5 Funding Options for Small Business Owners That Don't Have Venture Capital

  •    Meredith Wood is Editor-in-Chief at Fundera, an online marketplace for small business loans.

Based on Bureau of Labor Statistics findings, nearly 1 million new businesses were formed in 2015. To add more fuel to the fire, according to the Kauffman Foundation, the U.S. is on the brink of an entrepreneurial boom. New markets and industries have primed us for a renewed era of small business and startup growth.

You know what hasn’t changed? The barrier to entry when it comes to starting your own business. Namely, capital.

By now, we all know about venture capitalists, angel investors and incubators/accelerators. But if you’re one of the nearly 1 million new business hopefuls this year, the chances that you’ll see any of that funding is slim to none. VCs reject 99% of the business proposals they receive.

If you’re anything like most new business owners, you’ll have to look for more reliable funding options. You’ve probably already considered friends and family, so here are 7 other possibilities that don’t require you to split equity with anyone:

​1. Business Credit Cards

Like personal credit cards, business credit cards are a double-edged sword.

Business credit lines tend to have a much higher limit than personal lines (add a “0” to your current monthly limit for a ballpark estimate). They’re an easy way for you to give your business a quick cash injection. They can also be used to earn you valuable, practical rewards—like cash for phone bills, Internet, and even office supplies.

On the other hand, business credit cards are not usually covered by consumer protections. This means that you are not covered by the Credit CARD Act of 2009, and your APR may change overnight. Additionally, business credit may affect your personal credit as well.

The best way to use a credit card to fund your new business is by playing it safe: don’t abuse your credit line and spend realistically. Again, use your card to inject cash into your business rather than float the entire operation. In a best-case scenario, you’ll pay off what you owe before each billing cycle.

2. Small Business (SBA) Loan

Another reliable way to get funding for your new business is to turn to the SBA (U.S. Small Business Administration). SBA partners with a number of lenders to offer financing help for small businesses. All you have to do is review the SBA Loan Application checklist before applying on the website.

The SBA offers several types of loans. Here are a few examples:

  • Basic 7(a) Loan Program - this is the SBA’s most common loan program, and helps businesses with special requirements. The loan amount varies widely.
  • Microloan Program - This program loans up to $50,000 to small businesses and not-for-profit childcare centers. The average loan amount is $13,000.
  • CAPLines - Loans in this program can go up to $5 million. CAPLines helps small businesses meet short-term and cyclical working capital needs.

They also offer very specific loans, like one for a company that has lost an essential employee who has been called up for active duty as military reservist. There’s even one for businesses that intend to install pollution control facilities.

​3. Home Equity Loan

Outside of the SBA, business loans are becoming harder to get. Small business loan lending dropped $116 billion per year between 2008 to 2011, and still hasn’t recovered. Additionally, getting an SBA loan or a loan from a bank can be a lengthy and drawn-out process, which is why many small business owners take out a home equity loan instead.

There are two types of home equity loans: traditional, and home equity lines of credit (HELOC). Traditional home equity loans are a one-time lump sum that you repay monthly at a fixed rate, just like a regular mortgage. HELOC, on the other hand, is like a credit card. If gives you access to a line of credit that you can re-borrow and repay as many times as you want during the draw period (you won’t be charged interest until you withdraw funds).

No matter which option you choose, it’s important to keep in mind the risks and rewards with taking out a home equity loan to fund your business:

  • Lower interest rates - Since your home equity loan is secured by your home, it’s going to have a lower rate than a bank loan.
  • Flexible borrowing - You can use the money from a home equity loan however you like, without restrictions.
  • Tax-deductible debt - Interest on your home equity loan is usually tax deductible up to $100,000 (single) or $50,000 (married and filing separately) if you claim it under Schedule A, Itemized Deductions.
  • You put your home (and business) at risk - By using your home as collateral, you risk foreclosure and the loss of your business if you fail to repay.

Closing costs and fees - Home equity loans and HELOCs typically carry upfront costs for application, appraisal, attorneys, etc. HELOCs usually come with annual fees as well.

​4. Crowdfunding

Depending on the type of business you have, you may also look into crowdfunding as a creative but dependable way to get a lot of funding fast. Crowdfunding sites were built with DIY entrepreneurs in mind, and are friendly options for enterprising business owners who don’t have a lot of capital on hand.

Sites like Kickstarter are perfect for creative enterprises like video game studios and gadget companies (the Pebble Smartwatch raised over $10 million), while Indiegogo approves almost any funding campaign (except investment). These sites are purely reward-based, meaning the campaign managers don’t have to put up any money of their own, while other sites, like SoMoLend, are debt-based.

Even better, a new ruling by the Securities and Exchange Commission lets anyone invest at least $2,000 a year in a small business in exchange for a stake in the company. Dozens of sites, like SeedInvest, have sprung up to fill the gap.

The hardest part for many business owners is figuring out which site is a best fit for their business. That being said, crowdfunding is also an art, and you can stand to learn a lot from how video game studios do it. Star Citizen has raised over $100 million in crowdfunding and hasn’t even been released yet.

​5. Gifts and Grants

There’s a lot of misinformation out there about small business gifts and grants. While this federal money does exist (and you can peruse over 1,000 grant programs at Grants.gov), it’s reserved for very specific candidates. It’s not for:

  • Starting and expanding a business (that’s what SBA loans are for)
  • Covering operational expenses
  • Paying off debts

Since this money is funded by our tax dollars, the government is very picky with its candidates, and typically awards grants only to small businesses in certain industries, like scientific, environmental, and medical research. The Small Business Innovation Research (SBIR) program, for example, is a highly sought after grant program for tech startups.

But if your small business happens to be women or minority-owned (at least 51%), you may also qualify for a number of additional small business gifts and grants. Minority-owned and women-owned small businesses can apply for certification, which gives them the exclusive ability to bid on corporate, federal, and state-specific projects. Several discretionary incentive grants also exist for these types of businesses, though they tend to favor not-for-profits.

Even if you aren’t women or minority-owned, you may qualify for other state-specific discretionary incentive grants, as well as corporate and nonprofit grants.

Don't Look a Gift Horse in the Mouth

If venture capital, angel investments, and incubators aren’t for you, there’s always going to be some way for you to find the funding you need. Before you even apply for funding, it’s important to talk with your partners, tally your resources, and do your due diligence before trying to get funding from any specific source.

Any one of the aforementioned options will take a lot of time and patience to leverage properly. And there’s something to be said for low-hanging fruit—there is no such thing when it comes to funding. Anything that’s easy to get (e.g., business credit card) will be riskier than an option that takes longer up front but may ultimately be more stable and reliable (e.g., crowdfunding).