Nothing comes close to the thrill of starting your own business. Sure, it involves a lot of work, stress, and possibly some sleepless nights, but the sheer view of your dream coming to life is something words can’t describe.
The problem is that a brilliant business idea and passion might not be enough to turn your venture into a successful business. For that, you need one thing many small business owners tend to lack initially. Yup, we’re talking about money.
It’s sad, but true. Without proper financing, it’s impossible to grow a sustainable business. The good news is that there are multiple financing options for small businesses. And to help you find the right one, we’ve put together this little guide.
Overview of Small Business Financing Options
In a hurry? Here’s a quick look at available small business financing options:
10 Financing Options for Small Businesses
There are numerous ways to get small business financing. From business loans to funding, here are the ten most popular funding options for small businesses:
1. Bank Loans
📜 Best for: Established businesses with strong credit and stable annual revenue.
Bank financing is a natural first choice for most small business owners. And it shouldn’t surprise, as bank loans often come with competitive terms and low interest rates. Also, it’s a bank, so you know you’re not getting scammed.
The catch here is that bank loans come with strict qualifications. To have a chance of getting bank financing, you’ll need to:
- Have a strong personal credit score;
- Present established annual business revenue;
- Have a minimum of two years in operation.
If you tick all these boxes, you can successfully apply for bank financing. The best way to start is to go to the bank where you keep your business account and ask for financing there. Some banks even require you to have an established relationship with them before applying for a loan.
Pros & Cons of Bank Financing
2. Online Loans
📜 Best for: Small businesses with not-so-great credit in need of quick funding.
Online loans can be a great alternative if you don’t qualify for conventional bank financing. These are typically offered by lenders with no branches or business bank accounts, such as Fintech companies.
The most significant advantage of online loans is that they come with much less strict qualification requirements than conventional bank loans.
This makes them much more accessible for small businesses and startups without a stellar credit score or established annual revenue. Funding is also faster, with many online lenders offering same-day financing.
Where’s the catch? There are several. First, because online loans aren’t as strict, online lenders typically charge much higher interest rates to optimize the risk. Repayment terms are also faster, often five years or less.
Pros & Cons of Online Loans
3. Small Business Administration (SBA) Loans
📜 Best for: Small businesses that don’t qualify for conventional loans.
The U.S. Small Business Administration is a government agency whose primary goal is to support small businesses. In an effort to achieve that, the agency has partnered with lenders, primarily established banks, to offer SBA loans.
What is an SBA loan? Without going into too much detail, such loans are offered by SBA-approved lenders and come with favorable terms and rates set by the SBA. To make these loans more favorable and less risky for banks, the SBA grants lenders a federal guarantee on your loan.
Because of their favorable terms, SBA loans are very competitive. Because of that, lenders typically add strict application requirements for business owners. Lenders also need to get loan approval from the SBA, which prolongs the funding decision to 30 or even 90 days.
Still, such loans can be a great alternative for businesses that cannot meet the stricter criteria of conventional loans. When applying for an SBA loan, you can choose from several types of loans:
- 7(a) loans – most popular SBA loans that can be used for general purposes, such as equipment or real estate financing;
- 504 loans – these are designed specifically for real estate and equipment purchases or improvements;
- Express loans – these are 7(a) loans with faster approval times and maximum loan amounts of up to $500,000;
- Microloans – loans of up to $50,000 dedicated to underserved communities.
Pros & Cons of SBA Loans
4. Business Credit Cards
📜 Best for: Small businesses that need to cover small gaps in cash flow and don’t qualify for conventional loans.
Business credit cards are excellent for covering small expenses, such as repairs or inventory shopping. Using a credit card is also a good way to build your credit, increasing your chances of getting a loan in the future.
The requirements for a credit card are also much less strict. You won’t need to show your income or explain how long you’ve been in business. All you need is a relatively good credit score – typically 670 or higher.
Another benefit is a potential reward program. Many credit card companies offer cashback and prizes for everyday purchases.
It’s important to remember, however, that business credit cards can have high interest rates. There’s also a risk of unauthorized spending if your card gets stolen.
Pros & Cons of SBA Loans
5. Small Business Grants
📜 Best for: Startups and new businesses that need free capital.
So far, we’ve covered only financing options that you need to pay back. Here’s one that you don’t need to repay – a small business grant.
These grants, offered by the government or private companies, are designed to provide funding to small businesses. Sounds like a dream, right? The reality is a bit more brutal.
While the promise of free money is appealing, qualifying for a grant can be incredibly difficult. Such grants usually come with strict qualifications, and let’s not forget about the numerous businesses that would also like to access those funds.
The rules of financing can also play a big role. For instance, some organizations may require you to invest in a specific infrastructure or achieve predetermined goals. If you don’t meet these requirements, they may ask you to pay the funded amount in full or a part of it.
Pros & Cons of Small Business Grants
6. Community-Based Lending
📜 Best for: Minority business owners and startups with bad credit.
Community-based loans are typically dedicated to support certain communities and minorities. These loans focus on minority-owned businesses and underserved or financially disadvantaged markets.
If you fit in either of these two groups but don’t meet the requirements for conventional loans, then a community-based loan can be the best option to finance your business.
As for where to get them, community-based loans are offered by lenders, such as banks or credit unions, certified under Community Development Financial Institutions (CDFIs) or Minory Depository Institutions (MDIs).
Pros & Cons of Community-Based Loans
7. Crowdfunding
📜 Best for: Businesses able to stoke public interest or get investors’ attention.
Crowdfunding has gained a lot of popularity in the past few years. But is it really a good small business financing option? That depends.
On the one hand, crowdfunding is a great way to get funded, especially since you won’t need to pay the money back. Also, with the variety of crowdfunding platforms, you have a greater chance of reaching your funding goals.
On the other hand, if you don’t have a unique product or one that fills a specific market gap, you don’t stand much chance of getting funded this way.
The crowdfunding landscape is extremely crowded. Without something unique to offer, it’s practically impossible to stand out among the thousands of campaigns.
Still, given the small risk, setting up a crowdfunding campaign is not a bad idea. Even if you don’t reach your goals, you may reach a specific audience and start building a community around your business.
Pros & Cons of Community-Based Loans
8. Private Investment
📜 Best for: Startups and early-stage businesses that aspire to grow.
Private investment refers to the process of raising capital from individuals or groups outside traditional financial institutions.
This type of financing can come from wealthy individuals (known as angel investors), venture capitalists, or private equity firms. Each type of investor has different expectations in terms of returns and involvement in your business, but private investment can provide significant funding to fuel business growth.
There are three primary types of private investment available for small businesses:
- Angel Investors: Angel investors are high-net-worth individuals who provide funding in exchange for equity. They often invest in the early stages of a business and may offer valuable mentorship and industry connections.
- Venture Capital (VC): Venture capitalists are firms or individuals that invest in businesses with high growth potential, typically in exchange for significant equity. They often focus on rapidly scaling startups and may have higher expectations regarding business growth and exit strategy.
- Private Equity (PE): Private equity firms generally invest larger sums of money in more established businesses. They typically buy a controlling share of the company and focus more on driving profitability and operational improvements.
Now, while private investment can give your business a great boost, you need to remember that private investors’ primary goal is yielding returns.
That said, if you are seriously considering getting funds from private investors, you must first ensure you have a unique product or service and a clear business plan highlighting your growth opportunities.
Pros & Cons of Private Investment
9. Invoice Factoring
📜 Best for: Small businesses struggling with cash flow in need of fast capital.
Invoice factoring refers to the alternative business financing method where a service provider fronts you money on your outstanding invoices, which you repay once your customers settle their liabilities.
This way, your cash flow remains uninterrupted, providing you with the funds you need while you wait for your customers to pay their invoices.
There are two options for invoice factoring:
- One option is to work with a factoring company that buys your outstanding invoices by paying you a percentage of the total amount owed. The company then collects payments from your customers.
- The alternative is working with a lender who loans you money against your outstanding invoices. In this scenario, you’re responsible for collecting your payments and repaying a loan with interest.
The biggest advantage is that both of these methods are usually much faster than conventional loans, providing immediate access to working capital. On the flip side, factoring companies can charge high fees for their services, and interest rates from lenders can also be high.
Pros & Cons of Private Investment
10. Friends and Family
📜 Best for: New small business owners with wealthy family members or friends.
This financing option is pretty self-explanatory. Long story short, it involves asking friends or family to help fund your business and get it off the ground. Naturally, the best idea is to reach out to close ones with the money available for a potential investment.
The biggest advantage is that borrowing from close friends and family is much less stressful than going to the bank or a professional lender. You can also negotiate more favorable terms for both parties, and the entire process is much less official. This also means that you can get your funds faster.
The issue is that borrowing from close ones can lead to unpleasantries if you can’t repay them. Also, you are unlikely to ask for huge amounts. It’s definitely not the best financing option if you require more capital.
Pros & Cons of Private Investment
Wrapping Up
So yes, there are multiple options to finance your small business. Which one you choose will depend on your needs, capabilities, and type of business.
If you have a good credit score, conventional or SBA loans are your safest bet for getting the financing you need. However, if your credit isn’t that great or you prefer to seek other funding methods, alternative financing options, such as private investments or crowdfunding, can be the way to go.
Overall, our advice is to carefully assess each option. Think about what you need financing for and whether you have the means to apply and, in most cases, repay the received funds. Also, don’t hesitate to reach out to lenders and investors to learn more about what they can offer.
We’ll leave you with that. And remember, whenever you need some advice on financing or running your small business, our blog is full of great resources.
Until next time!
