7 Popular Sources of Capital for Your Small Business

Takes money to launch and grow a business.

But finding it doesn’t have to be so hard.

From bootstrapping your own business to tapping into grants from government and private agencies, the options are there.

In this article, we will explore the pros and cons of bootstrapping, borrowing from friends and family, tapping into SBA loans, and tapping into angel investors or crowdfunding to start and run a business.

We will look at the advantages and disadvantages of each option to help you decide which one is right for you.

Sources of Capital to Tap Into

Here are the 6 most popular sources of business capital sorted in the order of my personal preference.

1. Bootstrapping

Pros:

  • Low startup costs: Bootstrapping your own business means you don’t have to rely on outside sources for funding, allowing you to keep startup costs low.
  • Flexibility: You have the flexibility to make decisions about your business without having to consult with investors or board members.
  • Ownership: As the sole owner of your business, you have complete control of your business operations and decisions.

Cons:

  • Limited resources: When you bootstrap your own business, you don’t have access to the same resources that investors or creditors may provide.
  • Time-consuming: Bootstrapping requires a lot of time and effort, and you may need to be prepared to put in long hours.
  • Risk: As the sole owner of the business, you are taking on all of the risk if the business fails.
2. Friends and Family

Pros:

  • You can often get a loan with no interest or at a lower interest rate.
  • Your friends and family are familiar with your business concept and have faith in you.
  • It is easier to get the loan approved, as they know and trust you.
  • You will be able to benefit from the advice and support they can offer.

Cons:

  • It can be difficult to maintain a good relationship with your friends and family if you are unable to repay the loan.
  • You may feel pressured to take risks you wouldn’t otherwise take if the loan was from a bank or other lender.
  • Your friends and family may be less willing to take risks and may not be as flexible as other lenders.
  • If you are unable to repay the loan, it can put a strain on the relationship.
3. Grants from Government and Private Agencies

Pros:

  • Provide financial assistance to startups that lack the capital to launch their business.
  • Used to fund research and development projects that could advance a business’s capabilities.
  • Help entrepreneurs build relationships and connections with potential partners, customers, and mentors.
  • Help entrepreneurs gain access to resources and technology that would otherwise be cost-prohibitive.
  • Provide a boost of confidence and credibility to entrepreneurs who are just starting out.

Cons:

  • Difficult to obtain and require a lot of paperwork and due diligence.
  • Restrictions on how the money can be used can limit the flexibility of a startup’s operations.
  • Limited time frame in which the money must be used, and if not used within that timeline, the money must be returned.
  • Competitive. No guarantee that an application will be successful.
  • Additional reporting requirements to ensure that the money is being used as intended.
4. SBA Loans

Pros:

  • Low-interest rates: Generally lower interest rates than traditional bank loans.
  • Long repayment terms: Longer repayment terms than traditional bank loans, which can make payments more manageable.
  • Flexible eligibility requirements: Flexible eligibility requirements for businesses that may not qualify for traditional financing.
  • Access to capital: Provide access to capital for businesses that may not qualify for traditional financing.

Cons:

  • Lengthy application process: The application process can be lengthy and complex.
  • Documentation requirements: Require extensive documentation, including business plans and financial statements.
  • Collateral requirements: Typically require collateral, such as real estate or equipment, to secure the loan.
  • Lower loan amounts: Typically have lower loan amounts than traditional loans, which can limit your borrowing power.
5. Angel Investors

Pros:

  • Typically invest larger amounts of capital than crowdfunding campaigns, allowing businesses to scale more quickly.
  • Provide more than just capital – they also offer mentorship and industry connections.
  • Willing to invest in riskier ventures, providing businesses with the opportunity to pursue more ambitious goals.
  • Have more flexible terms than traditional venture capitalists.

Cons:

  • Have a lot of influence over business decisions.
  • May demand a significant stake in the business, leaving founders with less control.
  • Typically require a more extensive due diligence process than crowdfunding campaigns, which can be time-consuming.
6. Crowdfunding

Pros:

  • Typically much faster and easier to launch than working with angel investors.
  • Allow businesses to reach a larger pool of potential investors.
  • Provide businesses with the opportunity to reach a more diverse range of investors, including individuals and institutions.
  • Come with more flexible terms than angel investors.

Cons:

  • Typically attract smaller investments, so businesses may not be able to scale as quickly.
  • Come with more stringent requirements, such as setting a predetermined fundraising goal.
  • Unpredictable, as it may be difficult to predict the response from potential investors.
7. VC (Venture Capitalists)

Pros:

  • Access to large amounts of capital to fund new ideas and business initiatives.
  • Ability to leverage networks of advisors, mentors, and investors.
  • Potentially faster growth due to larger sums of money available.

Cons:

  • Loss of control over the company‘s future direction.
  • Giving up equity in exchange for funding can be costly.
  • Loss of flexibility as investors may have their own ideas about how the company should be run.
  • High expectations from investors can lead to additional stress and distraction.

As we discussed, there are many different ways to finance a business, and each option comes with its own set of pros and cons.

If you can afford to bootstrap it yourself, do it.

It’s definitely the best way to go.

Ultimately, the right source of financing for your business will depend on your individual circumstances and goals.