9 Small Business Financing Sources to Explore

If you want to go fast, go alone. If you want to go far, go together. This old saying is relevant when it comes to small businesses. Most businesses eventually reach a point when they need to seek small business financing from outside sources. In this article, we aim to help business owners wondering how to get business funding.

Some business owners turn to outside funding because the books are thriving. Others use the extra financial support as a bridge across difficult times.

Outside funding is an important resource for entrepreneurs starting their businesses. In fact, around 58% of small business owners in the US start with less than $25,000, much of it from external sources. But what about when your business has already been operating for a while? 

As the retail landscape becomes more competitive, business owners have to focus on their long-term growth and viability in their industry. With that in mind, funding may be necessary to facilitate these goals. 

Despite being the beating heart of many economies, SMEs often find it difficult to secure funding. In fact, it can be hard to know what your options are in the first place. 

This guide aims to help you with this. Here’s what we’ll cover:

• Should you seek outside funds for your small business?
• How to grow your business with funding
• 9 funding options for your small business
• How to choose the right funding

Let’s jump in.

Should you seek outside funds for your business?

You might want to get some help with cashflow. Or maybe you’re planning to buy some new specialist equipment. Or, you could be exploring how to bring more of your retail store sale activities online. Business owners have an almost endless array of reasons for seeking outside funding. 

“When the pandemic hit, our $2.8 million per year business crashed to zero overnight,” said Michael Alexis, CEO of TeamBuilding, which runs team-building events for companies such as Johnson & Johnson, Netflix and Apple. “For us, seeking outside funds was a lifeline to keep the business going while we reinvented with a new model.” 

Funding was clearly transformative for TeamBuilding—but every business is different. And it’s important to take a look at the downsides of outside funds, as well as the upsides. 

Pros and cons of small business financing

The main benefit to pursuing outside funding is that it allows you to continue achieving your business goals—without having to cut back on expenses. 

When businesses cut costs, it can hamper important goals, said Nishank Khanna, CFO of Clarify Capital. “Paying for the right talent, or the best equipment, for example, is often worth the upfront money because it makes your business better,” he said.

That said, a major drawback of raising certain funding is that it can dilute interests and add more external pressures. “For example, if you sell equity in your business to raise funds, then you will have a smaller stake in it,” said Alexis. “As the business grows, you don’t participate in as much of the upside. If you take a loan, then you add interest charges and a risk of default.”

When to seek outside funds (and when to hold off)

But let’s say you’ve decided you’re going to go ahead.

When should you seek funding for your small business? 

Here’s what two business owners had to say. 

• Seek funds before you need them, suggests John Miller, who is COO of Addition, a London-based financial services firm for SMEs. “Write a financial plan and then work out when you need to raise. Don’t rush to the first deal you see, as there are plenty of options out there.”
• Seek funds when you have a business plan. “Your plans should include how you will repay your loans and grow your business,” said Jeffrey Zhou, CEO of Fig Loans.  “You may feel a business plan is too formal if you’re asking for funds from friends and family—but keeping things professional is always advised. This way, everyone who is willing to chip in has a more informed perspective of the potential risks,” he said.

What you do with funds matters just as much. 

How to use small business financing

Small businesses need to be smart about putting outside funding to use.

“Small businesses need to think like investors,” said startup consultant Jonathan Mills Patrick, a former banking executive and three-times startup founder who has been involved in over $800M in debt and equity funding for entrepreneurs. “Taking on additional capital should preferably happen when there are available investments that can be made with that capital. For example, buying a new piece of equipment that will help satisfy increased orders.”

TeamBuilding’s Alexis suggests small businesses treat funds like their own business’s money. “Countless startups have raised millions of dollars and then burnt through it quickly. Instead, treat the money as if you have earned it, and then diligently invest it to earn back more,” he said. 

This is useful advice. Ultimately, the way you use your funding should fit into your greater business plan. Are you planning to invest in projects that will take months to years to fulfill, like expanding to a new location? Or do you need funding during a specific season for inventory? Knowing exactly how you’ll use your funds will help set you up for success down the road.  

9 small business financing sources

Small businesses can look at a range of different options for funding—let’s take a quick look at some of those in this handy table before we go into each one. 

1. SBA loans

You often have to be in business for a few years to secure a business loan. “It sounds paradoxical, but it’s because most lenders will require some proof of concept and viability before taking the risk,” said Jeffrey Zhou, CEO of Fig Loans.  “However, it is possible to get a small business loan from the Small Business Administration (SBA), which will grant microloans of up to $50,000 for new businesses.”

Business bureaus, state programs, and non-profits often also offer special grants and scholarships. 

TIP: Be sure to look out for dedicated programs for women entrepreneurs in the BIPOC, LGBTQIA+, and other under-served business communities. 

2. Asset finance

This is a popular option for businesses that rely on specialist equipment or machinery to serve their customers. With asset financing, you can borrow to buy or replace an asset. Asset is a broad term here—think of your delivery trucks, your ovens, your fridges or your top-end computers and printers. The loan is secured with the asset you buy. That’s the collateral that lenders will recover if you’re unable to repay. 

Depending on your preference, the financing can be structured as a lease or secured loan. That means you don’t have to pay the full purchase price up front. The loan is secured with the asset you buy. That’s the collateral that lenders will recover if you’re unable to repay. This is a good option for growing businesses that lack the upfront capital to invest in high-quality machinery. However, keep in mind that assets have to be maintained regularly in order to ensure they retain their value.

3. Bank lines of credit

Or a revolving credit facility, if you want to give it another name. Think of this as a mix between an overdraft and a credit card,but for your business. You agree to a revolving credit facility with your bank. You’re given a maximum withdrawal amount and your business can access the funds at any time you need.

There are two types: secured (backed by collateral) and unsecured (no collateral, but potentially higher interest rates as a result). 

Lines of credit may be a good option for you because you pay interest only on the amount you use. They’re often used for short-term financing needs, like maintaining fluctuations in cash flow or unexpected expenses.

4. Receivables financing

Service-based small businesses can struggle with late customer payments. And accounts receivable can heighten concerns about cash flow. All up, they can be a real source of stress for owners, especially if things are already tough. Invoice financing can relieve some of this pressure because it allows businesses to use outstanding invoices as collateral for funding, or a “float” of the invoice amount.

Basically, a business will sell its outstanding invoices to a financier at a discount in exchange for upfront cash. That way, they can access funds that are tied up in accounts receivable. 

5. Government funding

Small businesses should seek outside funds through government aid, says Jim Prendergast, SVP of asset-based lending company AltLINE Sobanco. “In many states, there are government incentives to opening up your own business, which means they’ll usually help you financially. Though you can fund most of the business through your own money, it’s always wise to take advantage of any government programs available,” he said.

Government funding can come in many different forms for the purpose of encouraging business development and innovation. It includes:

• Grants
• Loans
• Tax credits and incentives
• Vouchers
• Subsidies

Take a careful look at your government funding options–you may qualify for more than one type. However, keep in mind that government funding can be very competitive, as they receive a large number of applications. 

6. Venture capital (VC) funding

VC funding can help your business cover ongoing operating costs, but it’s probably the most suited to startup or scaleup businesses with an identifiable potential to ‘scale up’.  That’s VC-speak for becoming bigger, more valuable, more profitable and more attractive to future investors.

VC funding can help your business cover ongoing operating costs, but it’s probably the most suited to startup businesses with an identifiable potential to “scale up”. That’s VC-speak for becoming bigger, more valuable, more profitable and more attractive to future investors.

These high-growth potential businesses give venture capitalists equity in the company in exchange for funding. It can come in the form of seed funding (initial investment), early stage, expansion or late-stage financing.

7. Family and friend loans

Funding from your own personal network is another option. That could be a friend, your partner or the good old-fashioned bank of Mom and Dad. Bear in mind that everyone should still know where their money is going, and you should have a structured payment plan as you would with any other type of financing. You’ll be accountable for repayments based on the agreed terms.

8. Crowdfunding

Another one for businesses that have a start-up feel. Fledgling businesses often turn to crowdfunding to validate product ideas and build an audience of potential future customers. Crowdfunding is as much an art as it is a science—and business owners will need to put some serious effort into marketing a fund-raising campaign if they want to reach their target amount.  

9. Merchant cash advances

If you have consistent sales, a merchant cash advance (MCA) could be right for you. With an MCA, you receive upfront, working capital in exchange for a portion of your future sales. It usually includes a flat fee, and the percentage of your sales that’s used to pay the advance varies depending on the provider. It can be a solid option if you need quick access to capital, but it can be more costly than a traditional loan. 

Did you know? Eligible Lightspeed customers can take advantage of Lightspeed Capital, our merchant cash advance program. If you’re approved, you can get funding in as soon as two business days, which you can use for any expense. Plus, there are no payment schedules, fluctuating interest rates or lengthy applications. The advance is remitted daily through a portion of your sales. To find out if you’re eligible, sign in to your Lightspeed account and go to the Financial Services section, or email us at [email protected].

Funding in action

If you plan to grow your business through funding but don’t know where to start, it’s helpful to look at how other businesses use their financing. There are many ways you can use your funding to advance your business and grow sales.

Tips for choosing a funding partner

Whichever option you choose, bear these tips in mind.

• Understand your pain points and why you want more funding, said Michael Knight, co-founder of Incorporation Insight, which helps new businesses to incorporate. “If your business is experiencing slow periods, credit lines or a business loan may provide you with the working capital to keep going. If you want to fund business growth, consider equipment financing and leasing options if you need new equipment.”
• Choose a reputable source of external funds from partners that understands your industry. That’s a tip from Carol Tompkins, a Business Development Consultant at AccountsPortal, an online accounting software. “Also, choose a partner whose terms are fair, and who sees value in what you are offering to the market. Do thorough background research on each source before applying for the funds,” she said.

Is outside funding right for your small business? 

The biggest benefit of outside funding is that you can keep your business moving without dipping into personal savings. “While there may be occasional expenses that pop up and can be easily put on your tab, draining your savings to cover startup costs can hurt your financial future. If something goes wrong or there are delays getting started you could find yourself without any safety net and a harmful blow to your credit score,” said Zhou of Fig Loans. 

Interested in upgrading your retail business with the right technology, tools and financing partner? Talk to us to learn how Lightspeed’s complete commerce platform can help.

Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we’ve included primary sources. While we work hard to publish accurate content, we cannot be held responsible for any actions or omissions based on that content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.