Securing funding for a new or existing business has an air of mystery to it—which can make it intimidating when starting to research financing options. Many entrepreneurs turn to small business loans or even venture capitalists to pay for startup costs and other early financial obligations. However, the lack of access to funding is a common (and central) obstacle to business success, especially for minorities.
During Yelp’s 2022 Women in Business Summit, three leaders in the financing space contributed their unique perspectives and knowledge around funding for small businesses, the opportunities their organizations provide, and more.
Getting started in financing
Much of the invention and innovation we enjoy as consumers started small and gained the attention of investors who believed in the future of the product or service. The question is: How can you claim some of the funding for your own idea? Understanding financing terminology, the options available to you, and how to capitalize on opportunities are the first steps toward securing the funding your business needs.
The two main categories of funding fall into either business loans or venture capital. Loans are the most common type of funding for a small business. Business owners typically receive loans through banks, meaning there are more formal steps—including credit checks—involved in the funding process. Loans come in various amounts and must be repaid by the deadline set by the lender.
Venture capital funding is best suited for a startup with an innovative idea. When a business owner attracts the attention of a venture capital firm, that funding serves as the firm’s stake in the business. In other words, the firm has purchased equity. This detail is important because it means the business owner does not need to repay whatever funding they received. Instead, the funding partner now owns part of the business and shares in its profits.
The role of the SBA and its portfolio of loan options
The Small Business Administration (SBA) acts as a lending partner to provide funding resources and support to small businesses by reducing lender risk and generating guidelines for loans. Increasing access to capital is the name of the game for the SBA—the program functions across the country and provided nearly $45 billion in loans in 2021. SBA loans fulfill a variety of business needs with long-term, short-term, microloans, and grouped loans being just a few of the options.
Long-term loans: Typically require repayment within a maximum of 10 years; for some industries, the maximum can reach 30 years. This type of loan is best suited for established businesses ready to make a large financial commitment, since the long repayment time frame maximizes the capacity for high-dollar financing.
Short-term loans: Must be paid back within 6-18 months and are best suited for businesses that have immediate financial needs. Since these types of loans must be repaid in a shorter time frame, the size of the loan is typically smaller.
Microloans: Less than $50,000 with short repayment timelines—the SBA program starts collecting repayment on the 13th month after the money is lent.
Grouped loans: Require entrepreneurs to apply together, typically in groups of three or more, and guarantee each others’ loan repayments. Rooted in joint responsibility, group loans are fairly simple to obtain and do not require collateral.
Helping underserved entrepreneurs
The numbers don’t lie: Systemic discrimination is an invisible hand that touches all aspects of the venture capital scene. For example, the Kellogg School of Management reports that JPMorgan Chase lent more money in a singular, predominantly white Chicago neighborhood—Lincoln Park—than it did in the rest of the majority-Black neighborhoods combined. Furthermore, eight in 10 Black businesses fail in their first year and a half—a rate four times higher than the average.
That’s where the resources and funding opportunities provided by organizations like the Association for Enterprise Opportunity (AEO) and the SBA come in, designed specifically to support small businesses and provide the capital they need.
“Our research shows that cash flow and cash flow management is one of the top reasons why there are so many exits in the Black and brown business community,” said Connie Evans, president and CEO of AEO, a trade association that links underserved microbusiness entrepreneurs with its member network of 2,700 organizations that provide capital and business support services.
Community Development Financial Institutions (CDFIs) are among that support network, and they mainly give out capital ranging between $250,000 and a million dollars. These institutions are financially inclusionary, nonprofit lenders who primarily provide capital to business owners with fewer than 20 employees and financial needs of up to $250,000 in capital—for this reason, they are a great option for entrepreneurs who identify as an underrepresented minority.
“CDFIs are more likely to fund community businesses, what we call ‘main street’ types of businesses. They have to use a traditional underwriting lens of, ‘How can this business really help the community, help grow their own business, and hire locally?’” said Connie.
Minority-owned businesses that fall outside the category of community service-oriented work can also use CDFIs to secure loans—they just might need to pursue a different funding classification. Sometimes lending opportunities are not explicitly listed as CDFIs but still prioritize assisting underrepresented entrepreneurs. AEO is currently testing a few different programs like this right now. Two of the programs would give Black women an edge in getting more of their businesses approved for capital, and a third intends to make loans more accessible to entrepreneurs with prison records.
Pitch framing: how to ask for the funding you need
Does your pitch look different if you’re asking for $10,000 versus $1,000,000? Absolutely.
Samantha Huang, principal of BMW i Ventures—a branch of BMW that invests in high-performance companies in hardware, software, and sustainability—shared: “There’s a line between when you want to go for a $10,000 financier (angel investor) versus a venture capital investment, which is probably starting out… in the couple million dollars.”
A big difference between the two is that an angel investor is typically a high-net-worth individual who uses their own funds to financially back startups or individual entrepreneurs, while venture capital investments come from an institution, like a bank, or another source that is a conglomerate of funds.
While these types of investments can provide big benefits, Huang explained that for business owners in the small- to medium-sized categories, SBA loans would be better suited than venture capitalist investments.
“If you talk to a VC investor, what they care about is that exponential growth, the scaling narrative,” Huang said. “When they invest in you, what they’re seeking is to get an exit, with the acquisition or IPO, so that they can make money on their investment.”
The IPO (initial public offering) is the process in which shares of a private company are sold to both individual and institutional investors. The company then becomes publicly traded on the stock exchange. Venture capitalists seek out IPO opportunities because they’re looking for more drastic returns, say ten times their original investment.
Huang suggests smaller businesses aim for a smaller loan because the lender has different criteria for what they want to see—essentially getting their principal back (the original loan amount) plus interest. Angel investors can also be impactful, especially those who align with your personal and professional values and goals.
What are financiers looking for in my business to give me funding?
Standing out in a crowded market is one of the most difficult parts of starting a business and fundraising. Understanding what investors are looking for in a business can help you target your efforts and ensure you’re on the right track.
“What we’re looking for is a founder with a clear and strong vision that’s compelling, big market opportunities, something that they believe in—the world should be different or is changing,” said Kathryn Weinmann, vice president of Norwest Venture Partners, a leading venture and growth equity firm that focuses primarily on the consumer and enterprise sectors.
“Usually that coincides with some sort of technological breakthrough or secular change,” Weinmann said. “Consumer preferences have shifted, and the world hasn’t caught up. And here I come in, as a founder, with an opportunity that has never existed before. Really nailing that ‘why now?’ question is super important to us.”
Tell your story, but acknowledge investor risks
At Weinmann’s firm, founders who are transparent about the risk investors are taking on and what challenges the business might face are highly valued. The best way to present this information is through a long-term plan for risk mitigation, which is separate from the general business plan, addressing how the business will succeed against the identified obstacles.
“Each venture financing round should feel like the business is risk-mitigated from the prior round,” Weinmann said. “Obviously, seeds are very early, so there’s not a lot of data around customer adoption or things of that nature. So it really boils down, in large part, to the founder and how they communicate the story that they tell.”
If your business does have data to share, you should have those numbers memorized so you can present them with confidence and effectively persuade potential investors.
At the end of the day, funding your small business is just like everything else in entrepreneurship—it is dependent on and driven by your goals and motivations. There is no one-size-fits-all approach to financing your business, but there are plenty of options for securing the funding you need to start your journey.
This conversation was a part of Yelp’s 2022 Women in Business Summit. Watch a recording of this session below and check out the other sessions on entrepreneurship, diversity, equity, inclusion, and more.
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