If I were to quote Mark Twain, I’d say, “The secret of getting ahead is getting started.” For small businesses especially, getting started often means securing funds to translate their innovative ideas into reality.
However, the question facing many entrepreneurs is how to get started with that initial funding? With myriad options now at your disposal, this blog post will examine some of the most popular methods to help you navigate the oft-complicated avenue of small business funding.
1. Traditional Bank Loans
In the tapestry of business funding and financial leveraging, traditional bank loans have always had a substantial presence. For many years, bank loans were practically the singular financial resource available to buoyant entrepreneurs and existing small businesses.
Even today, bank loans do carry an essence of a tried-and-tested formula, and many businesses continue to consider it as a reliable method of ensuring capital influx. However, the realities of modern financing have illuminated certain inherent inefficiencies in traditional bank loans. Additionally, the successful securing of such loans is not guaranteed, making them a somewhat precarious option.
However, having a favorable credit rating, coupled with an alluring business plan, can significantly optimize your chances of getting a loan approved by a bank.
Statistical Analysis of Bank Loans
A study conducted by the Federal Reserve provides useful insights into the nature of small business loan approvals. According to the study, nearly half, precisely 50%, of the small business loan applications were given the green light by banks in 2018.
While these statistics do not maintain an overwhelming favorability, bank loans as a means of financing continue to be a potential path to explore.
Examples of Bank Loan Success
Let’s delve into a few success stories to delineate how traditional banking loans have been a progressive force for some businesses.
- Corporation A: As a small fashion retail startup, Corporation A was faced with the challenge of expanding their business. With a strong business plan and impressive credit history, they were able to secure a substantial loan from their bank, resulting in the successful opening of two more stores in key locations.
- Corporation B: As a software development agency, Corporation B needed additional funds to invest in more advanced resources. Through a bank loan, they managed to cover their costs, leading to remarkable growth and profitability in the following years.
The examples above serve as testament to the fact that despite the challenges associated with securing bank loans, they can indeed be instrumental for small businesses willing to brave the odds.
Federal Reserve Quote on Bank Loans
To further corroborate the relevance of bank loans, a quote from a Federal Reserve official clarification stands profound, “Even as we observe the rise in popularity of alternative financing methods, traditional bank loans maintain an integral role in small business growth.”
2. Online Lenders
Times have changed. In the modern world, the digital revolution has rem
odeled the way we do business and, subsequently, how businesses secure funding. Entrepreneurs are increasingly turning to online lenders for their capital needs, impressed by their speed, ease, and higher approval rates compared to traditional banks.
According to a SBA report, approval rates for small businesses by online lenders reached a staggering 56% in 2017.
3. Crowdfunding
Picture this – you’re a tech enthusiast and you’ve created an innovative new gadget. But alas, the traditional routes for funding are frowning upon your lack of credit history and sales. Enter crowdfunding, the modern-day fairy godmother for startups and small businesses. Websites like Kickstarter and Indiegogo allow you to pitch your product or idea to the massive audience of the internet, who then fund your idea through small contributions.
However, like all fairy tales, this one also doesn’t always have a happy ending. Success rates of Kickstarter projects stood only around 38% in 2020, underscoring the importance of a compelling pitch and promotion.
4. Venture Capital
As we set foot into the realm of private investors, we encounter venture capitalists (VCs). They provide funding in exchange for equity, or partial ownership, in your business. This might remind you of the famous TV show “Shark Tank,” where entrepreneurs pitch their business ideas to a room of investors, hoping to secure funds in return for equity.
However, VCs prefer to invest in high-growth companies with a proven business model, so this option isn’t ideal for every business.
Comparing Funding Options
To summarize, here’s a simple table that compares the different options we’ve explored:
| Funding Option | Approval Rate (%) | Ideal for |
|---|---|---|
| Traditional Bank Loans | 50 | Businesses with good credit & solid business plan |
| Online Lenders | 56 | Most types of small businesses |
| Crowdfunding | 38 | Businesses with a compelling product & strong promotion |
| Venture Capital | – | High-growth businesses with a proven business model |
Federal Reserve Small Business Credit Survey, 2020
U.S Small Business Administration (SBA), 2017
Kickstarter Statistics, 2020
When it comes to choosing your source of capital, what matters most is that you understand your business’s needs and consider the potential consequences of each funding option. In the vast ocean of small business funding, there is certainly no one-size-fits-all solution. As the famous entrepreneur Naval Ravikant once said, “The Start-up world is not a meritocracy. It’s a skills-and-effortocracy.” So put in the effort and the money will follow!