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In business, capital plays a crucial role in determining success. It’s the lifeline that fuels growth, innovation, and stability. As a result, understanding the sources of capital available to you and your business is essential, whether it’s unlocking growth opportunities, hiring essential talent, investing in infrastructure, or acquiring necessary assets.
If you find yourself concerned about raising capital, you’re certainly not alone: Since 2022, there’s been a 5% drop in the number of businesses that feel their ability to raise capital is in good standing.
“Choosing the right source – be it traditional banks, SBA loans, crowdfunding, or alternative lenders – is key to unlocking the potential of your business,” said Credibly Founder Ryan Rosett.
In this blog, we’ll likewise help you identify your capital options and the most common resources for capital that small businesses like yours rely on.
What are the two top sources of financing for small businesses?
For small business owners looking for funds, there are a few key options. First, many use their own savings. Then, there are two main types of outside funding:
There’s also a third option: grants and scholarships. They can come from the government, non-profits, or even businesses.
Common sources of capital for entrepreneurs
Finding the right sources of funding for your small business is essential. The choice you make directly impacts cash flow, risk management, and control over your operations. As an entrepreneur, understanding your funding options is key to securing the capital you need for sustaining or growing your business.
Small business loans
Small business loans are a vital source of capital. A working capital loan, for example, is particularly beneficial for expanding your team, making the hiring process smoother and more manageable.
For businesses with fluctuating revenue or lower credit scores, a merchant cash advance is an excellent option. This can be utilized for a range of purposes, from stocking inventory and paying employees to covering emergency repairs and financing marketing expenses.
Long-term loans are ideal for substantial investments like opening a new location, purchasing new equipment, or making renovations. These loans come with the advantage of lower annual percentage rates (APRs) and longer repayment periods.
Lastly, a business line of credit offers the utmost flexibility, providing access to funds whenever needed. This option allows businesses to draw exactly the amount they need and pay interest only on the withdrawn amount.
Small Business Administration (SBA) loans
Provided by the SBA, these loans are popular due to their lower interest rates and competitive terms. As an alternative, some government grants are available, especially for businesses involved in research and development, as well as businesses operating in low-income areas.
Access up to $400,000 in as little as 24 hours
Crowdfunding is a modern method of raising funds online from a large number of individuals. This option hinges on winning crowd support and effectively communicating the business’s needs and goals.
Popular platforms for crowdfunding for businesses include:
- Kickstarter (Be aware that if your business is successfully funded, Kickstarter collects a 5% fee. Processing fees can also fluctuate between 3% and 5%.)
- Fundable (If you decide to go this route, you’ll have to pay a subscription fee every month—$179. Processing fees sit at 3.5% and $.30 for every transaction.)
- GoGetFunding (The platform fee is only 4%—lower than some other options.)
Crowdfunding campaigns typically set monetary goals and offer rewards or recognition to contributors, making it a great way to not only raise funds but also build a community around a product or service.
Known as invoice advances, this involves selling outstanding invoices to a lender in exchange for immediate cash. This option is particularly useful for businesses in urgent need of capital, though it involves a loss as the business receives less than the full invoice amount. In terms of the advance, you’re looking at 70% to 90% of the total invoice amount.
Conventional business loans
Offered primarily by banks, these include loans and lines of credit. They’re typically used for funding business expansion or meeting short-term cash flow needs. Banks also tend to have lower approval rates for loans, but require extensive paperwork, and demand strong credit ratings.
Equipment financing offers a tailored solution for businesses needing to purchase equipment. With this option, you can make periodic payments, which include both interest and principal, over a fixed term. As a result, you can more easily manage cash flow while obtaining essential equipment.
The security for equipment loans typically includes a lien on the equipment itself. In some cases, lenders may require additional security, such as a lien on other business assets or a personal guarantee from business owners.
Sources of financing for a small business—at a glance
|Source of Capital
|Lower interest rates, competitive terms, SBA-guaranteed.
|May have specific eligibility requirements.
|Access to a large number of investors online, community building, rewards/recognition for contributors.
|Platform fees, requires effective marketing, no guaranteed success.
|Immediate cash flow, useful for urgent capital needs.
|Receives less than full invoice amount, can be costly.
|Suitable for small businesses, lower interest rates, short-term financing.
|Smaller loan amounts, may not cover large capital needs.
|Conventional business Loans
|Useful for expansion or short-term needs, includes loans and lines of credit.
|Lower approval rates, extensive paperwork, strong credit rating requirements.
|Tailored for equipment purchase, manageable periodic payments, helps preserve working capital.
|Requires collateral, potential risk of repossession, additional security may be required.
How to access sources of funding for your small business
Securing capital is a critical step for businesses in all stages of growth. Each option caters to different needs, offering a range of solutions for business financing.
1. Capital markets
Capital markets act as hubs where savings and investments are exchanged. Suppliers provide the necessary funds which are then accessed by various entities for a number of purposes. These markets are integral in facilitating the flow of capital and serve as efficient platforms for buying and selling securities.
2. Direct lending
Direct lending is a significant source of capital, especially for privately-owned companies often backed by private equity sponsors. It involves the provision of privately negotiated loans or credit, typically senior in the capital structure, made directly by non-bank lenders.
3. Traditional banks
Banks generally provide lower interest rates and longer repayment terms. However, their application process can be stringent, with requirements for strong credit scores, substantial collateral, and detailed business plans. Traditional banks are best suited for established businesses with a solid financial history.
4. Small Business Administration
The SBA provides a variety of loan programs designed to support small businesses. These loans are not directly from the SBA but are instead issued by participating lenders and partially guaranteed by the administration. You should know, though, that competition for these loans is tough.
SBA loans are known for their competitive rates and flexible terms. They are ideal for businesses that may not qualify for traditional bank loans but have strong business models and potential for growth.
5. Alternative lenders
Alternative lending has emerged as a popular source of capital, especially for businesses that may not meet the strict criteria of traditional banks. These lenders offer various financing options like merchant cash advances, peer-to-peer loans, and online lending platforms. The application process is typically quicker and less rigorous, with higher approval rates and faster funding.
The future of your business, built better—with Credibly
Choose Credibly for a diverse range of financing options for your right-fit financing.
With a high approval rate and an experienced North American-based team, we’re committed to understanding and supporting your financial goals.
We offer up to $400,000 in funding, and we’ve already empowered over 30,000 businesses, and we’re ready to support yours too.
Speak with a financing expert today.