Small Business Funding: How to Fund Your Small Business

Small business funding can be daunting for the uninitiated. Get up to speed with this overview of the most common financial resources.

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Sandra Beckwith

Sandra Beckwith has been writing for traditional and online publications since she sold her first magazine article while still a journalism student. Her articles in business, consumer, trade, and custom magazines; in corporate, alumni, and nonprofit organization publications; and on websites and blogs help readers learn more about successful initiatives and interesting people, or about how to do something better, faster, or smarter.The author of three traditionally published nonfiction books and a past contributing editor of three trade journals, Beckwith writes frequently on small business, logistics, supply chain, and work-life balance topics.She is also a national and regional award-winning former publicist who teaches authors how to market their books. Her book marketing website, BuildBookBuzz.com, has been recognized for excellence by four organizations and is ranked in the top 10 globally for book marketing blogs. She has served on the board of directors of the American Society of Journalists and Authors, where she remains an active volunteer and member. She is also a member of the Association of Ghostwriters. Beckwith is a graduate of Utica College of Syracuse University, a past member of its Raymond Simon Institute board, and a recipient of its Outstanding Public Relations/Journalism Alumna Award. A resident of a sweet little Erie Canal village in Western New York, Beckwith listens to audiobooks every evening while walking along the canal's original towpath for exercise. Her hobbies include eating, sleeping, and spending time with friends and family—but not necessarily in that order.

Self-funding

In 2023, Lendio reported that 54% of small business owners funded their businesses with personal savings. 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."

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, including 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.