10 Best Startup Funding Sources In 2021, Part 2

small business Jun 25, 2021

Startups can be entrepreneurs who are beginning a business for the first time, or a business owner who is beginning another business venture. Either way, initiating a new business plan takes capital.

Why is it important to secure enough funding? Business owners need to ensure they have enough to get their business off and running, so they can pay their investors or financiers back. Securing initial capital can be difficult, especially if there is no business history for investors to assess.

In our last post, we covered the first five funding sources for startups. The sources included crowdfunding, small business grants, family and friends, angel investors, and venture capital.

Here are the next five best solutions in 2021 for your startup funding needs.

6. Personal Loans for Business

A personal loan for business is a loan that an individual takes out for the purpose of funding their business expenses. It's a useful tool for individuals and entrepreneurs who don't have a track record to secure investments from angel investors or other sources. Generally speaking, one should have a good credit score, above 670, to pursue personal loan opportunities.

Personal loans are useful for a few reasons. They are typically easier to qualify for than business loans, they have lower interest rates than business loans, the repayment plans are more flexible, and collateral is often not required. It can be a great option for startups.

There are some downsides to taking out a personal loan for business reasons. First off, you will not get as much capital with a personal loan. Business loans can be awarded into the hundreds of thousands of dollars, depending on the business and the history, whereas personal loans are usually in the low tens of thousands of dollars. Also, if the business doesn't work out and you struggle to pay the loan back, your personal credit score is affected.

7. SBA Micro Loans  

The Small Business Administration (SBA) Micro Loan process is designed to assist underserved communities. The SBA awards PRIME Loans to nonprofits or organizations (referred to as intermediaries) at discounted rates, that assist micro-entrepreneurs.  These intermediaries then offer loans to entrepreneurs in their community. Their aim is to assist those from low-income, urban, rural, or tribal communities, but anyone can apply.

Finding a microloan intermediary in your area may be a great way to get the funding you need. These microloans are usually capped at $50,000, but each location will have specific limitations and requirements. These loans can be used for a variety of business purposes including, purchasing inventory or machinery, improving the condition of the business (i.e. new furniture, building updates, etc.), or for working capital.

Unlike some of the other SBA loans, the SBA takes a back seat in microloans and lets the intermediaries dictate the terms. As an added benefit, the SBA also provides funding to intermediaries to act as business mentors. In addition to providing funding, the intermediaries offer advice on marketing, business management, and other topics to those they lend to.

8. Business Lines of Credit

An alternative to a business loan is a business line of credit. With a loan, a business is given a specific amount of capital to use, at a specific financing rate. With a line of credit, businesses are only charged interest on the amount that they use at any given time.

Here is how a business line of credit works. The lending institution grants your business a specific amount, let's say $50,000. If you only use $20,000 for the first few months, you only pay interest on the $20,000. The money can be used for any purpose, withdrawn at any time, and it's a great way to build your business credit score.

One drawback to business lines of credit is that many lenders want some kind of business history before they lend. In other words, a line of credit is likely not going to provide you with the initial seed capital to launch your business. However, it can be a means of additional financing six months or so into your business, if your initial seed capital begins to run short.

9. Invoice Financing

Invoice financing, also referred to as accounts receivable financing, is a form of financing where businesses receive an advance on their unpaid invoices. Typically, lenders will lend you up to 80% or 85% of the total of your invoices. When you are paid, they get the amount they lent to you, along with their fee, and you receive the rest of the invoice balance.

Invoice financing is typically easier to qualify for than other lending options because the invoices themselves serve as collateral. It alleviates issues that arise from unpaid customer balances, and keeps cash flowing. This is a great option for B2C or B2B businesses.

Similar to a business line of credit, this option is available once a company launches and has invoices. Some companies do not require businesses to be established for very long in order to qualify, some only requiring as little as three months in business.

10. Equipment Financing

Almost every business needs some kind of equipment, whether it be office equipment, electronic devices, or kitchen supplies. Like invoice financing, these loans are easier to qualify for because the equipment is the collateral. Institutions will often lend up to 100% of the equipment value. The loan is then paid back with interest, over a determined period of time.

One of the added benefits of equipment financing is that they loan to new businesses. Unlike business lines of credit or business loans, many institutions will lend to businesses who are just starting up. It's a great way to get your business up and running with the equipment you need, even when your business is brand new.

Which Source Is Right for Your Business?

Between our first post and this article, we've covered the 10 best funding sources for startups. In order to decide which option is best for you, it's imperative that you gather all of your information. Have your business plan handy, because you and any potential lenders need to know where you business is heading.

Here are some questions to ask yourself when considering your options:

  • Do I know people that could invest in my company?
  • How much money do I need?
  • Am I willing to give up equity in exchange for seed capital?
  • What industry am I in (or going to be in) and how will I compete?
  • What is my annual revenue or intended revenue?
  • What is my personal credit score?
  • What grants are available to me?
  • What equipment do I need?

At the end of the day, you know your business best. Your seed capital may come through more than one option. You may start with crowdfunding or an angel investor and then turn to a business line of credit to keep afloat through the first 12-18 months. No matter which source you pursue, being able to sell your business plan is critical.

📌 Pro-tips:  Join nearly 100,000 others getting early access to grants and other funding opportunities on the Skip app. We also have 1-to-1 business coaching opportunities if you would like monthly support for your business. You can learn more here.

Dan Ansaldo

Dan is the Head of Content for Skip and has written on numerous topics including business, education, government, history, and more.

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