Raising Capital: How to Get Money for a Small Business

Where the money can come from

It's worth exploring every option before committing to one. Personal savings remain the primary source of capital for most new businesses, and while credit cards often fill the gap, better financing options are usually available even for small amounts. Friends and relatives are another common source, often at low or no interest, which can help in the early going. Banks and credit unions remain the most common formal source of funding, generally requiring a sound business proposal before approving a loan. Venture capital firms are a further option, though they typically take equity or partial ownership in exchange for helping a company grow.

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What lenders are actually looking for

It's a common misconception that small business owners have a uniquely hard time borrowing. Banks make money by lending it, but inexperience with financial matters often leads to declined requests. Walking in unprepared sends a signal to the lender: high risk. To be taken seriously, you need to know exactly how much you need, why you need it, and how you'll pay it back.

Loan officers generally pull a business credit report and weigh several factors alongside it: whether you've invested at least 25 to 50 percent of your own savings or equity into the business (lenders won't finance 100 percent of a venture), whether your work history, credit report, and references show a track record of credit worthiness, whether you have the training and experience to run the business successfully, whether your loan proposal and business plan demonstrate real commitment, and whether the business's cash flow can actually support the monthly payments.

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Building a loan proposal that works

Approval depends heavily on how well you present yourself, your business, and your financial needs. A written proposal is the best way to improve your odds, and a good one covers several areas. General information includes your business name, the names and Social Security numbers of each principal, the business address, and the exact purpose and amount of the loan. Business description covers the history and nature of the business, its age, employee count, current assets, and legal structure. A management profile gives background, education, and experience for each principal. Market information defines your products, your market, your competition, and how the business meets customer needs. Financial information includes financial statements for the past three years, or projected statements if you're just starting out, personal financial statements for each principal, and a list of collateral you're willing to pledge.

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Short-term vs. long-term loans

Loan terms vary by lender, but generally fall into two categories. Short-term loans typically mature within a year and include working capital loans, accounts receivable loans, and lines of credit. Long-term loans generally mature over one to seven years, though real estate and equipment loans can run as long as twenty five years, and are typically used for major expenses like real estate purchases, construction, durable equipment, and vehicles.

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SBA programs at a glance

The U.S. Small Business Administration doesn't lend directly in most cases; instead it guarantees a portion of loans made by banks and other private lenders, which reduces the lender's risk and opens up financing that might not otherwise be available. A few programs worth knowing about:

The 7(a) Loan Guaranty Program is the SBA's primary and most flexible loan program, usable for working capital, equipment, real estate, and refinancing, with broad eligibility requirements designed to fit a wide range of financing needs.

The MicroLoan Program provides smaller loans, up to $50,000, through nonprofit intermediaries, generally for working capital, inventory, or equipment. It can't be used to pay existing debts or purchase real estate.

The CAPLines Program helps small businesses meet short-term and cyclical working capital needs, covering seasonal inventory buildup, contract-based work, construction financing, and general working capital lines of credit.

The 504 Loan Program, delivered through Certified Development Companies, provides long-term, fixed-rate financing for major fixed assets like land and buildings, generally requiring the business to create or retain jobs in proportion to the loan amount.

SBA Express loans offer a faster approval turnaround for financing up to $350,000, using the lender's own documentation and process rather than the full SBA review.

Each program has its own eligibility rules, fees, and maximum guarantee percentages, and the right one depends heavily on what the financing is actually for. A lender approved to work with the SBA, or a CPA familiar with these programs, can help match your situation to the right one.

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