Small-Business Financing Options

When you need cash to finance your business’s growth or ongoing operations, there are many small business finance options to choose from. Financing options range from business credit cards and microloans to multi-million dollar SBA loans and crowdfunding.

Read on to learn more about different ways you can finance your small business and which one may be right for you.

Financing options for a small business

Below are some of the most popular small business financing options 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 SBA 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. 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.

Tips for obtaining funds for your business

Financing a business isn’t always easy. Depending on the type of financing you choose, there are steps you can take to maximize your approval odds.

Come prepared with a business plan

When evaluating your business loan application, a lender will consider your business’s financial standing and ability to make loan payments.

A professional, realistic business plan can explain how your business will make money to cover debt service. Your business plan should include:

• Executive summary: A summary of the rest of your business plan in one or two pages.

• Industry analysis: A description of the industry, including its major players, the products or services they provide, and recent trends.

• Market and competitor analysis: Outline of the niche your business will target. It includes details such as the size and demographics of your target audience, your primary competitors and how they meet customers’ demands.

• Services or products: A description of each of your offerings and how they stand out among the competition.

• Marketing and sales strategy: An explanation of how you plan to attract customers and make sales. It should include sales goals and solutions to possible obstacles.

• Operations plan: A list of daily tasks and how your business will operate day to day.

• Management: An introduction to each of your team members.

• Financial plan: Financial statements that show how much you will make and spend each year for the next three to five years.

• Exit strategy: An explanation of what you’ll do with your business if things don’t go as planned.

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

Improve your business credit score

Lenders consider business credit scores when evaluating applications, making it difficult to qualify if your business has poor credit. Similarly, you may not have enough credit history to qualify if your business is new.

To build or improve your credit score, make sure all your business information is up-to-date with the credit bureaus. Ensure that financial information is accurate and that there aren’t any errors in your reports.

If you haven’t already, put a system in place to ensure all of your bills are paid on time. Then, apply for a business credit card, line of credit or other accessible form of financing and make payments to build your credit.

And if you need money quickly and don’t have time to build your business credit, consider personally guaranteeing a loan or taking out a secured loan. These options pose less risk to lenders and may be easier to qualify for.

Seek financial advice for small business owners

If you’re unsure of what kind of financing you need, consider getting advice from other small business owners or a loan officer at your financial institution. They can guide you through the process, from researching your options to applying and receiving funds.

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.