How to Finance a Business and Fund Your Dreams as an Entrepreneur

There are many different ways to start and grow a business. Some entrepreneurs and small-business owners want to build from the ground up, while others opt to purchase an existing operation with an established market. No matter which approach they take, many business owners will need help with starting a business and getting it up and running, especially when it comes to financing. Multiple financing options exist, from small-business loans and government grants to crowdsourcing and venture capital investments. Although it may seem daunting at first, with a little research, aspiring business owners can learn how to finance a business regardless of whether they are launching a new venture or expanding their operations.

Before You Begin…

Financing a business can be risky and may require borrowers to take on debt that some will not be prepared to repay. A new business may not end up as profitable as the owner hoped it would be, but the owner will still need to repay any loans they take out, even if their venture goes under. Before a business owner figures out how to get funding for a business, they may want to consider the additional costs that come with different financing options and whether they can shoulder those financial obligations.

Business owners may want to first map out a comprehensive business plan, including profitability margins and competitor analysis, as well as how they plan to address potential dips in revenue or unexpected expenses. Addressing these risks in advance could help owners secure funds for a business (potential lenders may require borrowers to present a full business plan as part of the application process) and prepare them for the challenges of business ownership.

Those looking to start a business may also want to consider the full scope of logistical concerns facing them before applying for a loan or grant. For instance, some small-business owners may want to file their new business venture as an LLC. In those cases, it may be a good idea to first contact one of the best LLC services (such as LegalZoom) before exploring financing options.

STEP 1: Figure out how much funding you need to support your business.

Before applying for business financing, it’s wise for business owners to figure out exactly how much funding they’ll need to meet their goals, which can vary greatly depending on the type of business they run or are hoping to start. For example, the start-up costs for a cleaning business might be lower than the costs involved in starting a plumbing business. Unlike operating a plumbing business, which requires specialized training, licensing, and sometimes even an apprenticeship, a cleaning business won’t have those same requirements, which means start-up costs will be lower. Before small-business owners think about financing options, they will want to be sure that they get a business license for their particular profession so they can meet any legal and regulatory requirements.

As entrepreneurs create their business plans, they may want to strongly consider the funding needs of their future businesses. The Small Business Administration (SBA) provides resources to help business owners calculate their start-up costs. Some of the common expenses business owners may want to consider include:

• Real estate, such as office space
• Materials or inventory
• Utilities
• Business licenses or permits
• Professional services, such as legal and accounting
• Employee wages
• Marketing materials
• Business equipment
• Business insurance

Caitlynn Eldridge, founder and CEO of Eldridge CPA, LLC, an accounting firm in Omaha, Nebraska, recommends reaching out to other small-business owners to map out initial expenses and get an idea of how much they will cost. “A great way to calculate start-up costs is to talk to current business owners in the industry and use Google AI to create a robust list of items to price out: labor, leasing space, materials, supplies, licenses and permits, [and so on],” she says. “From there you can consult with the SBA and other owners for what current pricing of these items [is]. Knowing your own take-home pay number is also really important.”

Those starting a business for the first time may not have anticipated all of these initial costs, which could leave them unprepared to cover their necessary expenses during the early days of their new venture. For instance, they might not realize that many states require small businesses to carry workers’ compensation insurance if they have any employees on staff. Purchasing a policy from one of the best small-business insurance companies (such as NEXT Insurance or Thimble) will help satisfy these requirements, but insurance premiums will be another recurring expense that business owners will need to account for in their operating budget.

STEP 2: Review your financial situation and credit history to see if you qualify for financing.

There are two types of credit scores that lenders reference when considering an application for a small-business loan and certain other types of financing: the borrower’s personal credit score and their business’s credit score. Applicants looking to launch a start-up or other new venture won’t have a business credit score until they have established a credit history by taking steps such as registering their business, opening a business bank account, and making payments to vendors. As such, many lenders offering start-up business loans rely on the owner’s personal credit score to qualify for financing. Without a record of financial success, though, brand-new businesses such as start-ups may find it more difficult to secure financing than an established, profitable business. Many lenders financing small businesses have strict credit and financial requirements to help lower their risks. New business owners will likely want to go over their own financial situation and credit score before applying for start-up business financing to increase the chances of approval.

STEP 3: Consider funding your new business with your own money or help from family and friends.

The most straightforward way for business owners to meet their small-business finance needs is to start the business with their own money. Funding business ventures with personal funds—or getting help from family members and friends, for that matter—covers financial needs without requiring business owners to take out a loan, apply for a grant, create a crowdfunding page, or explore other potentially complicated financing options. Many business owners get the initial funds required for their venture by dipping into personal savings or tapping into their retirement funds, for example.

The risks of using personal funds or borrowing from family members include the potential to lose money and strain relationships. If a business owner borrows tens of thousands of dollars from their family to launch a new business and it fails, they may not be able to repay that money for a long time—if ever. As such, small-business owners will want to carefully consider all of their options before using their own funds or borrowing money from friends and family to support their new business venture.

Eldridge notes that the savings on interest payments could make self-funding an appealing option for those who can afford it, but that there could be less leeway for businesses that struggle to find their footing right away. “A pro of using your own funds is that you don’t owe interest to anyone, and if you need to close down, you only are out your funds,” she says. “A con: It could pressure you to have to turn a profit faster, as you may have significantly dipped into your personal funds.”

STEP 4: Take out a small-business loan from a bank or lender.

Traditional lenders such as banks and credit unions are some of the most common places to look for business financing. Borrowers can often get small-business loans from local, regional, and national banks, giving them plenty of options to consider. Additionally, business loans from traditional lenders generally have competitive terms and lower interest rates than other types of financing.

However, the downside to bank loans is the strict qualification requirements for businesses, which may restrict eligibility. Not all lenders offer business loans for start-ups, for instance, as some prefer to extend loans to established businesses rather than new ones. Those that do offer financing options for start-ups and new businesses may require borrowers to have strong personal credit scores and little (if any) debt to qualify.

STEP 5: Look into SBA-backed loans if financing from a traditional lender is unavailable.

Business owners who have trouble qualifying for traditional business loans may want to consider an SBA loan. The SBA loan program helps businesses connect with local lenders to expand access to financing. While the SBA doesn’t typically offer direct loans, it does guarantee a portion of the loan for the lender. This guarantee lowers the risk for the lender and makes it easier for small-business owners to qualify for financing.

There are several types of SBA loans business owners can consider, offering anywhere from $500 to $5.5 million in funding for a business. Borrowers can use loan funds for various types of business expenses, including renting office space, buying equipment, and hiring seasonal workers. Although the SBA loan program makes it easier to qualify for a loan, business owners will still need to meet their lender’s loan requirements to secure financing.

STEP 6: Open a line of credit to pay for business expenses as they come up.

A line of credit can be an excellent way for small-business owners to get working capital for their ongoing business needs. A line of credit works more like a credit card than a loan. Rather than receiving funds in a lump-sum payment, business owners will have access to a line of credit they can draw from to pay expenses. With lines of credit, borrowers typically only pay interest on the funds they withdraw and can pay down their balance to open up more financing.

Unlike some business loans, lines of credit don’t typically restrict how funds are used, so borrowers are often able to spend this money on any business expense they choose. Many business owners use lines of credit to help manage cash flow and increase access to working capital, for instance, but they may also tap into their funds to pay vendors, hire seasonal help, or make upgrades to their brick-and-mortar shop.

STEP 7: Tap into your home equity to cover business expenses—if you can manage two mortgage payments.

Homeowners who have built up a significant amount of equity in their property can take out a home equity loan to help fund business ventures. With this type of loan, borrowers can exchange a portion of their home equity for a lump-sum payment, which is repaid throughout the life of the loan. Homeowners gain more equity in their home every time they make a mortgage payment or when the property’s market value increases. Lenders will require borrowers to maintain a minimum amount of equity in the home—20 percent of the property value is common, but the exact requirement can vary.

There are few—if any—restrictions regarding how borrowers use funds from home equity loans, so this money could be spent on any number of business expenses. For instance, someone looking to start their own cleaning business could take out a home equity loan to pay for cleaning business start-up costs such as paying for business licenses, permits, insurance, cleaning equipment, and supplies. With that in mind, getting financing through one of the best home equity loan companies (such as U.S. Bank and Flagstar Bank) could be the right move for many aspiring small-business owners.

Before taking out a home equity loan, borrowers may want to remember that this type of financing is considered a secured loan—in other words, collateral is required. In the case of home equity loans, the home itself is used as collateral. This means that if a business owner were unable to keep up with their loan payments and ultimately defaulted on their loan, their lender could seize their home as collateral.

Another consideration to keep in mind is that borrowers who take out a home equity loan will have a second mortgage payment each month. Juggling two mortgages in addition to the rigors of starting and managing a small business could be very stressful, and the catastrophic ramifications of default may only add to a business owner’s anxiety. For that reason, they may want to carefully consider all of their financing options before putting their home up as collateral on a small-business loan.

STEP 8: Launch a crowdfunding campaign with the help of future customers.

Some business owners may want to consider alternatives to traditional avenues for financing business ventures—crowdfunding, for instance. Crowdfunding relies on potential future customers to fund a business or project before its launch. Although sometimes referred to as crowdfunding loans, this type of financing isn’t a loan at all, as people who give money to crowdfunding campaigns don’t expect financial returns—like shares of company ownership—for their support. Rather than receiving shares of the business or interest payments, campaign supporters often get gifts or rewards based on how much they donate to a campaign.

Crowdfunding is particularly popular for creative business endeavors and businesses with physical products. For example, a small-business owner who sells handmade jewelry might use a crowdfunding campaign to raise money to pay for materials and tools. The people who donate to the campaign would essentially be making preorders, meaning they will receive a finished product once it is completed.

STEP 9: Raise venture capital from investors—but be prepared to share ownership and control of the business.

Business owners who need to raise a significant amount of money to fund their start-up may want to consider venture capital fundraising. With venture capital fundraising, investors give the founder money in exchange for a portion of ownership in the business. Many investors will also request active roles in the business, such as a position on the board of directors. Perhaps the biggest downside to raising capital from investors is the prospect of giving up total control of the business. In some cases, disagreements between business founders and investors can cause irreparable damage to the success of the business or even cause the original owner to leave the business entirely. That being said, entrepreneurs with ambitious business plans may benefit tremendously from the financial support that venture capitalists can offer.

STEP 10: Apply for government grants to get interest-free funding for a new business.

A small-business grant is similar to a loan in the sense that recipients are given a lump-sum payment, but grant funds generally do not have to be repaid. There are some government grants for small businesses offered by federal agencies. In addition, many nonprofit organizations and private corporations provide grants to business owners whose visions align with the goals or mission of the organization. For example, a female business owner might qualify for small-business grants for women from organizations that seek to increase female business ownership. It’s not always easy to qualify for free grants to start a business, though. Many federal grants for small-business start-up owners, for example, are highly competitive with numerous applicants and have strict qualification requirements that need to be met.

STEP 11: Negotiate seller financing or debt assumption options when purchasing an existing business.

Those who plan to purchase an existing business have unique financing options as opposed to those who want to start a business from the ground up. Some business owners looking to sell their business will work with buyers to help finance the purchase themselves. Known as sell financing, this approach involves the seller loaning the buyer a lump-sum amount to buy out their ownership stake and take over the business. The buyer then pays back the seller over time with interest added to the initial loan amount.

Seller financing may allow the buyer to negotiate more favorable terms than what they would be offered by a financial institution. Buyers may also be able to qualify for a larger amount of financing over a traditional loan since the seller understands the potential profitability of the business through first-hand experience. However, sellers may require a significant down payment to secure the loan and may ask for additional collateral. Buyers may be able to negotiate a lower purchase price through a debt-assumption arrangement, in which they agree to take on the business’s existing debt but have that amount subtracted from the sale of the business.

STEP 12: Receive the funds to get your business off the ground.

Once a business owner finds the right type of financing for their business needs, they can apply for a loan, line of credit, grant, or other financial instrument. It’s a good idea for business owners to shop around for the best financing options for their credit profile and business strategy. Comparing financing terms from multiple lenders can help business owners meet their funding needs without taking on more debt than they can handle.

Depending on the lender, business owners taking out a loan or opening a line of credit might receive access to their funds in as little as a day or several weeks after approval. Before applying for a loan or line of credit, business owners may want to check with lenders to better understand potential restrictions on how loan funds can be used.

Starting a new business is a dream for many aspiring entrepreneurs, and with the help of various financing options, they can realize those ambitions. By comparing different financing options and analyzing their creditworthiness, those looking to start, expand, or buy a business will be in a better position to secure the funds they need without burdening themselves with excessive debt. When weighing their options, business owners may want to talk with different types of lenders to determine if a particular financing option is a good fit for them. Additionally, new business owners may want to research lenders or local small-business organizations to get helpful advice on how to finance a business.