Flexibility, being your own boss, following a passion–there are endless reasons to start your own business. And since they employ more people nationally than their larger counterparts, small businesses also play a key role in driving economic growth.
On the flipside, 82% of small businesses will close due to lack of capital, according to a U.S. Bank report. So, to transform your dream into a viable operation, it's important to set your business up for success–starting with strong capital.
Before you shop for funding, make sure your personal credit is in good standing. Ideally, you want to have a credit score of 720 or higher in order to secure the most desirable rates. If your credit needs some help, consider working with credit repair company to improve it, and process any disputes promptly.
Once you're ready to secure capital, remember to diversify your sources since funding from multiple sources will mitigate your risk should one of the pipelines close, meaning you can keep the business going while you look to replace that one channel.
With countless options available, here are some places to start:
- SBA Loans: The U.S. Small Business Administration offers microloans up to $50,000 for small businesses, with the average disbursement being $13,000. One thing to keep in mind is this type of funding can be difficult to get due to strict qualifications, and more established businesses tend to take priority. This doesn't mean you shouldn't apply. Instead, think of this as just one potential funding source.
- Microloans from Non-Profits: With more relaxed requirements, this capital is easier to secure for most borrowers. Also, these lenders often award to minority business owners, startups located in struggling communities, and companies with unstable finances.
- Grants: Securing grant funding can be a long road with a lot of paperwork, but the return may be worth the effort if it can bankroll your dream. gov and USA.gov each have a deep database of loan options, including ones targeted to specific demographics, such as vets, women, or minorities.
- Friends and Family: It's important to be strategic when seeking loans from friends and family. Make sure you focus on those who support your goal, and since they're making a personal stake in your dream, it's vital they clearly understand the risks.
- Crowdfunding: These sites allow owners to raise capital with the option to either gift donors a reward or offer them equity in the business. Kickstarter and GoFundMe are well-known reward-based options, and for equity sites, SeedInvest, CircleUp, or CrowdFunder are good places to start.
- High-Interest Options: Credit cards and personal business loans can secure funds, but keep in mind they come at the cost of higher interest rates than most other options, especially for those with poor credit. Financial advisors warn that these should be a last resort and only tapped when small amounts of cash are needed.
Applying for a new business loan is rarely a direct path, so if your application is rejected, remember you always have the option to review the reason and reapply with an amended application.