How to Fund Your Budding Small Business During a Recession Is the economy throwing you and your small business too many curve balls? You can still achieve the funding needed to see substantial growth.
By Jonathan Herrick Edited by Kara McIntyre
Opinions expressed by Entrepreneur contributors are their own.
Being a successful business owner is an aspiration for many working people. However, it's not for everyone.
Creating and growing a small business is a serious challenge, and that's true even when the economy is booming. And although we may not technically be experiencing a recession, we can all agree that the market is suffering, which can add intense hurdles for small businesses.
Unless you have wealthy friends and family to borrow money from, you will have to fight against the odds. While many entrepreneurs can rely on wealthy and connected parents to succeed in business, this is not an option for most of us. Having good sense and grit, especially in hard economic times, will get you extremely far as you embark on this journey.
If you have small business aspirations, don't let the current economic situation deter you completely. While it's true that almost one in five businesses fail within their first year, there are moves you can make to ensure you don't fall on the negative side of that statistic.
Getting the right capital, at the right times, will ensure your small business stays on course and achieves the success you're after. Let's look at some creative ways to get the capital needed and secure funding even when the economy isn't at its best.
Related: 4 Tips for Small Business Owners as They Navigate an Economic Downturn
Funding solutions for your small business
Bootstrapping
The common wisdom is to get a loan, but if your business faces unexpected issues, you could default on your loan and the lender could take the business that you worked so hard to build. If you have the skills, work ethic and financial discipline, you can start a new business with just your savings and the passion of yourself (and/or some like-minded people).
Bootstrapping means you succeed on your own terms. You won't have loan payments cutting into revenue, and you can retain full ownership and autonomy without outside investors. If you can save $150 to $500, you can afford a business license in the U.S. and start a new legal business entity. You may need other licenses, materials and labor, a website, or other expenditures, but if you can afford a smartphone, you can afford to become an officially registered business owner.
Related: Fundraising Vs. Bootstrapping: How To Decide What You Need For Your Tech Startup
Small business grants and loans
Sometimes, getting a loan is a necessity. Not all new ventures can be bootstrapped with savings; some businesses can be very capital-intensive. In this case, you want to get a loan with the best terms possible in order to increase your chances of success and minimize your debt expenditure.
Governments offer subsidized small business grants and loans in order to stimulate economic development, including the U.S. Small Business Administration or SBA. These loans often have better terms than private lenders, so make sure you do your homework — look into the loans that are available and ensure that you qualify for them.
Crowdfunding
People love supporting others, especially if they're working hard to build something they're passionate about. If you believe you have that passion and truly think your small business idea is a great one, pitch it effectively online and you could get many small investments via a crowdfunding platform.
Crowdfunding was once a unique method people used when they had no other options; however, it's now an extremely popular avenue for people to source funding. There are tons of platforms to choose from, such as GoFundMe, Patreon and many others. Going this route will require coming up with a strong, effective pitch and maybe investing in marketing for visibility on the platform. However, entrepreneurs have raised millions on these platforms and succeeded.
Related: 3 Bootstrapping Success Stories to Inspire Your Entrepreneurial Journey
Angel investors
An angel investor is a high-net-worth investor who believes in your business idea and gives you serious funding at the very beginning when most other investors are not yet ready to back you. Despite the benevolent-sounding, self-appointed title, an angel investor demands secure debt, equity, or revenue share in exchange for funding. It's not charity, it's investing.
Microfinancing
Microfinancing is a way to secure small loans for new ventures. These loans are exactly what their name implies: on the smaller side. However, if you are resourceful, a five-figure loan could be more than enough to get your new business off the ground, especially if you don't have much overhead or real estate.
Microfinancing can cover the startup costs associated with your online shop, as the average microloan is $13,000.
Peer-to-peer lending
A new form of financial technology is peer-to-peer lending, which utilizes the internet to connect lenders with borrowers directly, without the need for an intermediary financial institution, such as a bank or credit union.
Also called P2P lending, these often have a low barrier to entry for borrowers and can provide good passive income for lenders. However, as they are often sought outside traditional channels, these loans have a greater risk of default for lenders, and management fees as high as 1%.
Related: I Started 2 Companies During Recessions: Here Are 4 Tips For Scaling Your Startup During a Downturn
Support your budding small business with a marketing plan
No matter how you fund your business, you will need effective marketing in order to succeed. You could have the best product or service in the world, but without marketing, no one will know about it.
During an economic downturn, it may be tempting to scale back on your marketing efforts so you can keep your budget nimble. However, if you're to get the funding you need, marketing is an extremely important resource for brand exposure. Your marketing plan directly contributes to how you're able to appeal to investors. Plus, your competitors may be scaling back in this area, so you'll have the chance to occupy more real estate online.
If you're still concerned about having enough financial resources for these efforts, look at cost-effective solutions, like email marketing, content creation and social media. These channels are great for brand awareness and you can see tremendous ROI.
With a potential recession looming, don't let your small business aspirations get sidetracked. I'm not saying it will be smooth sailing, but if you've got the passion to see it through, these funding ideas paired with a marketing strategy will keep your plan in motion.
