By Salomie Chung, MBA

The number one challenge for small business wether its a start-up, in growth phase or beyond revolves around funding; primarily start-up and working capital. Some entrepreneurs where possible, choose the bootstrap method – using proceeds from savings and investment accounts and gifts and loans from family and friends. Others get personal loans or max out their credit cards. Why you might ask? Well its kind of like trying to find a job in a field you have no experience in. Banks usually want proof of revenues which you as a start-up do not possess. And if you are passionate about the cause you will take the path of least resistance.

The Small Business Administration (SBA) the federal government lending agency has always been the go to source for small business funding. However, if you are already a small business owner, you are aware that the SBA guarantees loans; they DO NOT give loans. The SBA has a list of authorized lenders to whom you must apply and be approved according to bank, not SBA standards. Although SBA guarantees the load the bank is the funding entity. So why not go directly to your bank? Well your business has no history or credit and the SBA route give you leg up.

So, what makes you a small business? it is a complex issue and can vary from business to business and state to state. Depending on your industry, a small business could be defined as business with a maximum of 250 employees or a maximum of 1,500 employees. They’re privately owned corporations, partnerships, or sole proprietorships that have less revenue than larger businesses. (Fundera). Small businesses with fewer than 20 employees make up 89.6% of all U.S. business enterprises.  And on top of that, 23 million businesses in the United States actually have no employees at all—meaning there’s only an owner going about business by themselves.

Beyond hard numbers, the SBA also looks at these qualifications to determine whether a company should be distinguished as a “small business”:

  • Whether the company is headquartered in the United States
  • Whether it operates primarily in the United States
  • Whether it’s a for-profit business
  • Whether it’s independently owned and operated
  • Whether it’s a minority company in its larger industry

For most industries, the SBA defines a small business as having under 500 employees. But the SBA actually publishes multiple “small business” definitions depending on industry. Consequently, the employee count for a “small business” can be higher in some industries than others. The definition of a small business (adjusted by each industry) is an important measure to help the smaller guys go up against the big, market-share holders in their industry. It’s meant to help small businesses get business loans from the government (SBA), win contracts with the government, and access general tools that can help them compete against larger corporations.

There are also other small business designations. Small Business Enterprise (SBE) is a company level diversity certification. SBE certifications are usually issued by the local or state government. Eligibility for certification as a Small Business Enterprise varies depending on the issuer; requirements may relate to number of employees, length of time the company has been in business and the net worth of the company’s owner. The Small Business Enterprise Program was developed to provide contract opportunities for firms that meet the eligibility criteria, to compete against others that are comparably positioned in their industries and markets. Applying for a certification could lead to benefits like increased recognition, limited business competition, preferential treatment, set-aside contracts, and increased revenue. In short, an SBA small business certificate encourages business growth. Another is the certified DVBE; to receive DVBE certification, a business must be at least 51% owned by one or more disabled veterans and have its daily business operations managed and controlled by one or more disabled veterans.

In addition to SBA backed loans, there are multiple available avenues of funding:

Small Business Investment Company. SBICs are privately owned and managed investment funds licensed and regulated by the Small Business Administration. They use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.  SBICs invest in small businesses through debt, equity, or a combination of both. Debt is a loan an SBIC gives to a business, which the business must pay back, along with any interest. Equity is a share of ownership an SBIC gets in a business in exchange for providing funding. Sometimes, an SBIC invests in a business through both debt and equity. Such an investment includes both loans and shares of ownership. A typical SBIC investment is made over a 3-year period. A typical SBIC loan ranges from $250,000 to $10 million, with an interest rate between 9% and 16%. Typical investments range from $100,000 to $5 million. Financing includes loans and ownership shares. Loan interest rates are typically between 10% and 14%. Investments range from $250,000 to $10 million.

Surety Bonds. These help small businesses win contracts by providing the customer with a guarantee that the work will be completed. The SBA guarantees surety bonds for certain surety companies, which allows the companies to offer surety bonds to small businesses that might not meet the criteria for other sureties. Some contracts require that the business doing the work be properly bonded.

Venture Capital. Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company. Venture capital differs from traditional financing in a number of important ways. Venture capital typically:

  • Focuses high-growth companies
  • Invests capital in return for equity, rather than debt (it’s not a loan)
  • Takes higher risks in exchange for potential higher returns
  • Has a longer investment horizon than traditional financing

Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding. There’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.

  1. Find an investor 
    Look for individual investors — sometimes called “angel investors” — or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies.
  2. Share your business plan
    The investor will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development.
  3. Go through due diligence review
    The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements.
  4. Work out the terms 
    If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions for the fund to make an investment.
  5. Investment
    Once you agree on a term sheet, you can get the investment! Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in “rounds.” As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.

Crowd Funding. Raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money. Instead, crowdfunders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler).

Crowdfunding is also popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.

Small Business Loan. If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan. To increase your chances of securing a loan, you should have a business plan, balance sheet and financial projections for the next five years. These tools will give you an idea of how much you’ll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan. Next, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms for your loan.

SBIR and STTR. If your small business is engaged in scientific research and development, you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. These programs encourage small firms to undertake scientific research that helps meet federal research and development objectives and have high potential for commercialization if successful.

STEP Program. The SBA’s State Trade Expansion Program (STEP) provides financial awards to state and territory governments in order to help small businesses with export development. The federal government generally offers grants only to nonprofits, educational institutions, and state and local governments. Sometimes, nonprofits and state or local governments offer economic development grants directly to small businesses. Check with your local and state governments for local grant opportunities. For more information visit to search for federal grants that might apply to your business.

For small business owners just starting out and don’t know where to begin, there are non profit community based organizations and resources such as SCORE, Small Business Development Centers, Women’s Business Development Centers and Veterans Business Outreach Centers that can offer assistance. Working with these organizations can be challenging and requires patience but they can provide invaluable information and guidance.

In addition, the Small Business Administration established the Certified Development Corporation Program to finance loans. A CDC is a nonprofit organization certified by the SBA to provide 504 loans to small businesses. This certification allows the CDC to operate statewide, sometimes in contiguous states. Another source of support and information is the Export Assistance Center designed to provide export assistance and make worldwide commerce achievable for your small or medium-sized businesses. Export Assistance Center One of dozens of offices run by the U.S. Department of Commerce providing advice and expertise to small businesses on how to export one’s products. There are export assistance centers in about 100 American cities and in 80 other countries.

Although the aforementioned information provides a range of available funding resources, there is still a funding gap through which a large amount of small business fall. The main source of funding is loans. Grants are offered only to non-profits. Contrary to the old adage – cash is king; it is the ownership of good credit that reigns in in the business realm which makes funding your small business via loans almost impossible. Using personal funding for business is risky. It is advised and advisable to use ‘other peoples money’ when funding a business. Ergo, bad credit and limited personal funds oftentimes shatters or delay hopes and dreams.

But there is hope. If you’ve established your business structure, i.e. you have registered the company, have a business plan and an EIN number, etc – try a small community bank or a credit union, especially if you own a home and is willing to use it as collateral. For small business owners who are willing to step out of the box, there is a community of Finteck companies such as Fundera that are willing to take a chance on you. Then there is Fund & Grow, a company that applies to several different 0% interest credit card companies on your behalf, and they do this through a power of attorney, signed by you. Once you’re approved for one or more of these credit cards, they coach you on how to use the money available to fund your business. These resources are offered as available options. You must do your due diligence and consult a financial advisor.

According to the SBA there are over 28 million small businesses in the US. Small businesses are the bulwark of the US economy. Entering the small business ranks can be risky, scary an challenging but can, if successful become your legacy and contribution to your community. Embarking on something that COULD and might fail is daunting but is in my opinion, better than not trying and then regretting having not tried. To paraphrase: It is better to have tried and failed, than never to have tried at all.