Business funding resources are a crucial aspect of small business management, as evidenced by a federal survey indicating that 44% of small business owners borrowed money to meet expenses.
This borrowing trend isn’t new; the survey dates back to 2019, highlighting that securing loans is a common and necessary practice in business.
Seeking financial assistance is not a sign of failure but rather a strategic move for growth and sustainability.
In fact, 56% of those who borrowed money did so for business expansion or asset acquisition, demonstrating the integral role of loans in business planning.
This information, gleaned from the U.S. small business survey, sheds light on the widespread use and importance of business funding resources.
Financing Options for a Small Business
There are many small business financing options. Here are the 17 best ways to finance your business:
Small Business Deals
1. Traditional Bank Loan
A traditional bank loan is a lump sum, term loan. Usually no collateral is required and the payback time is fixed. The interest rate for the term loan is fixed at the time the business loan is finalized. The monthly payback amount doesn’t change. A typical term loan is 7 years. Alternately, the term loan may be calculated for a time length based on 75% of the estimated business equipment life.
Best for: business owners who are purchasing fixed assets that will help the company increase revenue.
2. Short Term Loan
A short term loan is usually for a lesser amount than a traditional business loan. The payback time for this type of financing is usually from 12 to 84 months. The interest rate for short term loans can be fixed or variable. A series of short term loans, cleaned up in timely payments, can help a small business owner with credit score.
Best for: Startup businesses that are in need of capital while waiting for alternate funding.
Learn more about: Short Term Loans
3. Commercial Real Estate Loan
Commercial real estate loans for businesses come in two forms, real estate purchase or business construction loans. Loans have a fixed or variable interest rates and terms are usually from 7 to 10 years. The loan amounts start at $50,000.
Best for: Purchase of real estate, especially owner-occupied. Lenders will loan money up to 80% of the value of owner-occupied real estate. Also a good financing option for a construction loan. Lenders may offer interest-only construction loans, which allows a business to keep cash flow steady until the loan morphs to a term loan.
Learn more about: Commercial Real Estate Loans
4. Line of Credit
Line of credit loans offer the greatest variety of financing options. The interest rate is typically variable, and lenders may require assets for loan collateral. As a rule of thumb with line of credit lenders, the interest rates are higher for loans without collateral. The lower the loan amount, the higher the interest rates.
Best for: business owners who need cash flow to cover short-term expenses, such as inventory or payroll.
Related reading: Business Line of Credit
5. SBA Loans
Through the small business administration, the government guarantees payment of a substantial part of the business loan. Lenders who participate in the SBA loan program like this security. The program includes so many loan choices that it is one-stop shopping for business financing.
SBA loans do require additional paperwork. You may have heard that as a common complaint. But the paperwork is straightforward and available for download before you meet with lenders.
The Small Business Administration – as you’d think from the name – is all about assisting small businesses. The additional paperwork required for an SBA loan helps an applicant complete a complete loan package.
Best for: A business that seeks to borrow a large amount. Because an SBA loan is guaranteed, a business can borrow more money with longer repayment periods.
There are a wide variety of SBA loans available. Learn more: Types of SBA Loans
6. Online Loans
A faction of the online loan market gives the process a bad name. You may have a negative feeling from advertisements for companies that are no more than loan sharks with a website.
Reputable online lenders are great options for business financing. There are banks that have on-line business loan options, such as Wells Fargo, Chase Small Business and Capital One.
You can’t argue with the convenience of on-line applications to lenders, who are sometimes called FinTech providers. Examples of FinTech providers are companies such as PayPal Working Capital, Kabbage, OnDeck, Biz2Credit and more.
An online loan which consolidates debt may help a business improve its overall credit score. When a traditional lender considers small business financing, the lender would rather see one creditor than a number of creditors. Also, “paying off” those creditors may improve the business credit score.
Best for: borrowers with bad personal credit rating or unestablished personal credit rating who need quick cash flow can benefit from online lenders.
Learn more: Online Lenders
7. Merchant Cash Advances
Here’s how a merchant cash advance works. In exchange for a percentage of you daily credit or debit card receipts, a financing company advances cash to you. You’ll establish a merchant account, where credit and debit card payments are deposited. The financing company will be paid from the merchant account.
Does it sound like robbing Peter to pay Paul? Well, not if your business has a valid projection of future earnings tied to credit and debit card sales.
The MCA financing option can have high fees. You can shop MCA companies online. MCA companies do not require a high credit score.
A business can typically borrow from $2,000 to $250,000 depending on its past records of credit and debit card sales. A business owner with a credit score of 500 or better can usually qualify for merchant cash advances.
Best for: A small business with a poor credit score or unestablished credit score which needs quick cash flow.
Learn more: Merchant Cash Advance
8. Accounts Receivable Financing
Typically a business can’t consider unpaid invoices as an asset. Lenders want to see money in the bank.
Lenders that provide Accounts Receivable Financing look at monies which are outstanding as invoiced goods and services. Those moneys are considered an asset. And although those monies haven’t been paid, there’s a payment schedule (due dates).
Lenders which back Accounts Receivable Financing for a business use software called Invoice Factoring. The software syncs the invoices between the business and the Accounts Receivable Financing lender. When the business is paid, via the software, the lender is paid.
Best for: A small business which is seasonal (or has defined short-term cash income periods) which needs working capital in the meantime.
9. USDA Loan
Farmers and ranchers who need capital can borrow up to $10 million from the USDA. Interest rates are typically from 5 to 9%.
This type of business financing has a specific source, the USDA Business and Industry Loans Guarantee program. The applicant must live in a rural area, defined as an area with fewer than 50,000 inhabitants.
The applicant must have a good credit score and at least 10% equity in the farm or ranch. For startups, the requirement is 20% equity.
One of the best things about a USDA loan is through the program, the applicant gets mentorship and advice. In addition to discussions about a loan, the advisors may help the applicant develop a business plan.
Best for: Farmers and ranchers who need capital for renovation, modernization, purchases of real estate or inventory/supplies.
Note: Businesses connected with farming and agriculture should check into the SBA Limited Economic Injury Disaster Loan program. In early May 2020, this program was changed from general to specific. The program launched as a program for all small businesses, but is now for farm and agriculture businesses only. A business may get up to $2 million with a 3.75 interest rate.
Learn more: USDA Loans
10. Equipment Financing
An equipment financing loan can be structured as a term loan, line of credit, or a combination of the two types of loans. The flexible loan structures create repayment plans that are more flexible than with traditional loans.
Little or no down payment is required. The lender may allow the applicant to include the cost of installation and sales tax in the overall loan amount. This helps a business retain working capital while expanding.
Best for: A business that needs a vehicle fleet, such as delivery trucks. This type of small business loan can also be used to purchase packaging machinery and/or refrigeration units.
11. Business Credit Cards
A credit card dedicated to business use is a must. The business credit card report can make it easier to track expenses and compile information needed to file taxes.
But a business credit card can do more. It’s much easier to qualify for a business credit card than it is for a loan. Because interest rates are high, using a business card for a loan should only be for short-term financing.
Timely payments of the business credit card can help a company build a credit history. You may also earn reward money.
Best for: A business that needs to manage cash flow. The credit card payment can be set up to match the business’ billing cycle.
Learn more: Business Credit Cards
SBA microloans are for business owners who are minority, female, Veteran and/or low income. The SBA provides loans and grant directly to eligible nonprofit microlenders, who provide the loans to the business owners.
These loans are often used by startup businesses. The money can be used for training and technical assistance.
Best for: A business which fits the basic qualifications of the applicant and needs $50,000 or less.
Learn more: Microloans
In simplest terms, crowdfunding is a way to get small amounts of money from a large amount of people. Crowdfunding is done through the internet.
There are four basic types of crowdfunding:
Equity – Owner sells a piece of the business to an investor or investors
Donation – Just as it sounds, people give money to the business.
Debt – The owner gets money from individuals and owes them the money.
Rewards – For a set donation amount, the donor gets products, services or gifts.
Best for: start up businesses, entrepreneurs.
Learn more: What is Crowdfunding and List of Crowdfunding Sites
14. Peer-to-Peer Lending
Peer-to-Peer Lending is similar to Equity crowdfunding, in that a private investor is used. But with Peer-to-Peer, the owner isn’t selling a piece of the business. Instead, the owner is getting a loan from a peer.
The Peer lender gets a return on the investment. Because the Peer lender is taking all the risk, the lender wants a good return on the investment. Interest rates are often high.
How does it work? There are websites that facilitate Peer-to-Peer lending, such as Upstart and Prosper. Business people join the website as either a borrower or a lender.
The Peer-to-Peer Lending websites have software to calculate the borrower’s credit rating.
Best for: A business owner who is shopping for loans using the internet and comparing rates.
Related: Peer to Peer Loans
15. Trade Credit
With Trade Credit, the business selling goods or services extends credit to the buyer. The Trade Credit agreement the parties sign allows the buyers to pay at a mutually agreed upon later date.
Since the buyer doesn’t pay at time of sale, a Trade Credit helps keep operating cash-free.
The Trade Credit is most often used by a business involved in international trade. A U.S. business may get a Standby Letter of Credit or Commercial/Import Letter of Credit from U.S. bank. The bank that issues the letter is backing the business. The letter improves the business’s credit rating overseas.
Best for: A business that is involved in international trade.
Related: Trade Credit
16. Equity Investment
Think Shark Tank. Equity Investment takes the form of angel investors, venture capitalists or private equity. Despite the popularity of the Shark Tank show, this type of investor is a rarity. Angel investors make up the smallest percentage of this limited method of achieving business loans.
In exchange for the private investment, you sell a stake in your business to an investor or group of investors who hope to make a profit. To stand out from other companies, an owner must have complete knowledge of all the business numbers and a stellar business plan.
Best for: A young company with a lot of growth potential seeking venture capital.
Related: Size of Angel Investments
17. Startup Financing
Some lenders previously mentioned offer financing for startup companies. To cover all the bases, we’ll add Community Development Finance Institutions.
CDFIs are nonprofit lenders. They don’t require as much collateral as a traditional loan.
A CDFI has an advantage that is huge for some applicants. Of course, as all lenders do, the CDFI will want your credit score. But here’s where the advantage lies – the CDFI may listen to your reasons for a bad credit score. You might get the loan anyway.
Best for: A business owner with bad credit which can be explained by personal or family issues, such as illness or accident.
|Traditional Bank Loan
|Lump sum, term loan with fixed interest rates and a typical term of 7 years. No collateral required.
|Business owners purchasing fixed assets.
|Short Term Loan
|Smaller loans with flexible payback periods (12 to 84 months). Can be fixed or variable interest rates.
|Startup businesses in need of quick capital.
|Commercial Real Estate Loan
|For real estate purchase or business construction, with fixed or variable rates, starting at $50,000.
|Real estate purchase or construction projects.
|Line of Credit
|Offers flexible financing options, variable interest rates, and may require collateral.
|Covering short-term expenses, like inventory or payroll.
|Government-guaranteed loans with various options for larger amounts and longer repayment periods.
|Businesses seeking substantial capital.
|Convenient online applications with various lenders, including reputable banks and FinTech providers.
|Borrowers with bad or unestablished credit.
|Merchant Cash Advances
|Cash advances based on daily credit/debit card sales, suitable for businesses with future earnings projections.
|Small businesses with poor credit needing quick cash.
|Accounts Receivable Financing
|Treats unpaid invoices as assets, syncs with lenders via software, and follows a payment schedule.
|Seasonal businesses needing working capital.
|Available to farmers and ranchers for renovation, modernization, real estate purchases, or inventory/supplies.
|Farmers and ranchers in rural areas.
|Flexible loans for equipment purchases, allowing for little or no down payment and including installation costs.
|Businesses needing equipment like delivery trucks.
|Business Credit Cards
|Helps track expenses and build credit history with high-interest rates, suitable for short-term financing.
|Managing cash flow and earning rewards.
|Provided by nonprofit microlenders for minority, female, Veteran, and low-income business owners.
|Startups needing smaller loans and training.
|Raising small amounts from a large number of people online, with various types including equity and donation.
|Startups and entrepreneurs.
|Borrowing from individuals online without selling a stake in the business, often with high-interest rates.
|Comparing rates for internet-savvy borrowers.
|Extending credit to buyers, enabling later payments and often used in international trade.
|Businesses involved in international trade.
|Selling a stake in the business to angel investors, venture capitalists, or private equity for profit.
|Young companies with high growth potential.
|Options like Community Development Finance Institutions (CDFIs) for startups with potential flexibility on credit.
|Owners with bad credit due to personal issue
Evaluating Your Business’s Financial Health Before Seeking Funding
Before embarking on the journey to secure funding, it’s essential for small business owners to thoroughly assess their company’s financial health. This step is critical because it not only prepares the business for potential scrutiny from lenders and investors but also aids in identifying the most suitable funding option.
Key Areas to Assess:
- Cash Flow Analysis: Understand the inflow and outflow of cash in your business. Analyzing cash flow helps in determining the liquidity and day-to-day operational efficiency of your business.
- Debt-to-Income Ratio: This metric is vital to understand the financial obligations of your business compared to its income. A lower ratio typically indicates better financial health and can make it easier to secure funding.
- Profitability Analysis: Assessing your profit margins provides insights into the business’s ability to generate income relative to its expenses and costs. Consistent profitability is often a key factor considered by funding sources.
- Overall Financial Stability: This involves a comprehensive look at your business’s assets, liabilities, and equity. Understanding your balance sheet in detail can help in making informed decisions about the type of funding that is appropriate for your business.
Streamlining Your Application Journey
The process of applying for business funding varies significantly based on the type of funding you are pursuing. Each funding source has its own set of requirements and application processes.
Tips for a Smooth Application Process:
- Understand Specific Requirements: Each funding type, whether it’s a bank loan, SBA loan, or an online lender, has unique requirements. Make sure you understand these and have the necessary documentation ready.
- Prepare a Solid Business Plan: Many lenders require a detailed business plan. This should include your business model, market analysis, financial projections, and how you intend to use the funds.
- Organize Financial Statements: Have your financial statements, such as income statements, balance sheets, and cash flow statements, in order. These documents are crucial for lenders to assess your business’s financial health.
- Anticipate Lender Concerns: Be ready to address potential concerns, such as credit history or cash flow issues. Having explanations or strategies to mitigate these concerns can strengthen your application.
- Seek Professional Help if Needed: Don’t hesitate to consult with a financial advisor or accountant to ensure your application is comprehensive and well-prepared.
Seeking Expert Guidance
Navigating the world of business financing can be complex, especially for those not well-versed in financial matters. Seeking expert advice can significantly enhance your chances of securing the right funding.
- Consult Financial Advisors: A professional financial advisor can offer personalized advice based on your business’s specific needs and financial situation.
- Use Resources from Business Development Centers: Small Business Development Centers (SBDCs) and other similar organizations offer free or low-cost advisory services, including help with financial planning and loan applications.
- Join Business Networking Groups: Networking with other business owners can provide valuable insights and experiences related to different funding options and lenders.
- Leverage Online Tools: There are numerous online financial management tools and platforms that can help in financial planning and understanding various funding options.
Ensuring Sustainable Growth Post Financing
Securing funding is only a part of the journey. Effective management of finances post-funding is crucial to ensure the sustainability and growth of your business.
Strategies for Effective Post-Funding Management
- Create a Detailed Budget: Outline how you plan to use the funds. A detailed budget helps in tracking spending and ensures that the funds are used effectively towards business growth.
- Plan for Reinvestment: Consider how the funds can be reinvested in the business to generate more revenue. This could be through expanding operations, hiring key personnel, or investing in marketing.
- Manage Increased Cash Flow: Effective management of increased cash flow post-funding is crucial. Allocate funds wisely to areas that yield the most return.
- Prepare for Future Financial Needs: Always keep an eye on the future. Regularly review your financial situation and plan for future funding needs, whether for expansion, new projects, or contingency funds.
By incorporating these strategies, small business owners can not only secure funding but also utilize it effectively to pave the way for long-term success and stability.
Related: Small Business Startup Loans
Small Business Financing FAQs
What Financing Factors do Lenders Consider?
Lenders involved with small business financing have similar requirements as lenders who are loaning you money to buy a house or car.
Lenders consider many factors in making a financing decision. However, these are the top factors:
- Credit worthiness – Most lenders want to see a credit score of 650 or higher. They will want those scores from others who have a minimum 20% ownership in the business.
- Business plan – In addition to personal financial records of owner or owners, the lender will need your business plan. An important point to note, you should explain how obtaining the loan fits into your business plan.
- Business revenues – In most cases you will provide at least 2 years of business revenue records, including income tax records.
- Clean History – You may not have any tax liens or late payments of taxes personally or involved with your business.
What is the Best Financing Option for My Business?
Your best financing option depends on how much money you need, the type of repayment terms you seek and how fast you need the money.
Your best option is the one that meets your needs at the time and is available. Here are 7 factors small business owners say they consider when deciding which financing option is best:
- How fast you need the money – Getting a line of credit loan is usually faster than getting a term loan. Getting a loan from internet sites can take as little as 36 hours.
- Programs your existing bank offers – Many small businesses approach their existing bank first. See what your bank can do for you first. If your bank is an SBA lender, explore those options.
- A referral from a trusted source – A recommendation from a colleague or mentor can point you to a type of financing or lender.
- Is collateral required? – Some businesses, such as knowledge businesses and online businesses, don’t have a lot of tangible assets to put up as collateral. There are loans a business can get with no collateral, such as different types of term loans.
- Flexibility of terms – Interest rates can be fixed or variable. Payback terms and conditions can vary.
- Likelihood of being funded – With a poor credit score, it’s not a good use of time to pursue conventional financing options. Find your best fit. With poor credit look at online financing or merchant advances.
- Costs and interest rate – You may find an interest rate that’s lower, but the loan may require other fees. Depending on the payback time frame, those additional fees could negate your interest rate savings.
Source: The Small Business Credit Survey by the Federal Reserve Banks, page 17.
How Can I Finance a Business with No Money?
It can be hard to get a loan to start a business if you have no funds. But no funds plus determination can get you where you want to go. With no funds, there is nowhere to go but up.
You have several options to finance a business with no money. Entrepreneurs may find it hard to get a loan to start a business — a traditional business loan, that is. So startup entrepreneurs who have no funds use these alternative financing sources:
- Friends and family – Your inner circle of friends and family may be willing to back your venture.
- Personal credit cards – Not ideal, but entrepreneurs start businesses on credit cards all the time.
- Home equity loan – Again not ideal because it can put your family at risk, but people often start a business this way. It can also help build a good credit history.
How Do I Get a Small Business Grant?
To get a small business grant, you have to know where to look and not waste time in the wrong places.
At the Federal level there are two programs: the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. However, they have limited applicability. Certain local communities have programs along with various private sources. Read more: Where to Get Small Business Grant.