How to Fund a small Business

How to Fund a small Business

Depending on the stage your business is at you maybe looking for different types and amounts of small business funding. Obviously, some of these options to fund a small business may be better for your situation than others. Some will be a good fit for your business. Others may be impossible, impractical, you may not meet the criteria, have the guarantees or you simply don’t wish to give away that much of your business unless you have to. Traditionally women struggle to get bank funding for start-up businesses. The reasons why we’ll get into another day but for now we’re also going to quickly look at alternative funding sources that mean you never have to look your bank manager in the eye, as they once again, say “No”.


Personal Savings

This is usually the most straightforward. You don’t have to give away any of your equity, take on a partner or relinquish control and whilst you risk your hard-earned money, you don’t actually go into debt. Before you run off to empty your piggy bank there are a few other considerations to take into account including what percentage of your personal savings you should use? Generally speaking, it’s a good idea to keep some reserves to tide you over just in case. You may not immediately be able to pull money out of your business so if you’re giving up the day job to go all in you’ll need something to keep a roof over your head and food on the table. It’s not only good for you to have some extra in reserve it’s also good to have some earmarked for your business. However good your start up idea and however well you manage it there’s almost inevitably some kind of cash requirement in the first couple of years to either deal with an unforeseen problem or to fund an unexpected opportunity. Either way keeping something in reserve will serve you well. Another consideration is that it’s easier to borrow from a position of strength than begging family and friends when you’re down to your last few cents. Another unfortunate side effect of using your personal savings is the strain it may put on your family and personal life with the risk that if your business were to fail, you could lose a lot more than just the business.

If you do decide to use your personal savings to fund your small business, ensure that the expenses are kept separate. You can’t be dipping in and out, at best you’ll quickly lose track of what you’re actually spending, and your financial control will be out of the window. At worse you’ll be breaking the law.


Credit Cards

The obvious advantage of using your credit cards is you get unsecured money without having to worry about providing collateral or giving away equity. The danger is, it’s easier to spend too much than having the hard cash to account for. Depending on your location, economy etc the cost of borrowing money on a credit card can often be very expensive although introductory offers for a new business credit card can sometimes lower this almost to nothing, for a limited time.

Another big downside of having a business credit card is the blurring of distinction between personal and business finances. Ensure you don’t get lazy about which expenses go where. They are not interchangeable either from the perspective of your family or in many cases the law.

Be aware that credit card debt, even if you are managing it responsibly, can also have a negative impact on your credit rating, again this depends on where you are located, and the criteria used for assessment. 


Friends and Family funding your business

It’s no surprise to learn that borrowing money from friends and family is one of the most common ways small businesses get their start. It’s often available when obtaining funding from a bank or finding an investor isn’t a possibility. Walmart, Go-Pro, Dyson, Motown Records were all reportedly started with a family loan.  Funding your small business with a friends and family loan often gives you better and more flexible lending terms. For instance, they may not require any collateral, they won’t charge you an application fee, the interest rates they ask might be lower (or zero!), and they may even let you skip a couple of payments if needed.

There are however some guidelines you might want to consider so you don’t end up in court against your best friends or celebrating Christmas alone, disinherited and without your family. First and foremost, get really clear as to whether this is a loan or a gift and get it in writing.  If you are borrowing money be clear about how much you need and why. Be transparent. Treat the arrangement as you would any other loan agreement. Show your budget and cash flow so they can see how and when you intend to spend the loan. Set an agreed schedule for when the repayments start the and the amounts that will be repaid at each of the scheduled repayment points. Then stick to them.

Explain the risks of their loan and take them through realistic best- and worst-case scenarios. Make sure it is very clear that once they’ve lent you the money, they can’t get it back quickly. You’ll only be able to pay it back according to the schedule you agree, even if an emergency situation arises for them.


Retirement Accounts

This is your money, and as with using your own personal savings to fund a small business you don’t give your business or control away before you’ve even started. The risks however are higher and it’s not without costs. There are usually penalties and tax implications if you cash your retirement in early. An alternative depending on where you are based is rather than cash in – borrow. Some plans allow you to borrow a certain percentage of the value without penalty, provided you pay the money back within the stipulated time. A hidden advantage is that this type of founder-to-business loan is more likely to be repaid by the business, rather than the typical founder-to-business loans that gets forgotten or forgiven.


Business Loans / Lines Of Credit

Whilst women often struggle to get a bank loan that doesn’t mean it’s impossible. The scenarios vary wildly between countries and it’s certainly worth a try. Before you apply to your bank, compare several different lenders with similar options based on both annual percentage rate (total borrowing cost) and the terms offered. The APR is important as low APR is usually the best advantage banks have to offer so make sure you shop around so you know if you’re getting a good deal. That way you have something to bargain with your own bank and know up front just how helpful they really are being. Of the loans you qualify for, it usually makes sense to go with the lowest APR, as long as you are able to handle the loan’s regular payments month in month out. In some circumstances, you’ll find there may be other hidden costs of doing business. Some banks will ask you to purchase products such as insurances that you’re required to take out as part of the approval process or additional signing on fees. Penalties may exist if you want to repay your loan in larger amounts or in-full at a date earlier than agreed in the terms and conditions.

Generally small businesses have a hard time getting bank approved loans due to their lower sales, and limited cash reserves. Often founders don’t have great personal credit and may not have properties (real estate) against which to secure the loan. If you do ultimately get approved, it can take a long time to come through. Nevertheless, that low APR can make it very worthwhile jumping through all the hoops. Overall banks work best when you don’t need cash fast, you can provide plenty of collateral and/or you have great existing credit rating.

Once your business is established and the bank can see the levels of business that you’re regularly putting through your business accounts getting access to a reasonably priced loan to finance a new employees’ laptop or other expenditure becomes gradually easier. Just remember to factor the repayments into your cash flows and financial forecasts.



Like any other financing crowdfunding comes its own set of cautionary tales but as an alternative form of raising capital it’s here to stay. Not only does crowdfunding raise capital and awareness about your brand, it’s also an opportunity to engage customers. There are four basic types of crowdfunding reward, equity, lending and donation.

Reward based crowdfunding gives backers a reward in exchange for their funding. This could be anything form a T-Shirt with your logo and a handwritten thank you note to a prototype edition of your product for their investment. Most have a tier system of rewards based on the amount of investment. The bigger the investment the better the reward and usually more of the smaller rewards available and maybe only one or two of the top rewards. What your business is willing to provide and your capacity to provide the rewards are fundamental.

The growth in online giving currently exceeds the growth of online shopping. Charities have caught onto the power of donation crowdfunding and are joining the social causes, art projects and not-for-profits raising money and awareness through donation-based crowdfunding. Individuals donate money to a cause, charity or person without expecting anything in return other than the satisfaction of having contributed towards something they feel is worthwhile.

With reward and donation, based crowdfunding, when you pledge funds you do not own any part of that company but with the introduction of equity crowdfunding that changes. In exchange for relatively small amounts of cash each of the investors does get a proportionate slice of equity in the business. Unlike venture capitalist funding which was only open for investors who were accredited high-net worth individuals equity crowdfunding opens the doors to public investors to participate in high risk, early stage ventures with the (often phantom) promise of potential high returns. It’s important as an investor to do due diligence as you would any other investment, plus diligence on the platform itself to safeguard yourself against potential fraud.

Lending or debt-based crowdfunding can be a good way to secure a loan. Simply put it matches people who want to borrow money with those who will lend it. Individuals invest in a debt security issued by the company, such as a bond. Debt crowdfunding is suitable for established businesses and, in a few instances, start-ups. This one’s complicated and as with equity-based funding, you should be sure to investigate it very carefully ideally with the help of a qualified financial adviser who has specific experience in this arena. You will most likely still need to pass a credit check and once the lending agreement is in place the platform will usually update an entry on your credit report as with most other loan. Missing payments or defaulting on the loan will affect your credit rating just as doing so to a bank loan would.

With all these crowdfunding options it’s important to note that whilst you won’t be making a traditional pitch to a venture capitalist or bank manager that doesn’t mean you won’t be making a pitch. Far from it in crowdfunding your pitch is everything. Your story must be compelling enough to entice your audience and stand out from all the other projects and campaigns. A compelling pitch with details and captivating pictures and videos attract more attention than those that don’t.

Whilst many people still relate crowdfunding to small creative projects, in reality it’s long outgrown the stereotype and there are a growing number of more traditional or high growth businesses raising funds this way. Probably one of the biggest crowdfunding success stories is Oculas Rift. In 2012 the four founders raised $2.4m on Kickstarter from an initial goal of $250k. In March 2014 Oculus Rift was sold to Facebook for $2.3bn.

There are a number of different crowdfunding platforms. Some of the more established providers include Indiegogo, Pozible, Crowd Supply and Kickstarter. SeedInvest is specifically an equity crowdfunding platform that connects start-ups with investors. For more mature businesses or larger amounts there are other platforms such as Fundable and We Funder.



Microloans are as the name suggests usually smaller loans often aimed at entrepreneurs who are underserved by traditional lenders such as women and minorities. Microloans are predominantly short-term loans with a low-interest rate that can be used to start or more often grow a business.

Non-profit organizations and individuals or a collective of individuals are the most common microlenders rather than banks or established credit lenders. Microlenders help develop businesses for small entrepreneurs who would otherwise not be able to borrow and unlike traditional lenders along with the financial aid, many microlenders also offer free business mentorship, training, and assistance.

The idea of microloans started as aid efforts in third-world countries and as such revolutionised funding availability to those lacking a credit history or collateral. With extremely high repayment rates, the idea has spread widely and helped dispel negative myths about lending for small businesses within poorer communities throughout the world. An individuals’ circumstances and background doesn’t affect the quality of their business idea or their ability to successfully lead and grow their business with support from microloan small business funding.

For lenders microloans probably won’t be the right channel for those looking solely to turn a profit on their investment. For most lenders providing the funding for microloans the motivation is to provide financial help to people who would not otherwise gain access to affordable business capital.  Whilst repayments are unusually high, such loans are not without risk and in most cases are not backed up with guarantees or collateral.



There are lots of grants available but those that are a direct fit for your business may be relatively few and far between – which doesn’t mean you can’t try. Be careful there are a lot of companies out there offering access to information about Grants. If you are going to pay for that information just be aware that it is all publicly available information for anyone with access to a phone and an internet connection.

Each grant will have its own set of requirements and criteria for applying. Many of the grants available are very location specific depending available exclusively to those based within the geographic scope of authority offering the grant. Others may apply only to rural areas some grants may be sector based. Many have direct use clauses that mean they are available only for a certain part of your business, such as making eco-friendly changes, upgrading manufacturing equipment, innovation projects in science and tech or employment costs for new staff. Some grants are set up to match the investment you make up to a certain amount, in which case be sure you have that funding available.

Applying for government funded grants can involve plenty of forms to complete and sometimes multiple phases with complex processes each scheme is different so it really depends on the individual grant and the awarding body.

Due to the specificity and complexity, be sure you really do meet the general terms and conditions before wasting too much time and resource on an application process you have no possible chance of achieving. Read the grant objectives to understand why the grant is being awarded and what it aims to achieve. Then talk to the body awarding the grant to get a realistic assessment of your chances. In most cases there will be a requirement to present a professional business plan and if you’re an existing business details of your financials. Don’t hesitate too long, grants are usually time limited as there’s a limited amount of money available and as the pot dwindles so the competition increases.  Make sure you focus your application on the how the grant will be used and if it’s equipment, less on the equipment itself and more on how that equipment will be used to benefit your business and your stakeholders.


Venture Capital

Venture Capital funding for small businesses provides private equity financing mainly to early stage, and emerging companies. They are usually interested in funding companies who have demonstrated high-growth or are deemed to have high-growth potential. Their investment is usually in exchange for an equity share so if you decide to take this route, be prepared to give away a percentage of your business. This isn’t necessarily all bad as along with funding often comes significant input of expertise and other resources.

Most venture capital funding is looking for a relatively return on their investment and remember most venture capitalists will only structure deals if they are in their favour. There’s a big difference on the likelihood of getting VC interest depending on the industry you are in. Healthcare, software, biotechnology and artificial intelligence are currently amongst the biggest recipients but that can change based on where the best returns are perceived to be. If your start-up is a pet groomer or a pizza restaurant, you’re unlikely to get VC backing. How to pitch for VC funding is almost an industry in itself and we’ll look at this aspect in more detail in future posts.


Purchase Order Funding

Purchase order funding is only available to a fairly narrow range of businesses. It’s most often applicable when a business is experiencing high growth. A large order or orders are received from a new or existing customer, but your company has neither the materials in stock nor the cash to acquire them. To avoid the risk of losing both the order, and potentially the customer, you can apply for a purchase order loan. This will provide you with funds specifically and only for your direct supplier expenses in order to tide you over between receiving the order and payment. Purchase order funding mainly applies to wholesalers and distributors who resell, and who are supplying and delivering finished good products to commercial customers. If you meet the narrow criteria purchase order funding can be a good way to allow you to grow past your current financial limitations.


Seller or Owner Financing

Buying an existing small business will typically involve greater upfront cost, with appropriate due diligence it can also involve less risk than starting and funding a small business from scratch. One way to potentially get the best of both worlds is to purchase an existing business in stages.

It’s very common to pay for a small business in instalments enabling you to become a small business owner even if you don’t have the entire purchase price.  As the buyer, you agree a price for the business with the seller. Then you reach a legal agreement committing to how payment will be made. The advantages for the buyer are obvious. For the seller it opens the sale of their business up to a much larger market of buyers. The buyer is more likely to agree to the full asking price with the negotiations focusing on the payment terms. The spread of payment over a period of time may also have significant tax advantages to the seller.

In most seller financing agreements, the buyer makes an initial upfront payment, in cash, for a portion of the sale price usually between 30% and 80%. The seller effectively extends a loan to the buyer for the remaining balance of the sale price to be paid with interest over a set term.

In this arrangement the current business owner (seller) is acting as a lender and will perform due diligence to assess the creditworthiness of a buyer much as any other lender would. A seller will check credit reports, ask for financial documentation, a business to plan to assess if the ideas you have for the business are likely to enable the payment schedule to be met and other key information to satisfy themselves that as buyer you are likely to be able to meet the repayment terms.

The details of such legal agreements can vary enormously and would need to be drawn up professionally. If you are considering to fund a small business with a seller financing agreement be aware that most contain terms that give sellers the right to take back control of the business within a specified period (usually 60 or 90 days) if the buyer continuously misses payments.

As the seller has a vested interest in the buyers’ success to ensure their own payment it is common to see them agree to stay on in an advisory or consulting capacity for the duration of the repayment period.

Before going through with the purchase, as buyer you also need to do due diligence and thoroughly vet the business. Look at a list of liabilities, employees, assets and customers. Pay particular attention to the financials, from bank statements and cash flow to tax returns and P&L reports for the last 3 to 5 years. You’ll also want to, inspect the physical property, check equipment and other assets are accounted for and in working order. Take care to review all current contracts and leases. Ensure all inventory records are correct including a check of sales figures against stock movements to verify how much stock there is of the fast moving and profitable items and to ensure you aren’t paying for large quantities of excess or obsolete stock. Your potential new business is also made up of its people so check current employee contracts.




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