For entrepreneurs starting a small business for the first time, it’s easy to feel a bit overwhelmed by all of the funding options available. Do you go with the first offer made to you or shop around? Is it better to go it alone with your personal savings and bootstrap instead? And what about crowdfunding on a platform like Kickstarter or taking out a microloan like Kiva—does that really work for small businesses?
As you can see, there are a lot of different financial options available for startups! However, as much as it’s great to have a variety to choose from, it’s equally as important to know what it all means before you get in too deep. (And for startups, this is especially critical since the business hasn’t even launched yet!) Before you launch, take the following financial elements into consideration first.
1. Research small business grants
There are pros and cons that come with qualifying for a small business grant. The biggest pro, of course, is free money—money that never needs to be repaid back or worried over again. While there aren’t any cons that come with qualifying for a small business grant, it is a challenging process. Reputable grants are tough to find. When you do find and qualify for one, they’re also pretty specific about what you can and can’t spend the grant money on too.
Don’t let this deter you, though! From federal to local levels, research to find small business grants that are a perfect fit for your startup. If you need help getting started, check out Fundera’s list of 100+ small business grants available for startups of all kinds, including veteran and women-led small businesses.
2. Educate yourself before taking out loans
According to the SBA, the average small business owner uses $10,000 as their startup capital. For young startup firms, external debt is heavily relied on for financing, including using credit cards and taking out business and personal loans. However, before you apply for and take out any loan offer presented to you, do your homework to determine which loan is truly the best fit for your business. For example, you may find that instead of applying for a private loan, it’s a better alternative to apply for a government-backed loan, like the ones offered by the SBA. These loans are offered through commercial lenders who follow SBA guidelines and provide a partial guarantee for loans that ultimately help reduce lenders’ risk.
3. Don’t dismiss crowdfunding
Not too long ago, there was a time when crowdfunding wasn’t considered a viable funding model for small businesses. That all changed in May 2016 when Title III of the Jumpstart Our Business Start-Ups (JOBS) Act and Regulation A+ went into effect. According to SCORE, the SEC now allows crowdfunding platforms to register as equity “funding portals.” This means that through these platforms, entrepreneurs can officially raise up to a million dollars each year. While you’ll still need to pay attention to each platform’s specific rules for creating and raising money for a campaign, don’t dismiss crowdfunding (or microloans for lighter funding needs) as a possible option for your small business.
4. Build up your cash reserves
Last but not least and the best possible thing you can do for your new business: make sure you have a substantial financial safety net before financing your startup. As I mentioned in my most recent article, small business owners generally only have a month’s worth of cash flow on hand to cover expenses if their inflows suddenly stop. You don’t want to live month to month from the get-go with your new business, so make sure that you have a minimum of three to six months’ worth of savings before you get started. Trust me – your business bank account will thank you that you came prepared!
NOTE: This article was originally authored by Deborah Sweeney and is published with permission. Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation and Deborah at @deborahsweeney.