Find the Right Capital for Your Small Business
All capital is not equal – here’s how to find the right capital to grow your business.
Are you looking to grow your business? One of the biggest challenges for small business owners is that you need money to make money. The solution: find capital from outside sources to either start or expand your business. However, many small business owners find it challenging to know where to obtain capital and which offers are legitimate.
What Types of Capital Are Available?
There are three common types of capital available to small businesses:
- Loans — Business owners can apply for loans through online lending companies, banks and peer-to-peer lending sites. Small Business Association (SBA) loans are also a popular option because they typically offer lower interest rates and better terms.
- Investment capital — With this type of capital, investors provide money in exchange for a portion of ownership in the company or debt, which you must pay back along with interest after a predetermined period of time.
- Grants — While this is a less common option than loans or investors, grants are available to small businesses and nonprofits that meet certain criteria — example: the Small Business Innovation Research (SBIR) program.
Where to Look for Capital
It can be challenging to know where to start looking and how to spot legitimate opportunities. Many small business owners source capital from the following sources:
- Current banks and lenders — If you already have a relationship with a bank or lending company for personal or other businesses, they may be more likely to give you favorable terms because they know you and you already have a payment history. Large national banks, community banks and credit unions all offer small business loans.
- SBA — In addition to SBA loans, the SBA has a network of licensed investors. By selecting an SBA loan or an investor vetted by the SBA, you can have a high level of confidence that the capital is legitimate. In addition to guaranteeing the investment, the SBA matches investors’ dollars 2:1.
- Private investors — These investors often specialize in specific industries and typically provide capital in exchange for equity in your businesses.
- Alternative capital sources — Small businesses can also apply for capital from online lending companies, peer-to-peer lending companies and angel investors.
When looking for capital, watch out for the following red flags:
- A penalty for paying the loan off early. If your business grows unexpectedly, you will likely want to pay off the loan early to reduce your interest paid. By taking capital without a prepayment penalty, you can potentially reduce the overall cost of the capital.
- Terms that require you to personally guarantee the terms of the loan. This means that your personal assets, not just the business, can be taken if you default on the loan.
- Lack of experience with small businesses. Your business has different needs and revenue growth than a large company.
Finding capital doesn’t happen overnight. The trick is to start researching options before you have a need. This gives you time to find the right source of capital for your specific business needs instead of jumping on the first available offer. When the opportunity arises to grow your business, you can jump into action and take your company to the next level.