Small business capital, by definition, is usually money from an outside source that a small business needs to fund operations, business purchases, and growth. Small businesses can acquire capital though business loans or in funding sources,, such as grants, that do not need to be paid back.
Continue reading to learn how to determine your business’s financial needs and the sources to turn to to help fund them.
Key Points
• The definition of small business capital is money from an outside source small businesses may need capital to fund startup costs, the cost of daily operations, equipment costs, or the cost of growth.
• Small businesses can acquire capital through traditional loans, such as startup loans, SBA loans, equipment loans, and working capital loans.
• Capital may also come from federal and state government grants, which do not have to be repaid.
• Additional sources of capital may come from equity financing — selling shares in your company — or non-traditional sources such as venture capital or crowdfunding.
Assessing Your Business’s Financial Needs
Your business’s financial needs will likely depend on a variety of factors, including where you are the life of your business. For a startup, your financial needs are equal to the cost of starting your business. This will likely include several one-time costs such as beginning inventory and supplies, advertising, and permits, licenses, and related fees.
If you’re an established business, you may be looking at a couple of different things. Working capital is the amount of money you need to keep your doors open. It’s essentially the difference between your business’s current assets and its current liabilities. If your company’s liabilities are greater than your assets, you may have trouble keeping up with your financial obligations and may need an infusion of capital.
Beyond working capital, you may need to find a source of capital if you are looking to pursue a project to help you grow your business, such as opening a new location. Your financial needs will be equal to the cost of this project.
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Traditional Business Loans
There are several types of small business loans you may apply for to help cover your capital needs, including:
SBA Loans
An SBA loan is a small business loan that is offered through lenders, including banks, and is partially guaranteed by the U.S. Small Business Administration. To be clear, the SBA itself does not lend money directly, but its guarantee helps reduce risk to its lending partners. For that reason, SBA loans may offer competitive rates terms.
Business Line of Credit
Having cash on hand to cover day-to-day business expenses, bigger purchases, and emergencies can be important to your business operation. Rather than take out a loan as the need arises, you may consider a business line of credit. A business line of credit is a revolving credit line that allows you access to cash as you need it up to a certain limit. As you repay what you borrow, those funds become available to borrow again. You will only pay interest on the amount you borrow.
Equipment Financing
If you find that you need to purchase new equipment to help grow your business — whether it’s a tractor, a dentist chair, or a new computer — you may want to consider equipment financing. The equipment itself often acts as collateral, so this type of loan may offer lower interest rates than other conventional loans. Repayment options will vary, but typically span a few years.
Startup Loans
Startup loans help new businesses get off the ground. These loans may be easier to qualify for in some ways. For example, they may be willing to lend to borrowers with relatively low revenue streams. However, because startups are often unproven, lenders may require that you offer more collateral to back the loan.
Working Capital Loans
As we mentioned above, working capital is the money your business needs to operate on a daily basis. If you have negative working capital, you may want to pursue a working capital loan to help you cover expenses, such as payroll, monthly bills, debt payments, inventory, and operational expenses.
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Alternative Financing Options
In addition to loans from traditional lenders, such as banks, there are other ways you may seek a cash infusion to help your business grow.
For example, you might consider crowdfunding or a peer-to-peer (P2P) loan where an individual or a group of people loan you money via a P2P platform.
You might also explore venture capital, which is private equity financing that might be provided by high-net-worth investors, investment banks, or other financial institutions.
Equity Financing
Another way to raise capital is to sell shares of your company to investors. By purchasing those shares, investors are also purchasing ownership rights of your company. When a company is private, equity investors might include individuals, such as angel investors, venture capital firms, and corporate investors. It is also possible to raise equity financing through crowdfunding.
When a company goes public through an initial public offering (IPO), they are offering shares that can be purchased on public stock exchanges.
Government Grants and Programs
In additional loans and other financing options, small business owners have access to grants for new and existing businesses that can provide capital. Grants are gifts of money that do not need to be repaid.
The federal and state governments offer a range of small business grants. Some may be designed for companies that focus on specific fields such as science of technology, while others might be focused on community building, for instance.
Preparing Your Business for Funding
Securing funding is easier with a strong plan. First, define your needs, including how much funding you’re looking for and how that money will be used. Next, make sure you have a strong business plan that demonstrates your business idea, goals, and projected revenue. With these supporting materials in hand you can begin researching funding options and applying for loans, grants, and other sources of funding. Once you receive funding, it’s critical to track how it is used, and the return on your investment.
Small Business Funding
When it comes to funding, the right option for you will depend on your needs. And it may be that over the life of your business, you’ll need to pursue several different types of funding to meet your goals and objectives.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are the different ways to obtain capital for a business?
You may obtain capital for your business through small business loans or alternative methods, such as grants, equity financing, venture capital, or peer-to-peer lending.
How do I determine how much business capital I need?
The amount of business capital you need will depend on your goals. Startups may need to cover all the costs of getting a new business off the ground. Existing businesses may need to cover the cost of working capital, a piece of equipment, or other growth related projects, such as opening a new location.
What is the difference between debt financing and equity financing for business capital?
Debt financing is when you borrow money and agree to pay it back with interest over time. Equity financing, on the other hand, is when you raise capital by selling shares of your company.
What types of businesses are eligible for small business loans?
Eligibility will depend on the type of loan you’re considering. For example, to qualify for an SBA loan, manufacturing companies typically must have 500 employees or fewer, while most non-manufacturing businesses will need annual receipts under $7.5 million.
How can I improve my chances of securing business capital from investors?
A strong business plan that demonstrates clear financial projections and strong market potential can help woo potential investors. It is also important to demonstrate that you have the experience, tools, and resources you’ll need to successfully carry out your plan.
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