You’ve worked out your business idea, but how do you move on to the next step and get your business off the ground?

Access to capital is cited over and over by small business owners as one of their biggest challenges. Understanding your options for funding is the first step toward securing it and in this article we’ll cover several options.

Before we dive in, though, it’s good to know that most small businesses piece together their funding from several different sources over time. So take stock of where you are and what you need for the near future knowing that as your business grows, there will be next steps you can take.

Microlenders

Microlenders are financial institutions—quite often nonprofit mission-based organizations—that have a mission for helping small businesses grow and develop by providing them with lending resources.

While microloans tend to be small, they are meaningful to the business, providing working capital to those who may not have access to other capital sources. And, because the loans are small and typically have low interest rates, they can be paid back in a short time frame without burdening the borrower.

Along with loans, microlending bodies often provide coaching and training to build a strong business foundation. This support, along with funding, can help a small business get off the ground and thrive.

If you need a boost to purchase a piece of equipment, inventory, or fund another need where a relatively small loan could make a big difference, consider a microloan.

Small Business Administration Loans

A well-known resource for raising business capital is the Small Business Administration (SBA). The SBA website has tons of information about SBA-backed loans.

The most common SBA loan is the 7A loan. These are loans that are used to acquire a business or to buy another business. For example, if a current franchisee is interested in buying more franchise locations a 7A loan is a potential option.

There are three types of these 7A loans.

• The standard 7A SBA loan that has a maximum of up to 5 million dollars.
• The small 7A loan, which is a maximum of 350,000 and is guaranteed by the SBA that has a guarantee of up to 85% of the loan up to $150,000 and up to 75% of the loan amount above $150,000.
• The Express 7A small business loan has a max of $350,000, but expedites the response from the SBA from two or three months to within 36 hours.

Additionally, a 504 SBA loan is a great option for  buying a commercial property.

Take a look at the SBA and see if you find funding solutions there.

Bank Credit & Financing

To understand financing options through a bank, we recommend speaking to a business relationship manager either at your bank or at one that focuses on businesses. It’s the role of the relationship manager to work with business owners to help them obtain direct bank financing as their business grows.

As a general rule, banks look for at least two years of business credit prior to giving a loan and you would most likely be asked to provide various pieces of information such as your business plan and the valuation details.  Each institution has a set of requirements which will be clearly documented and reviewed with you during the loan process. (Note that this is the reason we recommend forming a business entity, such as a Limited Liability Company or Corporation, from the start in order to begin to develop business credit.)

If qualification for bank financing for your business is denied, another option is obtaining a home equity line of credit (HEOC) from your bank.  A HEOC offers flexibility and is a good alternative if an entrepreneur wants to finance the business from the start. The business owner would obtain an HEOC and then loan the money to the business entity pursuant to a promissory note that gets paid back over time, or the business owner may use the HEOC as a straight capital investment into the business. Needless to say, if you elect to go this route it is critical to have legal assistance to assure that the terms of the loan or investment are clearly documented.

Outside Investors

In some cases businesses will go to outside investors, which could include private, equity, venture capital, angel investors, and/or crowdfunding. Each comes with pros and cons and we’ll cover these options in a subsequent article.

Resources

The SBA has Small Business Development Centers (SBDC) throughout the U.S. They are a tremendous resource for obtaining free information and speaking with counselors about what to take into consideration when starting and growing a business.

The knowledgeable team at Chase Law Group, P.C. is also an excellent resource for you.  We are available to answer legal questions and provide consultation for small businesses before they begin raising capital. Give us a call at (310) 545-7700 or contact us here and set up a consultation today.