buy more inventory
• Buy new equipment
• Get working capital for every day costs like rent, payroll, etc.
• Refinance old debt that’s racking up interest


How much should I ask for?

When applying for a loan, it can be tempting to ask for as much as possible – however, it’s crucial to remember there’s no such thing as free money (unless of course, it’s a gift). Therefore it is essential you assess what you can afford. Equally, make sure you don’t ask for too little – you want your funding to have mileage. The best way to figure out how much to apply for is to ask yourself three key questions:


What do I want to use the money for? Here, it’s important to be specific: How many employees do you want to hire? How much will renovating a new location actually cost? How much do you need to spend on that marketing campaign?
What will the return on this activity be? For instance, how many more orders will you be able to meet with these two new employees?
What business expenses do I already have? In this calculation, it’s critical to include any existing interest on the debt.


The best way to make these forecasts is to constantly monitor your business performance. Make quarterly projections yourself or with the help of an accountant, estimating revenue and profit over a given timeframe. With these estimates, you can calculate how much funding you need and what you can afford.


What type of business funding should I go for?

In essence, there are two main types of business funding: debt financing and equity financing. Debt financing is where you fund your business by borrowing money. In this scenario, a lender – like a bank – gives you a loan. You pay them back over time with interest. For most small businesses, debt financing is the most straightforward option. In contrast, equity financing is where you raise money by selling a portion of your company to an investor. These investors could be venture capitalists, angel investors, or even a business partner.


Equity financing has its benefits, like mentorship and experience, but you have to be prepared to have a long-term relationship with the investor. Equally, there are big barriers to small business owners accessing venture capital. Generally, these investors tend to only do multi-million dollar deals with companies set for exponential growth. So, if your company is a tech startup with huge scaling potential, knock yourself out; however, for most small business owners, it’s likely to be more practical to keep control of your enterprise and opt for debt financing.


How do I know which type is right for me?

We’ve touched on this above, but it’s useful to drill down into this issue in more detail. If you’re trying to decide whether to go for debt financing or equity financing, you need to consider the following factors:


Your sector. Some industries fare better with equity financing than others. For instance, tech and financial companies often attract investors as they promise high turnover in short timescales with limited resources. Equally, if you’re in either of these industries, you’re more likely to have links to venture capital or angel investors.
How much money you need. Generally, venture capitalists deal in millions, not thousands. If you’re an established business owner who needs a little boost for everyday costs, debt financing is a more practical option.
Your timescale. If you need funding fast, go for debt financing. While bank loans can have long lead times, alternative lenders can get you funding in just 24 hours.
Control. This is crucial if you’re exploring equity financing. You need to think about how much control you’re willing to acquiesce for financial support. Depending on the portion of the company the investor owns, they can significantly influence day-to-day decisions.



What are my options with debt financing?

If you’re a small business owner, it’s likely that you’ll be exploring debt financing. However, there are many different types of debt financing out there. Below we break down the options.


Long-term loans

A traditional long-term loan is probably the kind of debt financing you’re most familiar with. Available from banks, long-term loans are best suited to owners of established businesses who want financing over a long period of time – typically more than two years. This funding will have predictable monthly repayments over a fixed term with a fixed interest rate. These loans are useful for expansion, working capital, and refinancing. However, as the rates tend to be quite low, you need to prove you have a strong credit history and robust business performance.


SBA loans

The SBA is a federal agency dedicated to helping entrepreneurs grow their businesses. These long-term loans are an extremely desirable type of business funding as they’re so affordable. However, it’s important to understand that the SBA itself doesn’t grant loans; they guarantee debt on behalf of other lenders. This means that the agency incentivizes lenders to approve funding by mitigating the risk. There are three main types of SBA-backed loan:


7(a) loans. The 7(a) loan program is the most common program, offering access to up to $5 million for working capital, equipment financing, real estate purchases, startup costs, and even debt refinancing.
Microloans. Microloans are loans under $50,000 for entrepreneurs who need a little boost to take their business to the next level. Small businesses struggle to get access to smaller loans from banks because these loan amounts aren’t that profitable, so the SBA meets this need.
504/CDC loans. The 504/CDC loan program is for financing real estate or other major fixed assets like large equipment or land redevelopment.


However, despite the affordability of these loans, you will be subject to the terms of individual SBA-approved lenders. This includes their interest rates and repayment terms, which are set within SBA boundaries. Usually, you’ll need an exemplary credit file, consistent revenue, and a compelling business plan.


Short-term loans

Generally speaking, the faster you need funding, the more expensive the loan. However, a short-term loan can offer a balance between affordable and fast small business funding. Short-term loans essentially work like expedited versions of their long-term cousins. You’ll receive a lump sum, which you’ll pay for a fixed term with fixed interest repayments. Usually, a short-term loan will be smaller but with higher interest rates. However, despite the cost, short-term loans tend to be more accessible than their long-term counterparts.


Business line of credit

A business line of credit is extremely versatile, as it essentially functions like a credit card. The lender will grant you a certain amount of capital that you can use when you see fit and you’ll only pay interest on what you borrow. In addition, when you pay back the funds, you’ll have access to the cash again – which is why they’re also known as revolving or rotating credit lines. A business line of credit is useful for companies that experience revenue fluctuations. Generally, the lender will allow you to use the money how you want, including for working capital, inventory purchases, or refinancing. However, a line of credit comes with a catch – you need to have an excellent credit history and they can be even more difficult to qualify for than a bank loan.


Equipment financing

Equipment leases or loans are a streamlined way to get funding for business infrastructure like computers, machinery, or vehicles. These funding programs are asset-based, which means that lenders collateralize the funding with the equipment. Whereas other types of funding depend more on your credit history and financials, equipment financing is more like car leasing; since the purchase backs the funds, the lender is more likely to approve it even if your credit history isn’t exactly glittering.


However, it is important to understand the difference between equipment leases and equipment loans. With a lease, you are effectively renting the equipment from the lender. At the end of the repayment term, you may have the option to purchase the equipment outright. In contrast, an equipment loan is more like a traditional loan with a payment schedule and interest.


Invoice Financing

If delayed payments from clients are causing cash flow issues, invoice financing can help get you back on track. Generally, invoice financing is most suitable for B2B companies that have capital tied up in unpaid invoices. Most invoice financing operates by injecting a cash advance of about 85% of the value of an invoice. Then, when your client pays the invoice, you’ll get the additional 15%, minus a fee. The handy thing about invoice financing is that the lender tends to be uninterested in your credit history – they care more about your clients’ repayment patterns.


Small business funding – the bottom line

There’s no hard and fast funding solution for every business. Like learning how to grow your company, sometimes finding the right program only happens through trial and error. Furthermore, many of these variables will rest with a number of factors that are entirely personal to you. However, on the bright side, there’s a world of options out there to help you grow your business. With proper preparation and thorough research, you can make sure you make a choice that meets your business needs.