Learn all about the 10 most common funding methods for your small online business, including their pros & cons and the cases they apply the most.
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Written by Martin Nikolaev: Point of Sale Expert
Understanding how to get funding for your online small business is key to its sustainability. Knowing how to turn your idea into reality is not enough. Proper funding is the difference between experiencing an immediate failure and having the chance to build your business from scratch.
More than half of all businesses in the U.S. currently prioritize online operations.* This is no surprise, considering the booming e-Commerce industry. However, not every business project is successful. It may come as a shock to you, but only one in ten startups is successful, according to an article by Kyril Kotashev on Failory.com.** The rest go down in flames, and 16% of them fail because of financial problems. To avoid such a fate, you need an appropriate and reliable funding source.
This guide will show you the 10 most common funding options you can choose from, depending on several factors such as niche, scale, budget, and several more. You shouldn’t be scared of the possibly painstaking funding stage or the other obstacles that may lie ahead. As Ron Conway, a renowned venture capitalist, once said, “Any time is a good time to start a company.” Therefore, you should not hesitate if you believe in your idea.
*Chevalier, Stephanie. Share of SMEs in the U.S. prioritizing digital services 2022, by region. Statista, 21 Jul. 2022, www.statista.com/statistics/1321584/small-midsize-businesses-ecommerce-digital-services-united-states-region/. Accessed January 29, 2023.
**Kotashev, Kyril. Startup Failure Rate: How Many Startups Fail and Why in 2023. Failory, 14 Dec. 2022, www.failory.com/blog/startup-failure-rate. Accessed January 29, 2023.
Don’t have time to read the entire guide? Jump to the section that’s most relevant to you:
- Terminology to learn before exploring different funding options
- Aspects to consider before comparing funding options
- Top 10 funding options
Terminology to Know About Small Business Financing
If you’ve never been in a position where you need to source funds for a new online business, you might find the whole process daunting. The good news is that there’s almost always a fitting solution for your needs. To recognize it, you need to master the relevant terms and abbreviations.
Read the list below, and you’ll be ready to explore the different funding options for your online small business. Plus, some online small businesses can be founded with (almost) no upfront expenses.
- Collateral: The assets you would need to use to secure and guarantee the funding you’re eligible for. If you cannot repay your debt, you lose the collateral in favor of the lender to cover their loss partially or fully.
- Return on investment (ROI): This is the cost of an investment to the return it brings or the loss it causes. The higher the ROI, the bigger the return on your investment.
- Secured/Unsecured: The former applies to collateral-backed loans and similar types of funding, while the latter refers to funding options that don’t require collateral but are based on your credibility.
- Credit score: Credit history status that allows lenders to assess the risks involved in funding any business.
- Annual percentage rate (APR): This is the rate that determines the yearly interest that a borrower must pay on a loan. APR doesn’t apply to all types of funding.
- Interest rate: This depicts the repayment rate of the borrowed amount. It’s the amount you pay the lender for being able to borrow from them.
- Cash advance: This is the amount of capital providers give borrowers for discounted future receivables or sales.
Things to Consider Before Choosing a Funding Route
Before exploring your funding options, you should first consider your specific situation. What applies to some of your competitors may not be ideal for you. To determine the perfect solution for you, ask the following questions:
- How much funds do you need?
- Should you opt for the highest amount your chosen lender can provide?
- Can you cope with the type of debt you’re considering?
- What are your chances of approval, given the requirements?
- Do you need to guarantee the loan using personal assets?
- What would the interest be for the whole repayment period?
- Will you be able to make the profit you need to repay the loan you take?
- What’s the biggest monthly payment you can afford?
- Can you go without funding?
- What’s the risk level of your online small business funding?
If you don’t have a business plan yet, I suggest you create one. This will give you a clearer idea of your startup costs, as well as your recurring expenses. A correct calculation is all you need to determine the amount and type of funding you should seek, but it’s not the only important aspect. You also need a precise assessment of the risk you are about to take based on your projected profit. This is how you can predict if you’d be able to repay the debt you agree on.
Don’t forget to add every little thing you know you’re going to need. Here’s a list of the most common online small business startup costs:
- Rent and utilities
- Hardware and equipment
- Supplies and inventory
- Insurance and taxes
- Legal and registration fees
- Marketing campaigns
- Payment processing
- Shipping and logistics
- E-commerce fees
Check out our post on how to calculate online business startup costs.
How to Finance Your Online Small Business: Top 10 Funding Options
The online small business funding options I’ve listed below are not ranked based on some criteria. I decided to introduce them because they are among the solutions that would most probably fit your needs. If you don’t find the solution you’re looking for in this list, this doesn’t mean you’re at a dead end. It’s more like a crossroad: you always have an alternative; all you need to do is find it. Still, I believe that most online small business owners would find the funding option they were looking for in this section.
Let’s take a look at the list before we dwell on the details:
- Business Line of Credit
- Small Business Administration Loans (SBA)
- Business Credit Cards
- Personal Loans
- Friends and Family
- Business Incubator
- Inventory Financing
1. Business Line of Credit
This is the solution you need if you predict frequent or consistent cash flow difficulties during the first year or so. A business line of credit will help you cope with recurring costs and unexpected expenses that you wouldn’t be able to cover otherwise.
Think of it as an emergency business fund you could use at will. Of course, the interest you’d owe is an expense on its own, but this is how you guarantee your business won’t stall.
You can choose between secured or unsecured lines of credit, depending on your situation. The first option requires some form of collateral, but it also comes with lower interest. The second option is not easier to get regardless of the no-collateral approval process, and the interest is always higher than the alternative. Typically, you’d need proof of previously generated revenue and strong credit records. When it comes to providers of a business line of credit, you have plenty of options to choose from, such as Kabbage and OnDeck.
- You owe interest only if you use the option
- A good option to fill in the gaps when you experience no revenue
- Moderate fees involved
- You will be able to up your credit score if you cover the interest payments on time
- Not easy to get approved when you have no track record of generating revenue
- Low credit limits
2. Small Business Administration (SBA) Loans
Getting a business loan needs to be planned correctly. Make sure to choose the right lender and the best offer. In terms of reliability, the U.S. government may help you find the best lender you could opt for.
SBA loans allow various businesses to benefit from a myriad of loan offers. When you enter the SBA homepage, you will find several tools to source an appropriate loan from a local lender. The platform is generally geared toward SMEs, but you can opt for a seven-figure loan if you have what it takes to qualify for it.
Overall, SBA loans are a great solution for all business owners who struggle to secure funding from banking institutions due to a lack of financial records.
- Easier approval due to lower application requirements
- Longer repayment terms equal lower monthly payments
- The typical SBA application process can be lengthy and overcomplicated
This is an amazing solution if you plan to launch an innovative product that you need funds to manufacture. Crowdfunding has become an industry worth dozens of billions of U.S. dollars, which means you have every chance of securing the funding you need.
Essentially, crowdfunding allows several parties, usually private investors, to help you launch your company and engage in production. Your business idea and the plan you have to make it happen need to be immaculate and promising, of course.
Crowdfunding can be organized differently. Sometimes, investors fund your idea for nothing in return, but such donations are more of an exception. The rewards-based form of this funding option is the most common one: this is the scenario where investors get a reward for their contribution, which is often the product the borrower wants to develop. Some crowdfunding campaigns are based on equity funding, meaning that investors receive equity (i.e., shares) in exchange for their funds. Your search for a crowdfunding platform should start with the most popular options, such as Indiegogo and GoFundMe.
- No collateral requirements
- No credit score checks
- Relatively fast funding process
- Success is far from guaranteed
- Requires precise targeting
4. Business Credit Cards
Business credit cards are different from personal credit cards because of their primary purpose. They are an affordable and quick way to separate your personal finances from your business. Plus, there are business credit cards you could opt for that don’t require business credit history checks.
Most lenders would require you to present a positive credit history before allowing you to use a credit card, but there are plenty of exceptions. You can qualify for one of them through your personal credit score.
The usually steep interest rates are the price to pay for this fast funding source. On the positive side, there are perks to take advantage of, such as cashback options and having to pay no annual fees. Some of the best options to check out are the American Express Blue Business Cash credit card and the Chase Ink Business Unlimited credit card.
- Options for employee cards (sometimes free)
- You can use them to build your business credit history
- Flexible short-term cash source
- May affect your personal credit record
5. Personal Loans
This may seem to be an unlikely option, but it’s one of the easiest ones to get. You can receive a loan from banks, credit unions, or even from an online lending platform. The fixed monthly payments you’d need to take care of require careful planning in advance.
Personal loans are often the only solution you may resort to when you want to launch your new online small business, but you need to think about separating personal from business finances once your company takes off.
If you’re just starting out or you need money to step up your game, then this might be the perfect solution. Personal loans are often unsecured, meaning that you won’t be required to provide collateral, but some of the best offers you can get are for collateralized personal loans. Make sure to check out SoFi’s online personal loan offer.
- Relatively low interest rates
- Low monthly payments
- Fixed monthly payments
- You usually need a credit score of 530 or higher to qualify
6. Friends and Family
This might be a tricky or sensitive topic to discuss in some cases, but it’s still among the most common types of funding for an online small business. If you have a close friend or a relative that has faith in you, then you might be able to get the funding you need without the additional hustle and bustle.
The hard part comes when you realize you need to accept that person not only as who they have always been to you, but as who they’re going to be from now on: your lender. Otherwise, you risk ruining your relationship with them.
They say that doing business with family members is a no-no, but it all depends on your trust in each other and the agreement you can make.
- No collateral needed
- Flexible, custom terms and conditions
- Flexible payments would be possible
- You keep complete control of your business (unless the agreement you make says otherwise)
- Loans from family members and friends are often too small
7. Business Incubator or Accelerator
Business accelerators are programs or organizations that provide startup business owners access to funding, mentorship, and practical training. They have become wildly popular in the last decade or so. They fund thousands of startups each year in the U.S.* Through a business incubator or accelerator, you can get expert advice, resources, or both.
What you need to have in mind is that not all accelerators are the same. There hardly is a universal solution, and you’re better off finding a startup incubator that’s relevant to your niche and has the right focus (investments, venture capital, etc.). Other aspects to consider are the timeline you would be offered and the size of the platform.
*Source: Statista Research Department. Leading U.S. startup accelerators by investments as of July 2021. Statista, 11 Jan. 2022, www.statista.com/statistics/1249900/leading-startup-accelerators-investments-usa. Accessed January 30, 2023.
Sometimes, the only person that can and should invest in your business is the one who created it: you. You can either use your savings or redirect another source of income you might have. Some entrepreneurs start saving startup capital immediately after they begin working on their ideas.
The huge responsibility of gambling your savings on an idea makes sense. Knowing the risks, you are likely to put in everything you have in order to avoid the grim fate of losing your own money. There’s no better motivation to assess the situation clearly than this.
Bootstrapping is the best option for business owners who want to launch a product or a service on their own, without seeking outside investment or funding.
- You keep full control of your business
- No fees, interest, and monthly payments to worry about
- You have the flexibility you need, as long as the savings you have are enough to propel your business
- Possible delays in development due to insufficient funds
9. Inventory Financing
Inventory financing is a great choice for e-commerce business owners who are just starting out. If you struggle to keep up with sudden rises in demand, then you’d need a solution that can help you catch up fast.
You can take advantage of this funding option in two different ways: by taking an inventory loan or opting for an inventory line of credit. The former means that you receive the funds you need to purchase the desired inventory, while the latter gives you the chance to take as much as you need when you need it, and you’d only pay interest on the amount you take.
Inventory financing providers usually collateralize your loan, meaning that you need to agree that your current inventory becomes the loan collateral. Fundbox is one of the common choices for small and medium-sized businesses.
- An ideal solution for businesses with fluctuating demand
- Comparably easier access to financing
- Options for inventory loans or lines of credit
- Inventory loans often come with steep interest rates
Grants can be private or public, depending on the project they’re aimed at. Being free, they need to be earned in competition with other businesses, meaning that you need to have a bulletproof idea and a business plan to match if you want to grab one.
Most often, grants focus on different causes, but you don’t necessarily need to start a nonprofit to get one. It’s enough to present an innovative service or product that can capture the interest of investors.
Usually, grants are targeted locally, depending on the investor. There are sometimes too many requirements to cope with, but this is the price to pay if you want funding without having to repay a loan afterward.
- Free money (literally speaking), which means no repayments are required whatsoever
- No business score checks
- Strong competition
- Lots of rules and requirements
- Lengthy application process
How to Get Funding for Your Online Small Business: FAQs
How do you receive funding?
The 10 funding options suggested in this guide are the best options by far. However, you can choose from several other types of funding, such as asset finance, overdrafts, invoice finance, cash advances, and more. Crowdfunding, business credit cards, and family loans are among the most common alternatives.
How can I start a business with no money or little money?
You need to have a viable business idea and do a lot of research. Then, you should find all the different funding options that you can secure. There are many free resources to help you along the way, such as online courses and different types of software. You can also start an online business from home, which will reduce your costs by a lot. See our step-by-step guide on how to start a business with no money.
What kind of online business is most profitable?
There are plenty of profitable online business ideas that you can turn into a successful reality, such as dropshipping, affiliate marketing, reselling goods through e-commerce platforms, selling your own products, and more.
Can you start a small business with $100?
Yes, you can start an online small business with $100 or even less. You can use your existing computer and smartphone and launch a dropshipping website from your home, which is the best example of a low-cost online business.