If you’re a business owner looking for capital to use as growth funding, you’re faced with the questions of where to get the money from and what you’re willing to give up for it. There are many ways to find investors or other agencies who see promise in your business. Here are a mix of traditional and uncommon investment sources many small business owners choose when looking for capital.
Many wealthy people actively look for new investment opportunities to grow their wealth further. These individuals, known as “angel investors,” often form groups to share the assumed risk of investments while still paying a portion of their funds into many ventures. Angel investors that believe in your concept and business plan can make a huge difference for a small business. Angel investments are typically between $25,000 and $100,000, though they can (and do) go much higher.1
Crowdfunding is a relatively new way that business owners are acquiring capital. Websites like Kickstarter, Fundable, and IndieGoGo all provide entrepreneurs with platforms to present their business and get people excited to support its growth. Crowdfunding is usually broken down into two different types: rewards-based and equity-based. Rewards-based means collecting funding through the incentive of a predetermined reward, like a special version of your product or package of services. Equity-based crowdfunding entails trading a portion of your company’s equity for the funds. In 2014, over $16.2 billion was raised through crowdfunding, an increase of 167% increase from 2013. The industry itself continues to blossom, making crowdfunding a very real and useful fundraising opportunity for small businesses.2
Government-backed small business loans are offered by banks and credit unions who partner with the Small Business Administration (SBA). This connection means that in the event that a business owner defaults on their loan, the government will pay off the balance. The SBA offers a variety of loans to meet the needs of the businesses applying for them, from startup capital loans and funds for new equipment to assistance in the face of disasters and even long-term loans.3
Many businesses simply turn directly to financial institutions to obtain financing. Business loans can be time consuming to apply for, however, and many applications aren’t accepted. With secured business loans, the borrower offers some form of collateral that can be claimed by the lender if the borrower defaults on the loan. Collateral can be physical objects, like business computers, desks, and other equipment, or even personal property like a home.
Many small businesses don’t require a large amount of capital to accomplish their growth goals. This is where a credit line can come in handy for those looking to acquire funds quickly. Under a business line of credit the borrower is allowed access to a certain amount of money, but is only charged interest on what they borrow.
According to the Federal Reserve, 82% of small businesses who applied for a line of credit in 2015 received at least some of the credit they applied for.4
Federal, state, and local grants are often given to small businesses in the hopes that they will provide opportunities for local employment and thereby support their regional economy. However, only certain kinds of businesses will qualify for each grant. Business grants are most common for those companies engaged in scientific research or development education, or other community-supporting non-profits like a child care center. They can also be awarded based on some qualifying status of the business owner, like veteran-owned businesses.5
When you’re looking for investors or other ways to source capital, keep what’s most important for your business front-of-mind. Long-term plans and personal finances can both be put at risk depending on the funding source you choose. Turn to your trusted financial advisers, bankers, and accountants for their professional opinions before making any decisions on loans or other funding avenues.