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The Essentials on Small Business Financing and Building Credit

This is the third in a five-part series on small business success.

Questions about money come with the territory when you’re starting a small business.

At first, it’s “How will I come up with the money to launch my business?” Then it shifts to “Where can I get the money to stay afloat in the early months?” and then to “Have I got what it takes to persuade someone to finance my business’s growth?”

As you can see, different dollar-type questions connect to different stages in the creation of a small business.

Recommended: 10 Steps for Starting a Small Business

How Much Money Does It Take to Start a Business?

You don’t necessarily need a lot of money to get off the ground. According to the Small Business Administration (SBA) Office of Advocacy, just over half (50.9%) of all new small businesses start with less than $25,000 in funding. Only 12% of businesses use over $250,000 to start.

In fact, when it comes to small businesses (defined by the SBA as having up to 500 employees), 24% of them got started with less than $5,000, which is the largest group in the report. The SBA says 11.7% of the businesses started with $5,000 to $9,999, and 15% started with $10,000 to $24,999.

Small businesses need help. The SBA says that small businesses borrow mainly for four reasons: to start a business, to purchase inventory, to expand, or to strengthen the firm’s financial health.

For established businesses with strong credit, small business loans are available. In a 2024 survey, the FDIC found that nearly all banks make loans up to $1 million to small businesses and half of banks make loans up to $3 million to small businesses.

But what about loans for startups? Many lenders say in 2024 they want to see at least two years in business, although there are some lenders who approve loans for businesses that have been around for six months.

It can be a challenge to find the funding you need at any stage, but the more you know about this world, the better you’re positioned to make the right moves at the right time.

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Small Business Funding: Debt vs. Equity

Basically, there are two types of funding available to small businesses — debt financing and equity financing. Both types have pros and cons.

Debt Financing

You are most likely very familiar with debt financing, even if the phrase is new. Purchasing a home, buying a car, or using a credit card are all examples. With this financing, you are taking a loan from a business, a person, or another entity and pledging to pay it back, usually with interest.

Many business owners, sooner or later, apply for a small business loan from a bank or other lender. Here’s a list of the types of debt financing:

•  Term loans

•  SBA loans

•  Business lines of credit

•  Invoice factoring

•  Business credit cards

•  Personal loans, usually from a family or friend

•  Peer-to-peer lending services

The advantage to debt financing is you can strengthen and expand your business thanks to this inflow of cash. And the lender has no control over your business. Once you pay back the loan, your relationship with this funder is over.

The downside is you must pay back your debts on time to avoid catastrophe to not just your business but your credit and sometimes worse if collateral is involved. Debt financing is unquestionably risky if you are not profitable. If you take out a small business loan and you turn no profit, you’ll still have to pay back the loan plus interest.

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Equity Financing

When you’re talking about equity, you’re talking about investors. You could be offering shares of your company to family, friends, and acquaintances in your networks in exchange for money. Depending on the planned size and scope of your startup, you could be pitching your dream to venture capitalists (employees of risk capital companies who invest money in companies) and angel investors (individuals who offer their own money in exchange for a piece of the business).

The forms of equity financing are:

•  Crowdfunding (such as CircleUp, EquityNet, WeFunder, and Fundable)

•  Angel investors, high net worth individuals who provide capital for startups

•  Venture capital firms, individuals, or companies that invest in young businesses

“The amount of venture and angel capital are a relatively small part of business financing,” says the SBA Advocacy report. However, the trend is on the upswing.

The chief advantage of equity financing is that there is no obligation to repay the money acquired through it. So you’re not going to spend sleepless nights worrying about loan payments and soaring interest. However, you are giving up some control of your business this way. In order to gain funding, you gave investors a percentage of your company. You’ll have to share your profits and consult with your partners any time you make big decisions.

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How to Fund Your Business Idea

Where do most small businesses come up with their startup financing? THE SBA Office of Advocacy breaks it down:

•  75% Personal savings

•  19% Bank loan

•  10% Personal credit card

•  7% Other sources

•  6% Business credit card

•  6% Home equity

•  2% Government loan

Traditional debt financing can be tough if you’re still in the planning stages. No matter how amazing your idea is and what kind of killer business plan you’ve written, it’s not realistic to expect to automatically get a loan from a bank before your venture is off the ground.

But these rules are not set in stone.

“You can get a business loan at the beginning of starting a business,” says DeLisa Clift, a certified mentor with SCORE, the nation’s largest network of volunteer expert business mentors.

“The ideal time to seek funding is when you know that you have a viable product or service that is needed and wanted by customers,” Clift explains. “You need to develop a business plan that is written to attract loans from financial institutions, family and friends, and other investors. Another ideal time to seek funding is when the business is in the growth phase, and you are looking to add more products or services and to expand your business into new markets. You can also look at non-traditional banks like Community Development Financial Institutions (CDFI) for funding solutions.”

Recommended: How to Get Business Capital

The options for getting money to support your business are:

Self Funding

Many people use their own money to pay for early expenses. It can be scary to watch your savings go down. On the other hand, you won’t lose control of your business to investors or be on the hook for a loan. And it shows passion for your idea to commit your own money.

Some people say it’s smart to keep a traditional full- or part-time job while starting your business as a side hustle. But bear in mind that being overly cautious might stifle growth. In your business plan, come up with a strategy for growing your business to the point that you can quit the day job.

Friends and Family

This is a popular path to raising money for your business. Perhaps it will come as a no-strings donation, or maybe the financial support will take the form of a loan, or even an offer of money in exchange for equity.

There’s an obvious drawback, however. Mixing money matters with friends and family can end in tears.

Ken Colwell, author of the bestselling book Starting a Business: QuickStart Guide, says, “I always recommend what I call the Thanksgiving Dinner test. Imagine your business doesn’t work out, and you lose all your investment funding. Would that ruin your Thanksgiving dinner, or would your family be okay with it? Is the money you’re borrowing immaterial to them, or are you risking their entire life savings? Think carefully about these questions.”

Tip: For every dollar that a friend or family member gives to your business, you need to put the understanding in writing.

Crowdfunding

There are different types of crowdfunding financing available for startups.

Rewards-based crowdfunding: Supporters make donations to your business and receive a token of your appreciation in return. Example: Kickstarter.

Equity crowdfunding: Supporters receive equity in your company while expecting future returns. Example: Wefunder.

Debt-based crowdfunding: Supporters give you a loan, which you pay back on a prescribed schedule with interest or fee. Example: Mainvest.

Running a winning campaign can give you a big boost. However, not all business ideas are a good fit for crowdfunding. These campaigns demand a lot of time and effort, and it’s hard to stand out in the crowd. And you may need to wait a bit for the campaign to close and money to materialize.

Debt Financing

While a Main Street bank might shy away from giving a loan to a startup, there are strategies and options to explore, even if you’re in the earliest stages.

Business checking account

You won’t get a loan or investment of money this way, but it will establish your business, especially if you link it to a Paypal account or other system that shows money passing back and forth. Three months’ worth of business checking account activity can help you build a case for yourself to get debt financing.

Recommended: Business vs. Personal Checking Account

Business credit card

A business credit card can give you a cash influx, and some are available for entrepreneurs just getting started, if your credit is strong. The interest could be high here, so be careful. There are cards with 0% APR introductory financing. See if you can qualify for one of those. But always scrutinize the fine print for fees.

Microloans

Yes, there are loans available for startups, but they’re not a shoo-in to get. With a favorable credit history and an excellent business plan, entrepreneurs can sometimes obtain microloans for small businesses, typically up to $50,000.

Microloans are offered by nonprofits, individuals, and alternative lenders. The purpose of a microloan is to provide entrepreneurs who otherwise wouldn’t be eligible for a business loan with access to affordable working capital. They are used to fund business ideas, expenses, or expansion.

And yes, microloans have to be repaid with interest. Moreover, you may be asked to offer collateral or a personal guarantee, depending on your credit rating.

SBA’s Microloan program provides direct, government-backed loans to intermediary microlenders who can then offer borrowers necessary funding and training to start and run a small business. Some programs are specific to women, veterans, and other underserved communities. SBA loans are desirable because they often have lower interest rates than other business loans. However, practice patience. Receiving a microloan can take anywhere between 30 and 90 days.

Other microloan programs include Acorn, Kiva, and Rising Tide.

Peer Lending

Peer-to-peer lending programs eliminate the bank as a middleman, making it easier for borrowers and lenders to connect via online platforms. For many borrowers, this financing offers faster approval and financing. For investors, it can be an opportunity to support businesses they believe in. The downsides: Limited regulations on peer-to-peer business lending and Interest rates can vary greatly depending on a borrower’s qualifications.

Business lines of credit

Business lines of credit are similar to business credit cards. A line of credit gives you access to a set amount of funding, and you can spend as needed up to the limit. Once you repay what you withdraw, you can borrow funds up to your credit limit again. It’s possible to get a business line of credit after you’ve been in business for six months. Note: Business lines of credit have interest rates and possibly fees.

Loans for Equipment Financing

Having the right equipment could be crucial to your success, whether you’ve opened a restaurant or an accounting firm. But because of how pricey it can be, many small business owners lack the funds to purchase essential equipment and machinery. Some startups can successfully obtain an equipment financing loan. It helps a lot to have good credit.

Recommended: 8 Tips to Get Equipment Financing With Bad Credit

The Importance of Business Credit

Having a good credit score makes all the difference when getting your small business off the ground.

If you apply for any kind of business loan, the lender will look at both your personal credit score and your business credit score if you have one. Minimum requirements vary widely, depending on the lender and type of loan. But, generally, a good personal score to get a business loan is 720 and above, while a good business credit score is often 80 or above.

If you’re wondering about your business credit score, your business credit is linked to you by your Employer Identification Number (EIN), which is how the government recognizes your business for tax purposes.

You can check your credit score through Experian, Dun & Bradstreet, or FICO. Tip: None of them allow you to check it for free, but you can do so during their introductory offer period.

Each of these business credit bureaus uses a slightly different “formula” for determining your credit score for small business loans, but the factors are:

•  How much debt your business has compared to its available credit

•  Whether you pay bills on time

•  How old your credit accounts are

•  Your industry

•  Your company’s size

Clearly, the better your business credit, the more opportunities you will have to grow your business. When considering funding options and risk vs. reward, always keep your business credit score in mind.

Recommended: Mompreneurs: Generational Wealth and Real-Life Struggles

The Takeaway

When you’re trying to get small business financing, it’s important to explore diverse funding options like debt and equity financing, including loans, credit lines, and crowdfunding. Maintain a strong credit score to enhance loan approval chances and secure favorable terms. Understanding credit is vital for accessing growth opportunities and reflecting financial reliability.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Part Four: How to Be Your Own Boss

Photo credit: iStock/Moyo Studio

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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This is the fourth in a five-part series on small business success.

Being Your Own Boss: Benefits, Drawbacks, and Tips

It takes guts to start your own business. But many people, after weighing the pros and cons, feel they can’t not make this move.

As Amazon’s Jeff Bezos said, “I knew that if I failed, I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day, and so, when I thought about it that way, it was an incredibly easy decision.”

While the failure rate for small businesses is sobering—one in five go under within the first year—pursuing a vision for yourself and overcoming all the obstacles has definite rewards. And learning how to grow your business often goes hand in hand with learning how to be your own boss, followed by being the boss of others.

Recommended: 10 Steps for Starting Your Own Business

Are People Who Work for Themselves Richer?

The adoration our society doles out to the DIY millionaires (or billionaires) actually has some basis in the data. The Forbes 400 Ranking of America’s Richest People in 2024 found that 67% of those on the list met the definition of “self-made.”

Bringing this down to earth, a recent Ziprecruiter survey found that the average small business owner’s salary in the U.S. stands at $99,979. (Worth noting is that many company founders take no salary in the first years of running a business, while others take so much that they have trouble scaling their business.)

But creating a successful business can lead to long-term and life-changing financial gains.

According to a report released by the Small Business Administration, “On average, the self-employed are wealthier than the non-self-employed and are significantly wealthier than workers and retirees.”

What must be factored into the equation is that the person who started the business spawning generational wealth may have had significant advantages in education, inheritance, and connections. As the SBA says, “It is not clear if the self-employed choose self-employment because they started with greater wealth, or if they created it, or both.”

Moreover, there are racial disparities in small business ownership. A 2024 Pew Research study found that, looking at small businesses where estimates of majority owners’ race and ethnicity are available, most (85%) had majority-White ownership. Smaller shares were majority-owned by Asian Americans (11%), Hispanic adults (7%), and Black or African American adults (3%). About 1% were estimated to have either American Indian and Alaska Native, or Native Hawaiian and other Pacific Islander majority owners.

Recommended: Mompreneurs: Generational Wealth and Real-Life Struggles

Are People Who Work for Themselves Happier?

Despite the long hours and serious challenges, entrepreneurs report consistently higher rates of happiness than wage-earning employees, says research reported by The Wall Street Journal.

“If you look at the data, it turns out that entrepreneurs on average earn less money than a typical employed person, work 13 hours more a week, and report that it’s a very stressful occupation,” Boris Nikolaev, assistant professor of entrepreneurship at Baylor University in Waco, Texas, told WSJ. “But despite that, there’s overwhelming evidence in the literature that entrepreneurs report significantly higher levels of job satisfaction.”

Harvard Business Review found a similar breakdown when studying work and happiness. “We find that being self-employed is associated both with higher overall life evaluation and with more negative, daily emotions such as stress and worry,” wrote one study author. “It will most likely come as no surprise to anyone who owns a business that being self-employed can be both rewarding and stressful.”

No, it’s not a surprise. But can anything be done about the worry and stress that devour so many small business owners?

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How to Recognize and Banish Burnout

Anyone might think they know what burnout feels like — you’re exhausted and overwhelmed — but it has specific markers for small business owners. The Small Business Administration found in a 2023 survey that 81.7%, or 27,104,006 firms, have no employees. So there’s no one to share the burdens with. Here are symptoms of entrepreneurial burnout:

•  Passion for your startup is being replaced by resentment and cynicism

•  You keep putting off important things because procrastination is a habit

•  You’re plagued with brain fog and forgetfulness

•  You’re wiped out even after a night of unbroken sleep of at least seven hours

A small business owner with no staff or a small one is in a tough corner when it comes to reducing burnout. Delegating is not always possible and every minute seems to count toward staying in business. But the bottom line is if you fall victim to serious burnout, your business will become toast along with you.

Do you want to ruin your health as well? According to Harvard Business Review, research has linked burnout to many lingering health problems, including hypertension, sleep disturbances, depression, and substance abuse.

Here are four advice points that can help.

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1. Don’t “Fake Relax” — Really Do It

For at least 30 minutes a day, you must truly relax and take your mind off work completely. Sitting on an exercise bike while you worry about invoices is not cutting it. Empty your mind of stressful thoughts without judgment and do deep breathing. Or do something you really enjoy: Listen to music, garden, split wood. This is not a cop-out from keeping your business going. It’s a key to business survival.

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2. Think of the Big Picture

It’s easy to slide into feeling bad about the setbacks and fretting over the competition, but a proven way to restore perspective and fuel yourself anew is to reflect on how far you’ve come.

Reflect on your past achievements and successes. Get away from the day-to-day. Look at what you achieved over a longer period of time to remind you how successful you’ve been.

3. Get Better at Saying No

Over-extending yourself is a path to burnout. It’s too easy to build up stress and anxiety when too much is on your plate. Try saying no more often.

4. Reach Out to Others

“The best antidote to burnout, particularly when it’s driven by cynicism and inefficacy, is seeking out rich interpersonal interactions and continual personal and professional development,” says the Harvard Business Review. “Find coaches and mentors who can help you identify and activate positive relationships and learning opportunities. Volunteering to advise others is another particularly effective way of breaking out of a negative cycle.”

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The Takeaway

Launching your own business can be deeply rewarding, but working for yourself can lead to burnout. Business owners should prioritize genuine relaxation daily, reflect on past achievements to maintain perspective, and learn to say no to avoid overextending themselves. Additionally, seeking mentorship and engaging in meaningful interactions can combat burnout, ensuring both personal well-being and business success.

Worrying about running out of funds is a top stressor for new business owners, and many forgo salaries in order to keep the lights on and keep up with payroll. Small business financing can help ease some of that stress.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Next part: 20 Small Business Startup Grants, Programs, and Checklists 2025

Photo credit: iStock/demaerre

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Should an accident occur on your business property, it could lead to a costly lawsuit that could put your business at risk. That’s why many small businesses that work directly with customers or the public choose to purchase public liability insurance.

Public liability insurance covers claims made by third parties, such as customers, clients, or members of the public, as a result of bodily injury or damage to their personal property while they’re on the premises of your business.

Public liability insurance is similar to general liability insurance, but the coverage is more limited. If you’re just starting a small business and don’t need all the coverages included in general liability insurance, purchasing a standalone public liability insurance policy may be a great option.

Read on to learn more about what public liability insurance covers, whether you need it, and how it compares to general liability insurance.

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What Is Public Liability Insurance?

Business public liability insurance provides protection to your company if you’re found to be responsible for causing an injury or damaging someone’s personal property while that person is on your company’s property. This can be a customer, client, vendor, contractor, or any member of the public.

There are many scenarios in which your business could be at risk of public claims. Accidents can happen in the course of your business operations, whether it’s a slip-and-fall situation at your office involving a customer, or one of your employees inadvertently damages someone else’s property while carrying out their work duties.

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How Does it Work?

Let’s say that someone who works for your interior design company has taken an action that harmed a customer’s personal property. It could be something as simple as offering to carry the laptop of a client so that you can look at their decorating ideas together at your desk, and then dropping and destroying that laptop.

An act of negligence could also trigger a public liability claim. For example, if you washed your reception area floor and you didn’t put up any warning signs — and someone slips, falls, and gets hurt — your business may be open to a lawsuit for negligence. (In fact, it would be up to the judge if the sign is sufficient to avoid liability.)

If someone files a lawsuit against your business for a reason covered by your public liability policy, you file a claim with your insurance company. Your insurance company then typically helps cover your legal costs and pays damages up to the limits of your policy.

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How Is It Different from General Liability Insurance?

General liability insurance and public liability insurance policies are similar in that they are both business liability coverages that would pay the legal fees and damages in the event a bodily injury or property damage claim is made by a third party.

General liability insurance, however, provides a business owner with a wider scope of coverage than public liability insurance, including false advertising claims and product liability claims, which public liability insurance doesn’t cover.

General liability insurance also doesn’t limit itself as to where a third party is injured or their property is damaged. If someone is accidentally injured at their home by an employee of a business, general liability insurance would cover that claim while public liability wouldn’t because the injury didn’t take place at the business’s physical location.

The coverage provided by public liability insurance is usually included in general liability policy. General liability policies typically cost more than public liability policies, and also tend to be more widely available.

However, public liability insurance can often be purchased as a standalone policy and may appeal to a small business owner who doesn’t need a wider scope of coverage and wants to spend less on liability coverage.

Here’s a summary of the differences between the two types of business liability policies.

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Types of Public Liability Insurance

Business public liability insurance generally offers two specific types of coverage:

•   Bodily injury: This is when someone in the general public gets injured on the site of your business.

•   Property damage: This is when your business is responsible for damage to a third party’s property while they are on your business’s premises.

The policy will typically cover the damages, as well as the cost of legal defense, including court and lawyer fees.

If, for example, you’re in the food industry, or even just provide refreshments to the public at an event, and someone claims that your food or drink caused them to become ill, (and the court rules in their favor), public liability insurance coverage can kick in.

Or, let’s say you own a convenience store and one of your employees spills a soda on a customer’s leather purse, a public liability policy could help cover the cost of replacing the bag and anything inside it that got damaged.

A public liability policy usually only covers bodily injuries your company has caused to members of the public, not to the business owner or employees. And, this type of policy generally only applies to damages or injuries that take place on your business property.

Recommended: What Is Small Business Umbrella Insurance?

What Types of Businesses Benefit from Public Liability Insurance?

Businesses that have frequent interactions with the general public, such as restaurants, coffee shops, retail stores, hotels, and dry cleaners, can be good candidates for public liability insurance. Any member of the public or any property of others that you come into contact with in the course of your business operations can be a risk factor.

Companies that have offices where customers or clients regularly visit, and even home businesses that see foot traffic from the public, might also benefit from public liability insurance.
If your business often interacts with the public in other locations, such as the customer’s home or a client’s office, a public liability insurance policy might not offer adequate protection.

Public liability insurance is a more limited policy than other types of business insurance, which means it’s more affordable, but it doesn’t provide as much coverage.

Public liability insurance can be a good choice for businesses who need to save money and have mostly on-premise risks and no exposure to potential personal and advertising claims.

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How to Get Public Liability Insurance

Like other forms of insurance, your business may want to get quotes from reputable licensed agents who provide this type of policy. You can also use online cost estimate tools from insurance companies and agencies.

It can be a good idea to compare rates, terms, and benefits for insurance offers from several different agents or insurance companies in order to find a liability policy that meets your needs and also fits into your business budget.

The cost of public liability insurance will depend on the type of business you operate and the risks involved in running it. For example, a busy coffee shop that has foot traffic all day long will likely have a higher risk, and pay more for a policy, than an accountant’s office that may only see a few clients a day.

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How Does Insurance Impact Your Small Business Loan?

When applying for a small business loan, you may discover that a lender will require you to have certain types of business insurance coverage, as well as a certain dollar amount of coverage. That’s because they want reassurance that if a member of the public gets hurt or otherwise suffers damage on your premises, you’ll have the financial resources to handle any compensation and associated legal fees while still being able to make your loan payments and keep your business running.

If it ends up that your policy lapses during the term of the loan (the lender may check regularly), the financial institution may take out the policy at your expense.

If you’ll be renting property for a small business, then your landlord may have liability insurance requirements as well. That’s because if a member of the public gets injured on your premises or otherwise suffers damage, the landlord will want to be sure you’ll have financial resources to handle the claims and legal fees. When you have adequate coverage, this protects the landlord, too, saving them time and money.

What type and how much liability coverage you need will likely be spelled out in your commercial lease agreement.

Recommended: Business Insurance Cost

The Takeaway

Public liability insurance is a minimum layer of liability coverage for your company against claims of bodily injury or property damage from the public. It can be especially important for companies that engage in frequent interactions with members of the public.

Compared to commercial general liability insurance, which typically provides more comprehensive coverage for a wide variety of scenarios, public liability insurance tends to be a more limited option that can be more economical for small and midsize businesses that may not have the resources or need to purchase commercial general liability coverage.

Though its protection isn’t as comprehensive, public liability insurance can still protect your business from claims made by third parties for bodily injury or damage to property that they own. This helps ensure that in the event of a claim, the costs of legal defense, court, settlements, and damages don’t have to come out of your company’s pocket and put your business at risk.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Who needs business public liability insurance?

Public liability insurance is essential for businesses that interact with the public, clients, or customers, such as retail stores, contractors, or event organizers. It’s particularly important if your operations involve high foot traffic or physical interactions.

What does public liability insurance typically not cover?

Public liability insurance usually does not cover employee injuries, professional negligence, or damages caused by defective products. These require separate policies like workers’ compensation or product liability insurance.

How much does public liability insurance cost?

The cost of public liability insurance depends on factors such as the size of the business, industry type, level of risk, and coverage limits. For small businesses, premiums can range from a few hundred to several thousand dollars annually, depending on the policy.

Photo credit: iStock/JLco – Julia Amaral

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Angel investors and venture capitalists provide early-stage and high-growth potential small businesses with funding. These two groups, while similar in what they do, have key differences entrepreneurs should consider when going about acquiring capital.

Angel investors often provide smaller funding amounts and might have less business acumen compared to larger venture capitalist groups. Startup companies should carefully consider all their financing choices so that their business has the money it needs to flourish.

Keep reading to learn more on angel investors and venture capitalists, including how they’re similar, how they’re different, and how to know which investor is right for you.

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What Is a Venture Capitalist?

A venture capitalist (VC) is a group of individuals that seed developed businesses with capital to grow. Startups have many small business loan options available, but sometimes working with a VC is a viable choice.

Venture capitalists take an equity stake in the company and get their hands dirty with respect to how the business is run. VCs pool money from companies and investment funds and can provide large funding amounts to a growing enterprise.

How Venture Capital Works

Venture capital works by investing money into high-risk small businesses within a process-based framework, often after the angel investing stage.

There is tremendous upside potential in the eyes of VCs who look to improve the startup’s operations, but with that possibility of a large return on investment comes major downside risk. Venture capitalists have an exit strategy in mind once they have injected funds and impacted a target company. They might buy the firm altogether or seek a potentially lucrative initial public offering (IPO).

Pros and Cons of Venture Capital

There are many advantages and disadvantages that come with venture capital funding. For one, a small business owner who seeks a large investment should pursue a venture capitalist rather than an angel investor. VCs can make bigger investments, typically.

A downside, though, is that venture capital then takes a significant equity stake in your company and you lose some control. Still, that reduces the risk for an entrepreneur. Moreover, you have access to VCs’ market knowledge and networking connections.

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What Is an Angel Investor?

Angel investors are often accredited investors who put up their own money to help launch a new enterprise. An accredited investor is someone with at least $200,000 in annual income and a net worth of at least $1 million. Angel investing is different from venture capital in that the former might be a friend or family member, not a consortium of wealthy business experts.

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How Angel Investors Work

Angel investors put up their own money to help early-stage small businesses grow. In exchange, they receive a significant equity stake in the startup. These accredited investors are often individuals, but angel investing can also be done among a small group of wealthy people. Angel investing and venture capital are done at contrasting times, with angel investors usually aiming at firms that are just getting going.

Pros and Cons of Angel Investors

Angel investors vs venture capitalists have their pros and cons. Angel investors take on more risk than VCs and banks issuing loans since it is their money at stake and the target firm is in its infancy. A small business owner assumes less risk, and as a result, if the new business goes bankrupt, the angel investor shares in the losses.

Another upshot is that angel investors might be knowledgeable about business matters, which the small business owner can benefit from. A downside, though, is that you as the owner give up control since angel investors take big stakes in companies.

Recommended: 10 Steps for Starting a Small Business

Venture Capitalists vs Angel Investors

There are many key similarities and differences between a venture capitalist and an angel investor. It’s important for small business owners to know the similarities and differences of each before making a decision.

Similarities Between Angel Investors and Venture Capitalists

Angel investors and venture capitalists are alike in that they target fast-growing startups, with tech and science companies being sought out by both.

A venture capitalist and angel investor will both perform their due diligence, though VCs often do more to closely understand the firms in which they invest. Both the two investor types might take an equity stake in your business.

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Differences Between Angel Investors and Venture Capitalists

Among the differences between a venture capitalist versus an angel investor is the amount typically invested, with venture capitalists typically investing larger amounts.

Another difference is angel investing is typically done earlier in the life of a business, whereas VC funding funds more established, though still emerging, firms.

And finally, the due diligence might be less intensive with an angel investor as opposed to a venture capitalist. VCs are usually experts on how a business should operate, in contrast to angel investors who may be there just to provide financial help.

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Alternatives to Venture Capital and Angel Investors

Small business owners have other means to acquire capital to grow a startup outside of angel investors and venture capitalists.

Small Business Loans

Capital can be acquired by applying for a small business loan. A small business loan can help foot upfront costs to help expand your business without giving up equity.

Crowdfunding

Another option is crowdfunding. This new way of raising capital provides an energy boost to a growing or even established company. You must create a campaign that aims to raise money from any of a variety of potential investor types. The biggest advantage of crowdfunding is the funds do not need to be paid back.

Merchant Cash Advances

A merchant cash advance is a way to acquire quick capital to build out your business. While they are not loans, merchant cash advances provide liquidity. They work by merchant cash advance companies buying future sales at a discount. For repayment, they might take a percentage of future deposits or withdraw funds directly from the business on a fixed schedule.

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The Takeaway

Startups have many options when it comes to raising money to grow their companies, including angel investors and venture capitalists. While there are key differences between the two, both provide cash infusions to high-growth potential firms, often in exchange for equity or future profits.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the difference between an angel investor and a venture capitalist?

A key difference between an angel investor and a venture capitalist is that an angel investor is often just a single investor, whereas venture capitalists pool money together from many wealthy business experts. They also invest different amounts, since a single angel investor often won’t put forward as much cash as a group of venture capitalists.

Is it better to pitch to an angel investor or venture capitalist?

It can be better to pitch an angel investor if you’re a startup in the beginning phases of your business. Venture capital is better suited for entrepreneurs who have already launched their businesses and need more capital to grow.

What are the advantages of working with an angel investor?

An angel investor takes on more risk, which means you as the business owner assume less risk. You also have access to a business-savvy individual when working with a single angel investor. But it’s also possible that your angel investor might not be as familiar with your industry as you are if they are just friends or family members.

What are the advantages of working with a venture capitalist?

A venture capitalist can help emerging enterprises grow quickly since they can provide more funding through a process-driven method. VCs also help reduce risk to a small business owner and give them access to a network of venture capital connections.

Photo credit: iStock/South_agency

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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If you have a small business that invoices customers (and then waits 30 days or longer for payment), you know that cash flow can be a big concern. Two financing options that may help you get paid faster are invoice financing and invoice factoring.

While both funding options allow you to use your company invoices to secure a cash advance, they work in very different ways. Here’s what you need to know about invoice financing vs. invoice factoring.

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What Is Invoice Financing?

Invoice financing helps bridge short-term cash flow issues that might occur because of unpaid invoices from clients.

You can use those invoices as collateral in order to receive a lump sum of financing before they’re paid. Usually, you’ll receive between 80% and 90% of the invoice total face value upfront. Then, once the invoice is paid, you’ll receive the remaining balance, minus the company’s fees. The fees are often a percentage of the invoice amount, typically between 1% and 5%. The rate can be charged as a one-time fee, or on a weekly or monthly basis, depending on the lender and terms determined.

Invoice financing is also known as accounts receivable financing because the borrowed funds are secured by future revenue. It’s considered a type of cash flow loan.

One of the benefits of invoice financing is that you maintain direct relationships with your customers, rather than having the financing company manage the collections process on your behalf, which is typical with invoice factoring.

Example of Invoice Financing

Here’s an example of how invoice financing works.

Say a company decides to finance $10,000 in invoices. It received 80% upfront, thus adding $8,000 back into the business’s cash flow.

The invoice financing company charges 3% for every month the invoice is outstanding. After two months, the customer pays the bill. The company is charged 3% monthly, which amounts to $300 per month.

So, instead of receiving the remaining $2,000, the company receives $1,400. The total cost of the invoice financing was $600 in this hypothetical situation.

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Pros and Cons of Invoice Financing

There are both benefits and drawbacks to using invoice financing.

Pros

•   Keeps you in control: With this type of financing, your company is still in charge of the collection process. That means you get to maintain your relationship with your customers and they don’t have any insights into your business’s finances.

•   Smoother cash flow: For companies that largely deal with other businesses, invoice financing can help alleviate cash flow issues due to unpaid invoices.

•   Relatively easy to get: Since your invoices serve as collateral for the cash advance, invoice financing can be easier to qualify for than other small business loans. Lenders are usually more concerned about your customer’s payment history than your (or your company’s) credit history. This means you may be able to qualify even if you have a limited or bad credit.

Cons

•   Can be costly: While a fee of 1% to 5% may sound low, you need to keep in mind that this rate is often charged on the total invoice value per month and, in some cases, per week. Invoice financing companies may also charge fees, such as maintenance fees, invoice processing or advance fees, and early termination fees.

•   Uncertain costs: Although you retain control of collecting payments, you’re not in control of the total cost of invoice financing. Your business could end up paying a lot if a customer takes months to pay.

•   Liability for unpaid invoices: Your business may be responsible for repaying the borrowed funds in full if customers don’t pay their invoices.

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What Is Invoice Factoring?

Invoice factoring is similar to invoice financing, but with a few key differences.

With invoice factoring, you don’t use your invoices as collateral for a loan but, rather, sell your outstanding invoices to a factoring company at a discount. The company pays you a percentage of the invoice amount upfront and then takes on the responsibility of collecting the full amount from your customers. Once they receive full payment, they send you the remaining percentage, minus their fees.

Example of Invoice Factoring

There are a number of ways an invoice factoring agreement could be structured. Here’s an example of a company that uses invoice factoring at a rate that amounts to 1% for every 10 days it takes the customer to pay a $10,000 invoice.

The business receives 80% ($8,000) upfront, and the factoring company takes over the collection process.

The customer takes eight weeks to pay the invoice, resulting in an 8% fee — or $800. The remaining $2,000 balance is reduced to $1,200 to cover the fees. So the company receives a total of $9,200 for the customer’s $10,000 invoice.

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Pros and Cons of Invoice Factoring

Invoice factoring can help ease cash flow issues, but there are also drawbacks to consider.

Pros

•   Doesn’t require collateral: Invoice factoring is considered unsecured financing. You usually sell the invoices to the factoring company, but you don’t need to worry about using other company assets to secure the loan.

•   Smoother cash flow: This type of financing can improve your company’s cash flow.

•   Available with bad credit: You could get approved even with bad credit.

Cons

•   Could jeopardize customer relationships: You can’t control how the factoring company deals with your customers when it’s collecting invoices. Also, your customers will know you’re having issues with cash flow.

•   Can be expensive: Compared to other types of small business loans, invoice factoring often costs more and is accompanied by additional fees.

•   Liability for unpaid invoices: Depending on how the factoring is structured, you may be responsible for the borrowed funds if your customers don’t pay their invoices.

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Invoice Financing vs. Factoring: What’s Right for You?

Which type of financing will work best for your small business will depend on the details of the agreement and your relationship with your customers.

If you’re a new business and don’t have the time or staff to follow up on customer invoices, you might prefer invoice factoring. If, on the other hand, you have personal relationships with your customers, want to remain in control of the payment collection process, and feel confident you can collect on your outstanding invoices quickly, then invoice financing might be the better way to go.

With either arrangement, you’ll want to pay close attention to costs and read the fine print about rates and fees, as well as your liability if your customers don’t pay their invoices.

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The Takeaway

If you invoice customers, both invoice financing and invoice factoring can help you manage cash flow issues or cover short-term expenses while you’re waiting to get paid. With both types of financing, you use your unpaid invoices to access capital for your business.

With invoice financing, your invoices serve as collateral for a cash advance. With invoice factoring, you sell your invoices at a discount to a factoring company that then collects payment for you.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the difference between invoice financing and factoring?

Invoice financing allows businesses to borrow against unpaid invoices while retaining ownership and control over customer interactions. Invoice factoring involves selling invoices to a factoring company, which assumes responsibility for collections. The key difference lies in customer relationship management and ownership of the invoices.

What are the pros and cons of invoice financing and invoice factoring?

Invoice Financing Pros and Cons: Pros include retaining control over customer relationships and flexible cash flow solutions. Cons involve paying interest and retaining the risk of customer non-payment.

Invoice Factoring Pros and Cons: Pros include immediate cash and reduced collection responsibilities. Cons include losing customer control and potential negative perceptions from customers.

Which option is better for maintaining customer relationships?

Invoice financing is better for maintaining customer relationships because the business continues managing collections directly. In invoice factoring, the factoring company takes over collections, which might impact customer perceptions of the business.

Photo credit: iStock/RichVintage

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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