This article was reviewed and updated on July 21, 2020.
Opportunities for growth arise, equipment breaks, inventory goes on sale, business slows, and operational expenses grow. Sometimes, all of those things happen at once in a small business. Regardless of what circumstance matches your experience, chances are you’ll need working capital to take care of it.
While the ideal solution may be to tap into reserve funds to manage costs, that’s not always possible. For many small businesses, money is tight once those expenses and payroll are covered, and there’s not a lot left over for unexpected expenses.
If you’re thinking about or in the process of securing small business funding, there are numerous options to consider, including small business loans, lines of credit, and business credit cards. Selecting the right funding will require you to take into consideration each option and decide which best meets your financial needs and credit profile, among other things.
Small Business Funding Options
Not sure where to start? Here are a few of the most common funding types for small businesses:
A term loan is what most people think about when they hear the word “loan.” When you take out a term loan, you receive a lump sum of money, which you’re obligated to repay within a certain amount of time, or the term.
Term small business loans come in a wide range of amounts and repayment terms. For instance, short-term loans are typically repaid within six to twelve months, while long-term loans may have repayment terms as long as ten or twenty years.
Both traditional lenders (like banks and credit unions) and alternative lenders (like peer-to-peer lending or online lenders) offer term loans to businesses. Rates, repayment terms, and fees (e.g., origination, application, etc.) will vary from lender to lender. However, most lenders will base each of those factors on a number of variables like your credit score, loan amount, and annual revenue.
That doesn’t suggest that you necessarily need to have good or excellent credit to secure a term loan. There are term loans designed to accommodate borrowers with poor credit, though many of these will be secured loans. In that case, the lender requires you to put up collateral (e.g., real estate property, equipment, automobiles) that can be seized to cover the balance in the event you fail to pay off the loan. And certain types of term loans can help you build business credit.
Though there are many types of small business loans, many with their own set of requirements and restrictions, they are typically considered to be quite flexible and can help you manage a variety of business costs. This includes things like inventory or equipment purchases, payroll, debt consolidation, or simply a working capital boost.
Small Business Administration (SBA) loans, which can be approved for up to $5 million, are guaranteed by the United States SBA and originated by approved lenders. Unlike bank loans, SBA loans are federally backed, so they often have lower rates and more flexible terms, making them a prime solution for eligible small businesses.
The SBA offers numerous loan programs, some of which have loan terms as long as 10 or 25 years. The 7(a) loan and the 504 loan are two of the most popular options.
Funds from a 7(a) loan can be used to manage a variety of business-related expenses, including working capital, debt consolidation, inventory, and equipment.
The 504 loan, on the other hand, is limited to project costs associated with the purchase, construction, modernization, or remodeling of real estate property, or to consolidate debt accrued from those activities.
To qualify for most SBA loans, including the two above, you must have what’s considered good credit, typically a 680 FICO score or higher, and meet any additional requirements as they apply to the SBA or the lender you go through. This includes size of business, industry, and revenue. You may be required to provide collateral, depending on the loan program.
Business Line of Credit
In many ways, a business line of credit is similar to a credit card. If approved, you will be granted access to a maximum amount of cash, similar to a credit card limit. However, instead of receiving it as a lump sum, as is the case with a loan, you can draw from available funds as needed, only paying interest on what you use.
At the end of the draw period, the line of credit will be closed and the account will enter into repayment status. During this time, you’ll be required to make monthly payments on the total balance for the duration of the repayment term.
When it comes to usage, a business line of credit is notably flexible. This makes it a good option if you’re looking to manage cash flow.
In the past, approval often required the company to have been in business for at least six months with a minimum annual revenue of $25,000 to $50,000. And while that still may be true for some lenders, the rise of online lenders has made business lines of credit more accessible, even to applicants who don’t meet traditional eligibility standards.
Business Credit Cards
Like the personal equivalents, business credit cards give you ongoing access to a revolving line of credit, up to your approved limit. When balances are paid in full by the due date, you can typically escape interest payments. When carrying a balance to the next billing cycle, you’ll likely be charged interest—unless, of course, the card carries a 0% APR introductory offer.
There is a slew of business credit cards out there, each of which carries its own qualifications, rates, fees, and benefits. Rates are often closely tied to your credit scores, and the higher your credit scores, the lower the interest rates you may qualify for.
When used properly, a business credit card can be a great boost to your business—it can help you manage cash flow, pay for unexpected expenses, and build your business credit. Business credit cards also can give you access to rewards programs, added purchase protections, and other benefits, like travel perks.
While many of the funding options above can be used for an array of business expenses, equipment financing, as the name suggests, is used to purchase or lease new or used business equipment. This includes things like commercial ranges, construction vehicles, and office equipment that you need to run your business effectively.
Overall, this type of small business funding offers borrowers access to equipment at a relatively low APR, though borrowers with average or below-average credit will likely find higher rates and less flexible terms.
Keep in mind that financing equipment, while certainly a valuable asset when needed, isn’t always ideal. This is particularly true if you have a longer repayment term on equipment that quickly becomes outdated.
Invoice financing, and its cousin, invoice factoring, are small business funding options that allow business owners to turn their outstanding invoices or accounts receivable into cash. Because they are based on invoice balances, this is only an option if your business offers goods and services in advance of payment.
Under this type of agreement, an invoice financing company will give the borrower a percentage of the invoice value upfront, typically between 80% and 90%, though it varies.
Once the customer pays the invoice, the financing company will give the borrower the remaining funds minus fees.
This type of funding is often best if you need to free up cash flow as you wait for payment on net-30, net-60, or net-90 accounts. And, since the invoices act as collateral, you may be able to secure this type of funding even if your credit isn’t ideal.
Merchant Cash Advance
Another funding option to consider, especially if you need cash fast or don’t qualify for the above options, is the merchant cash advance. Online lenders will make a decision to lend you money based on your sales and revenues, not your creditworthiness, and you can typically get funds within a day or two.
To pay back a merchant cash advance, the lender may take money from your daily credit card sales. It’s important to note: interest rates with merchant cash advances can be astronomical, so only use when you have no other financing option.
Small Business Grants
Simply put, grants are free money. Unlike loans or lines of credit, they do not have to be paid back. Therefore, small business grants, which may be issued by federal, state, or local governments as well as private entities, are the ideal funding solution.
There are hundreds, if not thousands, of grants available to businesses, many of which are designed with certain types of businesses in mind. For example, some grants may be geared towards minority or women-owned businesses while others may be awarded to startup companies, non-profit organizations, or businesses that meet environmental or community enrichment objectives.
As you may assume, many business owners would prefer free money, and so the grant process is typically competitive. It’s also important to note that applying for a grant often means meeting specific deadlines and eligibility standards and waiting through the review and notification process.
While grants are terrific, securing them can be challenging and often use is restricted. Shoot for the stars and apply for the grants, but have a contingency plan.
Alternative Small Business Funding Solutions
Though the funding types above represent some of the most popular options available to small business owners, there are a few others that you may want to consider along the way, particularly if you’re looking for startup funding.
As the name suggests, “crowdfunding” is a fundraising effort that draws investments or donations from both everyday consumers and professional investors.
If you’re considering different crowdfunding platforms, it’s important to pay attention to your marketing efforts, as much of your success will depend on your ability to make your product or services attractive to potential investors.
Venture Capitalists & Angel Investors
Though there are some differences between the two, both venture capitalists and angel investors offer access to funds in exchange for equity in the company. In addition to funding, these investment groups or individuals can also bring to the table valuable connections and industry expertise.
Be aware that if you take equity financing, you may be inviting others to have a say in the decisions you make about your company’s future.
When to Start Looking for Small Business Funding
It might surprise you, but the best time to start looking for money is before you need it. Some of the financing options above can take a while to process your application and get you funds, especially the SBA loan.
Be proactive about researching what the requirements are for a given funding type so you can work to improve your credit if necessary, to qualify for better financing options.
Waiting until you are desperate for the money will only increase the odds that your only choice will be a high-interest loan that will put a dent in your profits.
How to Calculate How Much Funding Your Small Business Needs
As part of your financing application, you will be asked how much money you seek. While it might be tempting to accept the maximum you are offered, realize that you have to pay it back. Without a plan to pay back a larger amount, you might end up in the hole.
Calculate the expenses you plan to use the loan for and then pad that amount with a little extra for unforeseen expenses. Make sure to build a budget before you get your money that includes that monthly loan payment.
Choosing the Right Small Business Funding Companies
With so many options, where should you seek funding first? Here are a few questions you can ask to help you narrow the search:
- How much funding do you need? Lenders typically set maximum and minimum funding limits. Determine how much you need and eliminate lenders who can’t accommodate your request.
- How quickly do you need funding? Some lenders provide funds within 24 hours of approval; others may have a lengthy application process or release funds weeks later. Determine which lenders are capable of meeting your time-to-funding needs.
- Why do you need funding? Some lending options, like lines of credit, credit cards, and term loans may be flexible. Others, like equipment financing and 504 loans are limited in use. Other options, like invoice financing, are designed to meet certain needs, like gaps between payments. Keep that in mind as you narrow your choices.
- How is your credit? One of the biggest determining factors in your pursuit of funding is often your credit score. Good or excellent credit scores can give you access to the best rates, flexible terms, and numerous options including prime business credit cards. Poor credit, on the other hand, may limit your options.
- What’s the total cost of the loan? It’s easy to assume that interest rates are the biggest indicator of affordability, but the total cost of a loan also includes fees. Origination fees, prepayment fees, and application fees can increase costs. Always find out what fees you’ll need to pay and factor them into your decision.
Best Small Business Funding Options
There are a lot of great funding options available to those who look, but finding them isn’t always easy. We provide numerous funding reviews in our marketplace, as well as an in-depth look at how business financing works, but here are a few of our favorite funding partners.
Business Credit Cards
American Express® Blue Business® Plus Card
With the American Express® Blue Business® Plus Card, you can earn 2X cash back on all eligible purchases up to $50,000 per calendar year, then 1X. Currently, the card also has an intro APR offer of 0% on purchases for 12 months from the date of account opening, which can certainly help when it comes to financing business expenses. Plus, there’s no annual fee, which makes this card a low-risk addition to your wallet.
Small Business Term Loans
Kapitus, which offers short- and intermediate-term loans up to $500,000, gets you your cash in as little as 24 hours. Interest rates vary from 5.99 to 18%, depending on the product and your qualifications.
Need more time to repay your loan? Smartbiz offers term loans from $30,000 to $350,000, with repayment terms up to 10 years and fixed interest rates between 4.75 and 7%. As an added perk, Smartbiz also is a marketplace for SBA loans, which means you may be able to do the bulk of your loan shopping in one spot.
With competitive rates, prime business resources, and a number of banking and lending solutions, Wells Fargo has long been known as one of the primary players in small business financing.
With a loan, you can typically borrower between $10,000 and $100,000 with terms between 1 and 6 years, depending on the product you choose. It also offers lines of credit and small business credit cards, in case you want to expand your funding search.
Kickstarter has become synonymous with crowdfunding, and today it’s one of the most popular platforms. The process is simple, and you can set your funding goals and market your product, concept, or business as you see fit. It’s a good platform for a variety of business verticals and you can incentivize in a number of ways, including gifts, discounts, early access, and equity shares.
Where can I find business funding for startups?
Funding a new or growing business isn’t always easy. Some lenders prefer that borrowers meet revenue or time-in-business milestones, many of which are just out of reach for startups. There are, however, many options for those who seek them out.
Invoice financing, equipment financing, some SBA loans, and business credit cards are all viable paths to startup funding. In addition, crowdfunding and grants can also provide you the capital you need to forge ahead.
Is it possible to get small business funding with bad credit?
Though they aren’t always easy to find, there are small business funding options for borrowers with bad credit. Secured business credit cards and term loans are designed specifically for borrowers with poor credit. Similarly, equipment financing and invoice factoring can be ideal for borrowers with bad credit.
That said, your best bet at funding is to improve your credit scores before applying for any financing. You can start by requesting a credit report, addressing any errors, paying bills on time, and even opening and responsibly using a business credit card.
Can you get business funding with no credit check?
The answer to that depends on the type of funding you want. Long-term business loans and even most short-term loans require the borrower to undergo a credit check. The same is true for many credit cards and equipment financing options.
If you have bad credit or would simply prefer to forgo a credit check, you may want to consider crowdfunding sites or one of the small business funding options listed here.
Where can I find small business funding reviews?
Small business funding is a common need, and so there are plenty of reviews available to those who look. You can find a plethora of reviews on our website, but that’s not the only place you should look.
As you sift through your options, it’s best to check numerous financial resources and review sites, including TrustPilot and BBB. It also may be helpful to check the lender’s social media accounts and Google reviews before you sign off on a loan agreement.
Nav’s Verdict: Small Business Funding
Whether you’re looking for debt financing or a startup loan, you now see that you have business financing options to consider. The financing solution you choose will be the one that’s ideal for your specific business needs.
Remember the purpose of business funding: to help you grow or maintain your company. Use the funding opportunity to reinvest in your company to make it great.
This article was originally written on July 21, 2020 and updated on February 2, 2023.