Securing financing is a critical step for nearly every small business, from a startup needing initial capital to an established enterprise looking to expand.
The source of funding often depends on the business’s stage, size, revenue, and financial health. Many small businesses begin by leveraging the owner’s personal savings, credit cards, or loans from friends and family.
Outside financing generally falls into two broad categories: debt financing (borrowing money to be repaid) and equity financing (selling a share of the business).
Common Types of Financing
Self-Funding (Bootstrapping)
Depending on your own savings and your personal network allows the owner to retain full control and avoids interest payments to commercial lenders, though it carries personal financial risk.
Small Business Loans
A traditional and popular option, loans from banks, credit unions, or other lending institutions provide a lump sum to be repaid over a set period with interest. These often include:
- Term loans have a fixed repayment schedule and are often used for major purchases like equipment or expansion.
- Lines of credit are a flexible option, like a credit card, allowing the business to draw funds up to a certain limit and only pay interest on the amount used.
- SBA loans are partially guaranteed by the U.S. Small Business Administration. This guarantee reduces the risk for lenders, making it easier for small businesses to qualify for better terms, such as longer repayment periods and lower down payments. The SBA 7(a) Loan Program is the most common.
Remember, lenders rarely fund 100% of a project, so even if you qualify for a loan, expect to pay a stake yourself.
Equity Financing
This involves selling a percentage of ownership in the company in exchange for capital. This type of backing is less common in Arkansas, but usually comes from two sources:
- Angel investors are high-net-worth individuals who invest their own money, typically in early-stage startups, often providing mentorship as well.
- Venture capital firms invest pooled funds in companies with high-growth potential, taking a larger equity stake and often a more active role in the business.
Alternative Financing
Crowdfunding platforms (like Kickstarter) allow a large number of individuals to contribute small amounts, often in exchange for a reward (product pre-order, recognition) rather than equity.
Grants are non-repayable funds offered by foundations, corporations, and other sources. They often target specific industries or groups (veteran-owned businesses, for example).
Invoice Factoring or Financing allows a business to sell its unpaid customer invoices to a third party (a factor) for immediate cash, minus a fee, helping to manage cash flow.
You can learn more about types of financing in our free resource, Funding Your Small Business: Loans and Other Options.
Stacking Sources of Funding
Let’s look at one possible example of financing a new business.
Maria plans to open a preschool. She needs a total of $75,000 to initially launch her business. Her multi-faceted financing strategy might follow this scenario.
- Source 1: Maria’s Savings ($15,000)
- Source 2: SBA Microloan ($50,000)
- Source 3: Friends & Family Note ($10,000)
- Total: $75,000
Finding the right funding is truly a personalized journey, blending strategy with self-awareness.
Remember that whether you choose debt, equity, or self-funding, your best preparation is an airtight business plan and a deep understanding of your own financials. Focus on the method that supports your vision for control and long-term growth, and you’ll be ready for your next big step.
Explore this topic further using these resources:
11 Types of Small Business Loans and How They Work – Lendio
Fund Your Business – U.S. Small Business Administration