Small business funding: How to fund your small business

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Whether you're working alone as you start your business or need to staff up, you're going to need money to help cover expenses until your operation is self-sustaining. Small business funding starts with a well-researched business plan that helps determine how much money you need to succeed. If you're raising capital, a business plan helps lenders and investors decide if the concept is viable and a low-risk investment.

There are a number of funding options available, but not all are appropriate for every business. Here's a breakdown of the most common.

Self-funding

Lendio reports that 77% of small business owners funded their business with personal savings in 2018. Also known as "bootstrapping," self-funding is often the only option for owners who don't qualify for loans.

Matthew Meier, the founder of Grand Canyon tour provider MaxTour, believes saving up is "the best way to finance your small business." While working full time, he picked up a part-time job for a year and banked that extra income for his new business. "This allowed us to start with zero debt," he says.

Customer funding

Why not let customers underwrite early expenses?

"I'm a big fan of pre-sales, meaning, selling something to a limited number of early adopter clients for a below-market price," says Stephanie Sims, author of Funding Your Business Without Selling Your Soul and founder of Finance-Ability.

Alternatively, she recommends asking clients to pre-pay more upfront in exchange for enticements that could include no charge for future upgrades or additional features or services that later clients won't receive.

Loans

Contrary to popular belief, bank loans can be hard to obtain for a fledgling business. "Most people don't understand that a bank will not provide loans without collateral to back it up in case of a default," adds Stephen Halasnik, managing partner of Financing Solutions.

Still, if you have a good personal credit score, have been in business for at least two or three years, and can demonstrate that you can pay back the loan, a commercial loan could be your growth solution. When Stephen Light, co-owner of Nolah Mattress, needed to borrow, he turned to online lending platform Lendio, saying, "We were gaining momentum in the market, but our cash flow wasn't enough for scaling."

LegalZoom’s trusted partner Bluevine offers a business line of credit up to $250,000. Eligibility: Owners with a personal FICO score of at least 625, who have been in business six months or longer, generate $10,000 or more in business revenue, and operate or incorporated their business in an eligible U.S. state. Other restrictions may apply.

Some business owners borrow from friends and family or even from their life insurance policy, while others turn to the equity in their home. "Borrowing against the home remains a fairly common option for entrepreneurs in need of startup capital, but losing your home is a serious risk if you can't make your loan payments," says Grant Ferguson, CEO of Unsecured Funding Source.

Crowdfunding

Crowdfunding, an increasingly popular option, allows you to use online platforms that include Kickstarter and Indiegogo to raise money through contributions from many individuals. It works best when your funding project is an innovative gadget, tool, or product.

It's also effective at helping you gauge the idea's potential in the marketplace. "Some ideas can go viral and achieve the funding target within days, and then you are good to go. Others may never reach $100 and stay dead in the water," says Stefan Smulders, founder, and CEO of social media automation tool Expandi.

Investors

Your idea might be big enough to attract investors. Whether they're "angel" investors—individuals using their own money—or venture capitalists investing pooled money from a professionally-managed fund, they will require equity in exchange for capital.

Venture capital allows you to avoid debt but it isn't for everyone. Companies that accept investor funds do so knowing that the end game is to take the company public or to sell it—since that's how investors recoup their investment.

"Investors make a bet that the money they invest in your company today will be returned with massive returns when you sell your company," Sims says.

Ask for advice

Struggling to understand what's right for your situation?

"If you're not sure where to start, set up an appointment for a free consultation with a nonprofit business organization, like a small business development center. They can walk you through your options, including investor funding and micro-lenders," says Anna Serio, Finder.com's certified commercial loan officer.

A lawyer or accountant with experience working with startups will also be able to help. Investing in professional guidance early on will help you make an informed small business funding decision with confidence.