Small business growth has exploded, with business applications significantly increasing since 2019.¹ But entrepreneurs know they need more than just a good idea: They need funding, too. If you’re wondering how to finance a new small business or need extra capital to jumpstart your growth, here are five categories of sources to consider.

Personal investment or funding from friends and family

This is a popular choice, with a survey from the Kauffman Foundation finding that 64% of respondents used personal or family savings to start a business.² This can take different forms: You might put expenses on a credit card, or homeowners who have built up substantial equity in their house can take out a home equity loan.

Some entrepreneurs might opt to take out a personal loan, but that comes with an extra set of risks. First, it can make it harder to apply for other types of credit or loans since it will boost your debt load. And it precludes you from building business credit, while also potentially putting your personal credit score at risk should your business fail to turn a profit and you miss a payment. In addition, the interest rate might be higher than for other types of loans and may not be tax-deductible.

If you are self-funding, remember to put away sufficient money to cover your own expenses until the business turns a profit — one rule of thumb is six months of living expenses. And if family or friends are contributing, make sure you keep the relationship professional. Develop a contract that spells out the terms of the loan and how and when they will receive a return on their investment, taking care to be upfront about the risks. Then keep them in the loop with frequent communication about your progress.

Traditional Lending and SBA Loans

Traditional bank loans and Small Business Administration (SBA) Loans are tried-and-true avenues to get the funding you need. There are two main types: conventional bank loans and U.S. Small Business Administration (SBA) loans. As the No. 1 SBA lender in Illinois in 2021 and 2022³, Wintrust is uniquely positioned to help local businesses access the funding they need. This extensive experience means they understand the local market and needs of small business owners just like you and the fact that decisions are made locally means you can access the funding faster.

Our bankers can walk you through the three main programs:

• SBA 7(a) loans offer a straightforward solution with up to $5 million for needs such as inventory and expansion costs. You can also refinance existing business debt with this type of loan.
• SBA 504 loans are longer-term vehicles that offer fixed-rate financing for up to $10 million for items such as equipment, real estate, and even construction financing.
• A third option is SBA Express Loans and lines of credit, which offers an accelerated process so you can access capital faster — up to $500,000. Other features include lower down payments on fixed assets, longer amortization of business expansion loans, and financed fees. You also have the option of applying for a loan or line of credit for even more flexibility. 

Wintrust also offers conventional bank loans that are customizable and flexible to help a business like yours achieve its goals. In addition to general business loans, they specialize in a number of unique industries, such as agriculture; construction, engineering and architecture; nonprofits, franchises; health care; and even condominium, townhome, and homeowner associations.

Outside investors

This funding source can take different forms. The two most common are:

1. Angel investors, who use their own money to fund a business, usually in exchange for partial ownership.
   
2. Venture capitalists, which are firms that pool funds to invest in promising early-stage companies, again usually in exchange for a cut.

One option to consider is Wintrust Ventures, which focuses on helping startups flourish through resources and support. Since its inception, it has invested close to $50 million in 42 ventures and recently received an additional infusion of $50 million. It offers a unique platform since most banks limit their financing to debt in the form of loans, rather than equity, as Wintrust Ventures does.

While outside investors can offer an appealing form of financing, note that these funds typically come with some strings attached. It’s important to find out how the investor intends to participate — whether it’s taking a share of equity or a more hands-on capacity in a decision-making role. Small business owners who accept these funds need to be prepared to cede control as required by your agreement.

Crowdfunding

You’ve probably heard of popular platforms, including Kickstarter and GoFundMe, where the general public contributes donations to what they see as exciting ideas.

You’ll write your campaign appeal, including your fundraising goal, and explain what the money will be used for, then augment it with images and videos that tell your unique story. With Kickstarter, you need to offer a reward in exchange for financial support, usually with different reward tiers for escalating levels of support. Before making your offer, be sure you have a system that will allow you to fulfill these obligations.

Keep in mind that many projects are vying for support, so campaigns with a robust marketing and social media push behind them typically garner the most interest.

Grants

Unlike a loan, a grant won’t have to be paid back so it can be a popular form of funding. Many governmental agencies, foundations, corporations, and other entities offer small business grants so it’s worth putting some time into the search. Grant programs could be national or customized to your geographical location or industry.

While they are an appealing option, the application process can be time-consuming. Follow the requirements carefully and only spend time applying for those that are a good fit.

A few places to start include: 

•  National Association for the Self-Employed (NASE) Growth Grants
• Grants.gov for federal grants
• A general search for “small business grant” + your industry or your state 

Starting your own business can be an exhilarating journey, and often the first step is accessing the capital you need to start down the road to success. No matter where you are on your journey, professional advice can help you get there faster. 

Match the goals of your business to the right lending solution with one of our many financing options.

1. Cate Chapman, “Small business boom is real,” LinkedIn, February 2022.
2. “Access to Capital for Entrepreneurs: Removing Barrier,” Capital Access Lab, April 2019.
3. Based on total amount of dollars lent through SBA loans for fiscal year ending 9/30/2022.