Four Traditional Funding Methods for Small Businesses

You are absolutely ready to start your business except for one tiny thing:  You need money.

Your passion for your idea and your desire to get started quickly could lead you to seemingly easier sources of funding than the traditional methods. In a previous article, I recommended that you resist using consumer credit, your 401K, or the equity in your home to fund your business.

If you listened to the complainers, you would suppose that traditional funding is no longer available, but that’s not true. It is just tougher to get than it has been in the past. This is a good thing because, now, only well-thought-out businesses with solid revenue-generating potential are being funded. (Let’s forget Twitter for now; they are an anomaly.)

As long as your business concept is strong and you can make a case for both profitability and sustainability in this economy, there are lots of savvy investors and banks looking for good investments.

Here are four of the most popular traditional funding methods:

1. Small business loans

A lot has been written about small business loans and how tough they have been to get. That was once true, but a window of opportunity has opened up in this area.

On September 27, 2010, President Obama signed the Small Business Jobs Act, which includes multiple initiatives for getting small businesses the funding they need. Many of these programs will be run through smaller banks and backed by the Small Business Administration. Check with your local bank to see what they have available or go to the SBA website for more information.

A small business loan is my preferred traditional funding method because the bank is neither seeking crazy-large returns on its investment nor a piece of your business. Instead, the bank is concerned that you will be able to pay back the loan.

2. Venture capital

Venture capitalists are investors or firms who want to put their money and expertise into businesses and get sizeable returns. They typically want both partial ownership and control in businesses with large growth potential.

For some businesses, going with a VC is a huge benefit. VC connections and knowledge can help a company to grow in ways that sole owners wouldn’t be able to foster themselves.

If you choose to go this route, be prepared for brutal feedback when presenting to venture capitalists. In my experience, they do not mince words.

Ask for introductions to venture capitalists from reputable sources. Most VCs tend to deal in specific areas of business, such as manufacturing, retail or biotech.

3. Angel investors

Angel investors are individuals or networks who want to put their money behind businesses that have the potential to make good returns. They take a portion of the business in exchange for their investment, while leaving the control with the business owner.

Angel investors are usually open to investing in local and regional businesses as well as larger ventures.

Look online for angel-investor networks in your area. Most host networking events and pitch sessions. You will have less than five minutes to capture the interest of potential investors, so make sure your pitch is tight.

4. Public or private grants.

Grants are a good way to go if both you and your business meet the qualifications of the grant, which can be quite strict.

What’s great about grants is that you do not have to pay them back, nor do you have to share a piece of your company with someone else.

What’s not so great about grants is they can be tough to find and typically have a long and involved application process. Some of them also have restrictions around what the money can be used to purchase and require you match the amount of the grant with personal money or other funding. There are also a limited number of grants available, so even if you qualify and turn in a fabulous plan, you could still be denied.

Not all businesses will be a fit for traditional funding methods. If yours isn’t or you are turned down, there are alternative funding methods. I cover several of them in this article.

If you think your business might be deserving of traditional funding, I encourage you to go through the process for the valuable feedback you’ll get on your idea and its viability in today’s marketplace.

Even if the investors say no to funding you, that doesn’t mean you cannot be successful; it just means they see it as too big a risk for them. They are looking to back “sure things.” I’ll talk more about preparing your business to succeed in future articles.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Small Business Banking