How Do Most Small Businesses Get Funding?

By Kieran Daly, 10 January, 2023

How Do Most Small Businesses Get Funding?

How Do Most Small Businesses Get Funding?

If you’re reading this, you’ve probably got a young business that you’re excited about, but you also don’t have a ton of cash lying around at home to finance it. It can be frustrating to have a great idea, but simply not have the capital to fully see its potential. Thankfully, there are many small business loans out there, but the key is to know which loans to apply. As you will soon learn, not every option is worth it.

What Are 4 Methods of Funding a Business?

First, let’s look at four very different ways to acquire capital for a business and how they work:

  1. Loans: This is the most common way smaller businesses get started and established. Loans can come from a variety of lenders—usually a bank or credit union—and are often found through organizations like the Small Business Association (SBA), who partners with those lenders. The requirements will vary, generally you will have to provide basic financial information, such as credit scores and sales records, to be approved for a loan. The ability to repay a loan over time allows access to much greater capital. However, as a drawback, some loans take a long time to get approved, and interest can be quite detrimental if you go to a lender with steep rates.

  2. Grants: If a business requires an extensive amount of research funding, small business grants are another avenue. The obvious benefit of a grant is that it does not need to be repaid. However, this does not necessarily mean it’s free—especially if you consider the opportunity costs. There is a rigorous application process, and while you do not have to repay it, the criteria for acquiring business grants is usually strict. Additionally, there will most likely be fierce competition. On top of that, some grants require you to match the funding you are awarded, which in some cases, will defeat the purpose of seeking it, particularly if funding is already a problem.

  3. Venture Capitalists: These are, in essence, people with a lot of money looking for the next hit idea. They provide businesses with the funding they need in exchange for a percentage of equity stake. Venture capitalists typically do not seek startups, but small businesses that are looking to greatly expand their reach. Unfortunately, because of this, they often only invest in companies with very high growth potential.Take the tech industry, for example. Additionally, since they are private investors, they likely will want to invest in ideas they are at least somewhat familiar with.

  4. Private Lenders: Banks are not the only institutions that provide capital. Organizations like Backd can provide entrepreneurs with advances, lines of credit, and even equipment leasing. Additionally, the requirements to work with Backd are far more friendly to smaller or newer businesses. Loans often favor larger businesses or business owners that have more money and collateral to spare.

These four are just a few of the many ways to get funding. However, many of those other options—such as business accelerators and crowdsourcing—are either not as reliable, more difficult to come across, or more difficult to obtain.

What Is the Most Common Source of Funding for a Small Business?

Loans are undoubtedly the most common method, for many good reasons. They give entrepreneurs access to far more capital upfront, and there are many options available to suit different financial needs. However, getting a loan can be particularly challenging for small businesses for several reasons:

  • Slow turnaround: There will oftentimes be a gap between applying for a loan and actually having access to it. As an example, many SBA loans have a 2-3 month approval time frame, making it tough if you have a fast timeline.

  • Tough requirements: In addition to having a good business plan and good credit, many loans require some investment. They may ask for a down payment of up to 30% and even some form of collateral.

  • Low approval rates: SBA loans approve about half of their applicants, but outside of them, approval rates dip much lower. Standard commercial loans get approved about 15% of the time.

Having Trouble Getting a Loan for Your Business?

Backd is passionate about helping entrepreneurs like you achieve the goals for your business. While many loan requirements shut out small businesses, Backd provides funding options that are not only easier on small businesses, but simple to understand and with a quick turnaround. By fulfilling just a few simple requirements, you’re able to get a custom funding plan that best fits your business and its needs. All you need, in addition to being based in the U.S.: 

  • 1 year in business minimum

  • $300K annual revenue minimum

  • A business bank account

  • A brick-and-mortar address

If you meet everything on that list, then you are literally in business! Apply today and get access to the capital you need in just a few days.