Ready to start your small business? You’re likely thinking of the physical space, equipment and employees you’ll need to be successful. And maybe you’re wondering how you’ll pay for it all. Financing your small business is one of the most important early steps you’ll take as an entrepreneur — it’s a daunting one, but you’re not alone. There are more than 32 million small businesses in the United States, making up 99.9 percent of all U.S. business, according to the Small Business Administration.
Five Types of Small Business Financing Options
1. Traditional Bank Loans
If you have a strong relationship with your personal bank, it might be your first thought for financing your small business. Small business lenders will look at your personal finances to determine credit-worthiness. To qualify for startup financing, you’ll want to make sure your personal credit score is in good shape. Check your credit reports for mistakes that could weigh down your score and dispute them with the credit bureaus, maintain a low credit card balance and stay on top of your bills.
2. Small Business Loans
The U.S. Small Business Administration (SBA) sets guidelines for small business loans made by its partnering lenders. These SBA-guaranteed loans range from micro (up to $50,000) to $5 million, and they often have restrictions on how the funds can be used. For example, SBA 504 loans are designed specifically for assets like real estate or equipment. Just know that it’s not always easy to obtain one of these loans; the SBA will take a close look at your business before providing you with a loan.
3. Angel Investors
Angel investors finance early stage or start-up companies in exchange for equity ownership interest. They are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by more traditional investments. This usually means quick growth! However, if you choose to go this route, you’ll share control of the company with your investor — which may come with helpful expertise or unwanted advice.
A micro-loan is often between $500 and $35,000. These loans are often so small that commercial banks don’t issue them. Instead, you’ll need to find a micro-lender. These lenders offer smaller loan sizes and often require less documentation than banks with more flexible underwriting criteria. Micro-lenders likely charge higher interest rates for loans than traditional banks.
Crowdfunding sites have become a staple for community members, educators and nonprofits in need. They can also help small businesses raise money for a relatively low cost. Keep in mind, crowdfunding sites aren’t built for long-term funding. Rather, they’re designed to facilitate the asking for and giving of a support for a single, one-off idea or project. Often, project-creators offer incentives for those who pledge, but some sites offer equity or act as a peer-to-peer lending platform.
Take the Next Step
No matter the size of your company, business insurance from Farm Bureau can help shelter your small business from the uncertainties of life. Your local Farm Bureau agent will spend time getting to know you and your business operation to help customize your coverage.