Small-Business Financing Options

When you need cash to fund growth or the ongoing operations of your enterprise, there are many small business finance alternatives to choose from.

Those include the possibility of securing an angel investor, especially if your venture is a startup. However, such an arrangement, along with other venture capital options, usually demands the willingness to surrender a stake of between 10% and 50% in your enterprise to your venture capitalists.

So this guide focuses on alternatives that require no such reduction in your ownership. Those financing options range from business credit cards and regular small business loans to microloans, multi-million dollar SBA loans and crowdfunding. Read on to learn more about these different ways that an entrepreneur can finance a small business, and to decide which option might be right for you.

Financing options for a small business

Below are some of the most popular small business loans and other varieties of business funding, ranging from lending platforms to crowdfunding.

Small Business Administration (SBA) loans

The Small Business Administration (SBA) is a government agency that provides services and resources to support small businesses. As part of these efforts, the U.S. Small Business Administration partners with local lenders to offer SBA loans.

The SBA sets guidelines to make funding more accessible to small businesses while also reducing risk for lenders by backing loans up to a certain percentage. Three of the most popular SBA loan programs include 7(a) loans, 504 loans and microloans.

7(a) loans

SBA 7(a) loans are the most common type of SBA loan, and you can use funds for a variety of business needs, like accessing working capital, refinancing debt, financing business equipment or buying real estate. You may be eligible for up to $5 million in business financing if:

• Your small business operates for profit in the U.S.
• You exhaust all other financing options before applying
• You can show why you need the funds and what you would use them for
• You’ve invested money in your business and are currently making on-time payments for existing debts

Interest rates for 7(a) loans are lower than for many traditional business loans and repayment terms can range between 10 and 25 years, depending on the purpose of the loan. There are several types of loans under the 7(a) program that may feature fixed or variable rates, but most are fully amortized.

504 loans

Through the 504 Loan Program, Certified Development Companies (CDCs) provide lending for small businesses trying to grow and create jobs.

You can qualify for up to $5 million (or $5.5 million for some energy projects) if your business operates for profit, has a net worth of less than $15 million, and has an average net income of less than $5 million for the previous two years.

504 loans only require a 10% down payment, which is lower than many other business financing options. Fees are also more affordable because CDCs include them in the loan amount rather than out-of-pocket closing costs.

However, CDCs often require extensive documentation and underwriters are thorough, which can lengthen loan processing times.

Microloans

Microloans may be a good option if you want to borrow up to $50,000. In fact, the average microloan is around $13,000.

You can use microloans for various business expenses, and they are a good option if your business may not qualify for conventional small business financing. Still, eligibility requirements vary by lender, but most require collateral and personal guarantees.

Small business grants

The primary advantage of small business grants is that, unlike loans, you don’t have to repay them. Many reputable companies offer small business grants and you can search for available programs online.

For example, you may qualify for grants from the SBA, Grants.gov, Small Business Innovation Research Program, Small Business Technology Transfer Program or National Institutes of Health Research Grant Programs.

That said, you must adhere to strict rules, application processes and eligibility requirements when applying for grants. Each program varies, but you may need to fill out a time-consuming application, wait long periods for approval or provide updates after receiving the grant.

In addition, grants are in high demand so you’ll likely face a lot of competition when applying for common grant programs.

Traditional bank loans

Some banks offer small business term loans similar to SBA loans. However, in some cases — such as for established banking clients — banks may try to provide loans with lower rates or better payment terms.

Working with a bank may also give you access to financial support and other banking products, such as credit cards or business checking accounts.

Bank loans typically offer flexibility in how you can use the funds for your business. However, certain loans may be restricted to specific types of purchases, such as financing for business equipment or real estate

It's also important to note that banks prohibit loan proceeds from being used for speculative purposes. That means you’ll need to make a strong business case when you apply.

Business credit cards

Business credit cards are an excellent way for newer businesses to build credit, and they are often easier to qualify for than loans.

Credit cards are a continuous funding source if you make your payments regularly and leave some of your balance available. Some credit cards also have rewards, so your business could earn cash back or miles.

On the other hand, credit cards can have high-interest rates. And credit card issuers generally charge fees, whether they be annual, foreign transaction or late fees.

Using credit cards for business expenses can also expose your business to risks such as unauthorized use of funds. For example, employees may be able to access the card if it’s not secured properly and, depending on the card, it may be difficult to dispute those charges.

If you're interested in this funding option, read our guide to the best business credit cards.

Credit union loans

Credit union loans are similar to bank loans except they’re restricted to members of the credit union. These loans generally feature lower rates and fees.

Credit unions also typically have fewer customers than large commercial banks, so they may be able to process your application faster and give you more personalized attention.

However, because credit unions are typically smaller than banks, they may not have the same benefits or features, such as online applications or same-day credit decisions. Plus, you’ll need to be a member of the credit union before you apply.

Invoice factoring

Invoice factoring is an alternative form of financing for which businesses with limited credit history may be eligible, particularly those who have a substantial number of outstanding invoices.

Invoice factoring involves working with a factoring company that will buy your outstanding invoices. When the company buys your invoices, it pays you a percentage of the total amount owed. It then takes on responsibility for collecting payments from your customers.

Another version of this is invoice financing, in which you work with a lender to borrow against your outstanding invoices. In this case, the lender gives you the invoice amount, but you’re still responsible for collecting the original invoice payment from your clients and paying back the loan with interest.

These two business financing services may be faster than traditional loan processing and can help your business access invoice payments before they’re due. However, fees can be expensive and you won't get the total invoice amount.

Additionally, your clients must have a good credit history for your business to qualify for invoice factoring.

Crowdfunding

Crowdfunding is another option that can help your business access cash without having to repay a loan. Crowdfunding sites generally recommend that businesses offer rewards to people who donate, but this isn’t always necessary. Depending on the platform you choose, you may also be subject to fees.

The overwhelming number of crowdfunding campaigns can make it hard to stand out to contributors. However, the overall risk is low compared to other financing options. Crowdfunding platforms such as Kickstarter even allow you to seek finding to a certain goal, and if you don’t reach that target, no funds are collected — and so no obligations created. And spreading the word about your campaign can be a great way to build a community around your business.

Merchant cash advances

A merchant cash advance involves borrowing money that is secured by your business’s future sales. The cash advance company automatically collects a percentage of your credit card sales — or cash from a bank account — daily or weekly until the loan is repaid.

The application process for cash advances is straightforward, and you may be approved instantly with online applications.

A merchant cash advance may be a good option if your business lacks credit, but the industry is largely unregulated, so the fees can be extraordinarily high.

What’s more, some lenders deduct their payments daily, which can have a substantial impact on cash flow and revenue.

Peer-to-peer (P2P) lending

Peer-to-peer lending matches borrowers to lenders and investors. While it’s similar to other financing options for a business, you borrow from an individual rather than a financial institution.

As with other forms of business financing, you’ll still need to fill out an application so the investor can analyze your creditworthiness.

Interest rates are often comparable to personal loans, and some investors may be open to lending to you even if you have bad credit.

Securing funding for your business

Launching a business is exhilarating, but securing the necessary funding can feel like a hurdle. The good news: with some strategic preparation, you can significantly increase your chances of obtaining financing. Here's a breakdown of some key steps to strengthen your application:

Craft a compelling business plan

Your business plan should be a persuasive pitch to lenders, demonstrating a clear path to profitability that showcases your vision and how you'll translate it into financial success. Key components should include:

• Executive summary: A concise (one-to-two page) overview that captures the reader's attention and summarizes your plan's key points.

• Industry analysis: Delve deep into your industry landscape, detailing competitors, current trends and potential challenges and opportunities.

• Target market: Define your ideal customer. Who are you trying to reach? What are their needs and buying habits?

• Products/services: Highlight what sets your offerings apart. Explain how they solve customer problems and stand out from the competition.

• Marketing strategy: Outline your customer acquisition plan. How will you reach your target market and convert them into paying customers? Include your sales goals and strategies to overcome any potential obstacles.

• Operations plan: Provide a blueprint for your day-to-day operations. This includes logistics, staffing needs and how you'll manage inventory and production.
  
• Management team: Introduce the key players behind your business. Highlight their skills, experience and qualifications that demonstrate the team's capability to lead the company to success.

• Financial projections: Forecast your revenue and expenses for the next 3-5 years. This demonstrates your understanding of the financial realities of running your business.
  

• Exit strategy: While it might seem counterintuitive, having an exit strategy shows you've thought through the long-term vision for your business, including if your plans do not work out. This could involve selling the company, passing it on to family, or taking it public.

• Appendix: Financial projections, resumes, marketing materials and other relevant documents.

Build a robust business credit history

Just like a personal credit score, a strong business credit history is crucial for securing financing. Here's how to establish or improve yours:

• Accuracy is Paramount: Ensure that all your business information is up-to-date and error-free across all credit reporting bureaus.
• Payment Punctuality: Develop a system to ensure timely payments for all your business bills. A history of on-time payments demonstrates responsible financial management.
• Responsible Credit Usage: Consider using a business credit card or line of credit to build a positive payment history. However, always practice responsible credit use and avoid carrying a high balance.
  

Explore alternatives for quick funding needs

If time is a constraint, there are alternative options to traditional loans:

• Personal Guarantee: This allows you to back a loan with your personal credit. While it can expedite approval, it also poses a higher risk as you're personally liable for repayment.
• Secured Loan: Offer collateral, such as assets or property, to secure a loan. This can potentially lead to lower interest rates as it reduces the lender's risk.

Seek expert guidance

Don't be afraid to leverage available resources for navigating the financial landscape:

• Mentorship Programs: Connect with experienced small business owners who can offer valuable insights and advice based on their own journeys.
• Loan Officers: Schedule a consultation with a loan officer at your bank. They can assess your needs, recommend suitable financing options, and guide you through the application process.

By following these steps and taking the time to prepare, you'll be well-equipped to secure the funding your business needs to turn your dreams into a reality.

Can a brand-new business borrow money to fuel growth?

While it might be a little more difficult to get financing right after you start a business, it’s not impossible. The best thing you can do is create a solid business plan and start building credit as soon as possible.

Work with a loan broker who understands your business and who can connect you will more accessible borrowing options.

Carefully explore all of your funding options

Researching all of your small business financing options is a crucial first step to getting the money you need to grow your business. You should take the time to learn about the pros and cons of each option before filling out applications.

Once you decide which direction to go, you can begin learning about financial institutions, investors or platforms that will work for your business.