Accounting for more than 99 percent of all U.S. businesses, according to the Census Bureau, small businesses are the backbone of the country’s economy and job market. They create many products and services used on a daily basis by consumers and other companies. If you’re an entrepreneur who has a small business, you understand the need secure funding to cover the costs for payroll, inventory, insurance and other essential business-related expenses.
1. Personal Funds
The most common way that entrepreneurs fund their small businesses is by using their own money or personal credit. Known as bootstrapping, more than three-quarters of all U.S. small businesses get funded this way, according to a survey conducted by Wells Fargo and Gallup. If you have money, assets or credit in your own name, you can use it to fund your small business. Some entrepreneurs use their money in their savings accounts, for example, while others use their credit cards.
Talk with a certified tax professional if you are considering financing your small business using personals funds. The Internal Revenue Service (IRS) has specific requirements that business owners must follow when borrowing personal funds for business usage, and failure to comply with these rules could leave you with a hefty penalty come tax season.
2. Accounts Receivables Financing
Offered by private funding companies, accounts receivables financing is a type of funding that’s secured using a business’s accounts receivables as collateral. Businesses use invoices that customers haven’t paid, known as accounts receivables, to secure the funding.
Accounts receivables financing have an advance rate of 70 percent to 95 percent. If your business is waiting to collect $150,000 from its customers, for example, you can use those unpaid invoices to secure funding of about $112,500 to $135,000. Like other types of asset based funding, accounts receivable financing can be more accessible than unsecured loans because they require collateral—your unpaid invoices.
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay their invoices, Universal Funding can help your growing company. Call us at 855.213.1453 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
3. Business Loan
Another common source of funding for small businesses is a business loan. That involves borrowing money from a financial institution under your business’s name with the promise that you’ll pay it back according to the loan’s terms and conditions. Banks and private lenders both offer business loans. Banks typically have more stringent requirements for approval, but they also offer lower interest rates than private lenders.
Business loans can be secured or unsecured:
- Secured loans are obtained using assets such as real estate property, inventory or investments as collateral. That provides the lender with recourse if the borrower defaults on the loan, as ownership of the collateral transfers to the lender. Secured loans are typically easier to obtain and have lower interest rates than unsecured loans.
- Unsecured loans do not require the use of collateral. Because of this, lenders scrutinize prospective borrowers’ credit to determine their ability to pay back the loan. Unsecured loans typically are granted to established companies with a proven history of revenue.
Assuming your small business is less than a year old, you may only be able to get a secured loan. And while using assets as collateral may sound daunting, it’s perfectly fine as long as you pay back the loan.
4. Hard Money Loan
Hard money loans have become an increasingly common way to fund small businesses in recent years. A hard money loan is a short-term loan offered by a private lender that’s secured using real property as collateral. If you own property — a home, condo, rental properties, etc. — you can use it to secure a hard money loan. Hard money lenders care less about your credit score and more about the value of your property. Therefore, you can obtain a hard money loan with bad or no credit; you only need valuable property to use as collateral.
Hard money loans have a high loan-to-value (LTV) of about 70 percent, meaning if you use property valued at $300,000 to secure a hard money loan, you can expect the loan to be about $210,000. However, they also have interest rates of about 10 percent to 18 percent, so these loans typically cover short-term expenses that result in immediate revenue for your business. If you operate a house “flipping” business, for instance, you can use a hard money loan to cover the cost of a foreclosure property so that you can quickly restore and resell it for a profit.
5. Angel Investors
If you’re willing to give up equity — or debt that you can convert to equity — perhaps you should partner with an angel investor. Also known as a business angel, an angel investor is a person who invests in an early-stage business, typically in exchange for equity. With this type of financing, you must give up a certain percentage of your business’s ownership to the angel investor. The good news is that you aren’t required to pay it back. With angel investors, you essentially sell the investor stock shares of your business. The angel investor is hoping that your business will succeed, thereby driving up its stock value and generating a positive return for him or her.
Thanks to the internet, many small businesses are now funding using crowdfunding websites like Kickstarter.com, GoFundMe.com, IndieGoGo.com and RocketHub.com. Crowdfunding lives up to its namesake by tapping into a large pool of investors to launch a new business. On most of the leading crowdfunding websites, including Kickstarter.com, you don’t pay back “investors.” Instead, you agree to produce and deliver the product for which their donation covers. You are only required to pay them back if you fail to provide the promised product.
You’ll need an innovative new business or product, as well as a top-notch marketing strategy, to succeed with crowdfunding. However, thousands of entrepreneurs have funded their business using this method. One study found that more than $34 billion was raised using crowdfunding in 2015, a number that has most certainly increased in the years since.
7. Venture Capital
Venture capital is a form of equity-based funding in which a large investment group, known as a venture capital firm, invests in businesses with high growth potential. Like angel investors, venture capital firms typically ask for equity or convertible debt in exchange for their investment.
There are a few critical differences between angel investors and venture capital firms, however. Angel investors, for example, usually offer smaller amounts, perhaps putting $100,000 into a business, while a venture capital firm may invest millions of dollars. Venture capital firms also prefer companies that are already generating revenue, whereas angel investors are more willing to take risks on startup businesses with little or no income.
Lack of capital shouldn’t prevent you from pursuing your dream of owning a small business. Consider the seven funding methods listed here to get the capital infusion you need to fuel your company’s growth.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.