Funding Your Small Business: Bootstrapping, Business Loans, Private Investors, Crowdfunding and Grants
Have a business idea that others may find profitable or promising? Finding the right funding sources is crucial to turning your vision into reality, and the following are some options to start and grow your business.
Bootstrapping
Bootstrapping involves starting and growing a business using personal finances and operating revenues rather than external investments. Many successful companies, including Amazon, GoPro, and Facebook began as bootstrapped ventures. This approach allows entrepreneurs to retain full control over business decisions and operations. By cutting unnecessary expenses, self-financing operations, and reinvesting profits, business owners can sustain growth without relying on external funding sources. Some bootstrapped companies generate revenue through preorders, using funds from early customers to build and deliver products. While bootstrapping provides financial independence, it can also pose significant financial risk for the entrepreneur, especially if the business requires substantial capital to scale.
Business Loans
Traditional bank and credit union loans are a common funding method but require a structured approach. (Think the 5 C’s of Credit: Character, Capacity, Capital, Collateral, and Conditions.) In the “big picture” sense, anticipate answering these 3 questions:
1) What is the loan for?
This is important to create the proper loan structure. If you request a short-term loan to buy inventory but use the funds to make building improvements, you may be stuck with a line of credit balance that is difficult to pay down. Clearly communicate what you will be using the funds for to find the best financing structure.
2) How will it get paid back?
Cash flow! If you have financial history showing the ability to pay back the debt, then perfect! If you’re dependent on your future income to pay back the debt, you’ll need to explain and support why the loan makes sense for your business and, therefore, the bank. Funding an equipment purchase? Validate how the amount of additional income generated by that equipment will increase income OR how it will prevent you from losing income. Your business plan is key to show a lender that you’ve thought through the essentials of borrowing and running your business. (Further shameless plug: Talk to your Michigan SBDC consultant for great tips on Business Planning!)
3) How will it get paid back?
Not a typo… it’s the same as question #2.
The question’s the same but it’s asking something different. If cash flow suddenly isn’t enough to make payments, THEN how does the bank get paid back? Bank loans are structured to be paid back based on cash flow generation. They are ALSO structured to be paid back if cash flow becomes insufficient to make loan payments. This is where collateral and the owner’s personal guaranty apply. The loan will likely be secured by collateral value exceeding the loan amount in the event of liquidation. Ideally, you will have an alternate source of income to support the business if needed.
Private Investors
Private investors provide funding in exchange for equity or future returns. These investors may include friends and family, angel investors and venture capitalists. Friends and family often serve as the largest source of early-stage funding but be sure to create clear contracts with terms of funding to avoid damaging family relationships if disagreements arise. Angel investors are typically high-net-worth individuals or professional investment groups seeking promising startups with high growth potential. Organizations such as the Angel Capital Association, Angel Investment Network and Pipeline Angels help connect entrepreneurs with investors who align with their business goals.
Business incubators, accelerators and startup studios also play a significant role in funding early-stage businesses. These programs provide investment, mentorship, and access to valuable resources including office space, equipment and training. CMURC, for example, is a business accelerator that offers co-working space throughout the Great Lakes Bay Region and helps startups connect with industry professionals and potential investors.
Crowdfunding
Crowdfunding has emerged as a viable alternative to traditional funding. This method involves raising small amounts of money from many individuals via online platforms. Contributors range from friends and family to strangers interested in supporting a project or business.
Crowdfunding provides access to capital without the constraints of traditional financing. It also serves as a form of market validation, as a successful campaign indicates demand for the product. Additionally, it helps build an audience, as campaign backers often become loyal customers and brand advocates. On-line sources include GoFundMe, Kickstarter and a host of other sites. Funders can be rewarded perks or special access to products and services.
Grants
Grants provide financial assistance from government agencies, private corporations, or non-profit foundations. Typically grants provide help with gaps in your business, but are not a major strategy for business funding. Grants do not accrue interest or require repayment, like loans do, which makes them an attractive funding source IF the businesses meet specific criteria. There will be strict eligibility requirements based on business type, location, industry or ownership demographics, etc. Expect the application process to be competitive and to require a detailed application and business plan.
To find organizations that have been awarded federal grants and are distributing them to for-profit businesses, you can use sites like Grants.gov. Many state and local governments offer their own grant programs as well. Industry associations and non-profits may provide grants for businesses aligned with their mission. Some grants require a matching contribution from the business’s own funds, and recipients must provide detailed reports on how funds are used. Pay close attention to submission deadlines and requirements to give you the best chance of a successful application.
Choosing the Right Funding Source
Selecting the best funding source depends on business needs, risk tolerance and growth objectives. Grants and crowdfunding may be ideal for businesses with innovative or social impact projects, while loans and private investors suit those with strong revenue potential. Bootstrapping provides complete control but requires significant financial discipline and personal risk. With the help of your Michigan SBDC Consultant, you can evaluate each option carefully to find the path to capital that’s right for you!
Brent Gettel
Business Consultant: Saginaw, Bay, Midland & Arenac Counties
Michigan Small Business Development Center – Lake Huron Region
Michelle Judd
Contract Business Consultant for Bay County, MI
Michigan Small Business Development Center – Lake Huron Region
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions and/or recommendations expressed herein are those of the author and do not necessarily reflect the views of the SBA.