How to fund a small business

How much funding do I need?

Work this out before you ask anyone. List your one-time startup costs and your monthly costs for at least a year, as the SBA recommends, then subtract what you expect to earn in that time. The gap, plus a cushion for delays, is what you need to raise. Startup costs walks through the list.

Funding less is often smarter. A small test that proves people will buy makes every later option, from loans to investors, easier and cheaper to get.

What are the main ways to fund a new business?

Can I get a grant to start a small business?

Rarely. The SBA states plainly that it does not provide grants for starting and expanding a business. Its grants go to nonprofits, resource partners and educational organizations that run counseling and training, and to specific programs such as research and development (the SBIR and STTR programs) and certain manufacturing and export initiatives.

Some state and local governments offer tax credits, small business loans or other incentives, often tied to goals such as job creation or urban redevelopment, the SBA notes. Treat any website that promises free government money to start a business, especially for a fee, with suspicion.

How do SBA loans work?

For these loans the SBA works through lenders. When a bank thinks a business is too risky, an SBA guarantee lowers the bank's risk and can make it willing to lend. Two programs matter most for new businesses:

• Microloans: loans of up to $50,000, made through SBA-approved nonprofit intermediary lenders in your area, to help small businesses start and expand. The SBA says the average microloan is about $13,000; the intermediary makes the credit decision and sets the terms and rate.
• 7(a) loans: the SBA's main loan program, with a maximum loan amount of $5 million, for a range of business purposes. Eligibility depends on what the business does to earn income, its credit history and where it operates.

The SBA's Lender Match tool connects you with lenders that offer SBA-guaranteed loans. Free or low-cost advisors at Small Business Development Centers and SCORE can help you prepare the application.

What do lenders want to see?

To improve your chances, the SBA suggests having a business plan, an expense sheet and financial projections for the next five years. Lenders and investors usually expect a traditional business plan, with a funding request that explains how much you need, for what, and over what period.

For a new business, the SBA notes that loan eligibility is typically based on the owner's personal credit score, and that poor credit history is one of the main reasons small business loan applications are declined. Check your credit reports at AnnualCreditReport.com, the only authorized source for the free reports guaranteed by law, and fix errors before you apply.

Should I use crowdfunding or investors?

Reward-based crowdfunding suits products people want to preorder. Backers usually get the product or another perk instead of ownership, and the SBA notes that if your plan fails you are typically under no obligation to repay them; read each platform's terms for your actual obligations. A campaign also tests demand in public before you manufacture.

Investors buy part of your company. The SBA notes venture capital focuses on high-growth companies, takes ownership rather than lending, and almost always wants at least a board seat. For many local product and service businesses that is not the right fit, and savings, early sales and loans are.