Startup vs. Small Business? Why Your Business Type Makes a Difference When You're Seeking Financing

It’s easy to confuse small businesses and startups. After all, both seem very alike—but when you take a closer look, the two business models couldn’t be more different. And that matters when it comes to finding the right funding.

A key difference: business goals

One of the fundamental differences between small businesses and startups is intention. Startups are created to expand, grow, and bring in capital; small businesses, on the other hand, are built to be profitable and self-supporting from Day 1.

Also, startups tend to go through a well-defined, clear-cut life cycle:

1. Notice a specific problem.
2. Prototype the potential solution.
3. Identify the right product/market fit.
4. Launch and then pivot accordingly.
5. Scale up the winning model.

Small businesses tend to be based on existing business models, so their life cycle is a lot simpler: Emulate a successful company in the same market and then find a point of differentiation.

Startup financing options

While some startups do benefit from government loans and incentives, the bulk of their funding comes from venture capital firms—wealthy, established investors who are looking to grow their assets with high-potential acquisitions.

Because startups feature creative solutions and have the potential for rapid, profitable growth, they are an attractive option for venture capitalists, who can offer large amounts of funding very quickly, often without the paperwork and wait time associated with government loans.

On the other hand, venture capital comes with strings attached. Because investors will own a large, expensive stake in the startup, they’ll demand a high return on their capital and a say in the decision-making process. At minimum, VCs will often sit on the board, doling out guidance and weighing in on any substantial moves, from pivoting to new products to risky acquisitions.

In short: venture capital is a high-risk, high-reward arena for innovative business models or novel products that are new or first in a category. These types of companies attract VCs.

Other Articles From AllBusiness.com:

• The Complete 35-Step Guide for Entrepreneurs Starting a Business
• 25 Frequently Asked Questions on Starting a Business
• 50 Questions Angel Investors Will Ask Entrepreneurs
• 17 Key Lessons for Entrepreneurs Starting A Business

Small business financing options

Unlike companies that are traded on the open market, small businesses aren’t faced with intense pressure to expand or constantly turn a huge profit for their shareholders, and are sheltered from the volatility and shady practices of the stock market, most notably naked short selling, which can sink companies in a heartbeat using only financial engineering.

Because they don’t face the same high stakes as startups, small businesses have several more options:

Business revolving line of credit. Because it allows borrowers to borrow up to a certain limit and only pay interest on funds withdrawn, a business revolving line of credit is a low-risk option. And thanks to its flexible repayment terms, a revolving line of credit can give both businesses and business owners an opportunity to boost their credit scores, as well as plenty of choice in determining how to use their funds.

SBA loans. The Small Business Administration (SBA) has a variety of different loans for various purposes, situations, and companies, with different incentives and uses in different industries (such as manufacturing-specific programs). Some popular loan programs include:

• The 7(a) loan program, a series of wide-ranging, large loans that can be used to expand your business, purchase new equipment, or to pay for contractors, seasonal expenses, or construction.

• The CDC/504 loan program, which helps small businesses purchase or renovate land, facilities, and equipment.

• Microloans which range from $10,000 to $25,000, and which serve as a quick injection of cash to help businesses stay afloat.

Alternative lenders. As a result of increased regulation stemming from the 2008 recession, most banks stopped lending to small businesses, leaving the market wide open. Alternative lenders, non-bank companies that provide capital to small businesses, filled the gap.

Alternative lenders have an approval rate of 61 to 64 percent. Applications require less paperwork, have a faster turnaround time, and have less restrictive terms than traditional avenues of funding like banks and the government. However, their interest rates are a bit higher than traditional banks.

Where’s my funding?

Ultimately, whether you want to run a startup or a small business really depends on you. If you’re debating between opening the next Amazon or starting your own local bookstore, weigh your financing options ahead of time.

If you do your homework, there’s no reason you won’t be able to find the funding you need when you need it.