Business Financing Options
Finding small business financing can feel confusing and overwhelming. Business owners have many choices in terms of financing options, and qualification requirements can be different depending on the type of financing you choose. Costs vary widely as well. Here we compare the most popular types of small business loans, including everything from SBA loans to lines of credit to business credit cards so you can make the right choice for your business.
Get to know your business financing options
Gerri Detweiler • October 18, 2021
This chart provides a quick overview of the most popular types of financing for small business owners. Keep reading to fully understand how each one works and how to qualify.
|Financing Types||Loan Amounts||Interest Rates||Repayment Terms||Turnaround Time||Credit Criteria|
|SBA Loans||$2,000 -$5 million||3.75% – 13%||5 – 25 years||30 days – 6 months||May require a minimum business credit score (FICO SBSS)|
|Traditional Bank Loans||$250,000+||5% – 10%||1 – 20 years||2 – 4 months||Usually requires strong personal and/or business credit scores|
|Online Loans||$25,000 – $500,000||7% – 30%||1 – 5 years||2 – 7 days|
Varies by type of financing
|Micro-Loans||$500 – $50,000||8% – 15%||1 -5 years||1 – 3+ months||More flexible but still a main factor|
|Merchant Cash Advance||$200 – $250,000||15% – 150%||3 – 12 months||1 – 7 days||Not required|
|Cash Flow Loans||$200 – $100,000||25% – 90%||6 – 12 months||Minutes – 3 days||Less important, but still a factor|
|Business Credit Cards||$250 – $25,000||13% 25%||30 days||1 – 3 weeks||Personal credit scores will be a factor|
|Vendor Financing||$1,000 -$100,000||0 – 36%||10 – 120 days||Hours to weeks||May require good business credit|
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Types of financing for businesses
Before you start researching your small business financing options, it’s wise to know what you want. Are you looking for long-term financing? Do you need cash within days? Do you need the money to refinance debt or buy real estate? Remember, many types of financing not only have a range of turnaround times from application to payout, but they may also have restrictions on how the money is spent. Get familiar with each of these most common business funding choices before you start applying.
Traditional bank loans
When you think of getting money for working capital or refinancing debt, do the traditional bank loans come to mind first? It’s not surprising since these loans are among the most coveted in the industry due to their low rates and favorable loan terms. You might consider inquiring with your existing bank, or a local bank, to see what they offer. Just keep in mind that banks often have high qualification standards.
Whether you consider a bricks-and-mortar bank loan or choose one of the newer online banks for financing your business, you’ll need to know how long you need to pay the loan back. There are three types of term loans popular with small businesses, from short-term loans (which can come with a higher interest rate but get you funded fast), to medium and even long-term loans. Depending on how much you want to borrow, and what your monthly payment amount needs to be, the bank should be able to help you find the term loan that is priced right for your budget.
The U.S. Small Business Administration (or SBA) has been helping small business borrowers get financing for many years. Except for Disaster Loans (including the Economic Injury Disaster Loans or EIDL which you apply for at SBA.gov) the SBA doesn’t make loans. Instead it guarantees loans made by participating lenders. There are a number of SBA loan programs, but the most popular include:
SBA 7(a) Loans
These are the most common of the SBA loans, offering qualified U.S. businesses low-interest loans for working capital through a variety of partner lending institutions. The maximum loan amount is $5 million and these loans may be used for a variety of purposes, including working capital, real estate and even refinancing debt. The beauty of SBA 7(a) loans is that they are designed to help small businesses who have not been successful getting funding elsewhere a way to secure loans at competitive rates and with favorable terms. You’ll still need good to excellent credit to qualify. If you’re looking for a large source of cash for business purchase or expansion, however, this may be an appealing option.
Note that Paycheck Protection Program loans (PPP loans) fall under the SBA 7(a) program. Those forgivable loans are no longer available.
SBA 504 Loan
Looking to finance real estate or major equipment for your business? You may want to look into loans provided through the 504 SBA Loan program. The loans are made available for fixed assets, such as machinery, as well as property. These loans involve a loan from a private lender, a Community Development Financial Institution (CDFI) and a down payment from the borrower. Low rates and stable repayment terms are just a few of the reasons growing companies turn to this program when it comes time to make large expansion plans.
SBA Express Loans
In a “speedy” version of the 7(a) loan program, the SBA has tapped preferred financial institutions to take on some of the risks in processing loans for quicker turnaround time. Instead of waiting weeks or even months to hear if you’ve been approved, the SBA Express Loan program can deliver a verdict in just a couple of days. (Actual funding can take longer than that, however; weeks or more is not uncommon so don’t expect to get funding in a matter of days.) You may also pay slightly higher interest rates for these expedited loans.
Another category of SBA funding is the SBA Microloan program. As the name suggests, the loan amount is smaller (up to $50,000). They may be more flexible, though. Typically made by nonprofit Community Development Financial Institutions, they may be available to startups or to business owners who have overcome bad credit. These loans carry competitive rates and come with technical assistance; help designed to make the business successful.
Business line of credit
Do you enjoy the flexibility of using a credit card as much (or as little) as you want, but would rather have the benefit of cash? Then a business line of credit may be for you. Like a credit card, the bank will give you a set limit that you can borrow against, then pay it back and borrow again. The perks of a revolving line of credit like this are that you can borrow just what you need. Interest rates vary. The better your personal credit score or business credit score, the more competitive the rate you’ll be able to secure. With rates ranging from 5% to 36%, it’s in your best interest to stay on top of your credit so you can qualify for those lower APRs.
If you know exactly how much your business needs to complete a specific project or goal, a term loan can be a great option. A term loan offers a lump sum, fixed amount of financing with a specific repayment period. For online loans, the repayment period is typically 6-24 months. Bank or SBA term loans typically offer a repayment period of anywhere from 2-25 years, depending on the amount borrowed and the use of funds. These loans may carry fixed or variable interest rates. Generally the lowest rates go to the most qualified borrowers. In addition, bank/SBA loans tend to carry the lowest rates.
Business credit cards
Among the basic financial tools that all business owners should consider is one or two business credit cards. If you pay in full each month, consider rewards cards that earn you cash back or other perks. If you’ll carry a balance, a 0% APR card may be a good choice. In addition to freeing up cash in an emergency, today’s business cards can provide a wide range of business cash management tools. See what your employees are buying, categorize spending for better budgeting, and use the reporting perks to make tax-time a breeze! With rewards ranging from airline tickets to statement credits to cold, hard cash, there’s likely to be a couple of cards that can help you squeeze a bit more out of your spending. Just be sure you keep your cards paid on-time and shop around to get the best annual fees and bonus offers for new card accounts.
If the fryers in your restaurant are on the fritz or you need to get that manufacturing line up and running again right away, you might consider looking into equipment financing. Equipment financing may include loans secured by the equipment, or equipment leasing, which lets you essentially rent equipment to purchase (or return) later. In the case of equipment financing, you borrow money from the lender for the explicit purpose of purchasing equipment, and the equipment becomes the collateral needed to secure the loan. Like financing any tangible items (such as a car or house), you keep making payments until the financing is repaid. Rates range from a low 8% to over 30%. Not surprisingly, the larger the loan you qualify for, the longer it will take to pay it back.
If you sell products or a service to other businesses (B2B), you may allow them to pay at a future date. The invoices those clients owe can be turned into cash through a lender. Invoice financing is a loan secured by your accounts receivables. Another version is invoice factoring, where the lender advances money from invoices due by other businesses and then may collect on behalf of the small business. Invoice financing and invoice factoring can be one of the more expensive small business loan types out there, so be sure to read your contract carefully.
Commercial real estate loans
If you’ve ever bought a home, you already know the basics of commercial real estate loans. Like any property financing, they can include a myriad of costs, from the price of the building or property itself to closing costs, fees, surveys, inspections, taxes, and title insurance. Commercial real estate loans can be enormous (often referred to as “jumbo” loans) but due to collateral, interest rates can be attractive.
If you own a business with even one vehicle, you will probably encounter a need for commercial auto loans. Once again, if you’ve ever bought a car, qualifying for one of these loans will be familiar. The difference, of course, is that you might want to apply with a lender that specializes in business financing and is accustomed to the needs of a growing small business. Banks or credit unions may be one option, but don’t forget financing through the dealership or manufacturer directly. There are fleet financing companies that only offer business vehicle loans and are up-to-date on all of the programs available.
Vendor credit can be useful for improving cash flow. In a vendor credit (also called “supplier credit” arrangement), you get goods from your vendors or suppliers without paying up front. You’ll then get a set time period to pay it off. Net-30 terms, for example, means you have 30 days from the invoice date to pay the bill. This type of financing is definitely considered a category of short-term financing, as you are expected to pay within a few weeks to a few months. Another potential benefit: some vendors don’t check personal credit so you don’t need good credit to qualify. And some vendors report payments to business credit agencies, helping you build business credit. When deciding which vendor to establish a credit relationship with, this may be an important factor.
How do online loans differ from traditional loans? The main difference is that the bulk of the loan application process is completed online—usually very quickly. A typical online lender will not require you to visit the lender in person to verify or complete paperwork.
Online loans vary in scope, price, and purpose, but it is assumed that they are more efficient and can produce a quicker turnaround from application to funding. Many can also provide you with a pre-approval— to let you know if you’ll have good chances of qualifying, your general loan amount, and the costs— before you ever apply. Because they are often more flexible, online loans will typically be more expensive than bank loans. If you need cash quickly, though, this is an important option to consider.
Did you know that the SBA isn’t the only option for obtaining microloans? Some online lenders as well as nonprofit Community Development Financial Institutions (CDFIs) may offer these smaller loans. They may be available to startups, or to entrepreneurs with less than perfect credit. To find a microloan, it may help to connect with your local SBA resource partner such as your Small Business Development Center or SCORE.
Merchant Cash Advance
A fast, but expensive, option for those with a wide range of credit, the merchant cash advance allows your business to get an advance against expected future sales. The lender will typically look at your average credit card sales (or other deposits) to determine how much you can get, and funds will arrive quickly—usually in a day or two. The application process is much easier than just about any other type of funding. The drawback, of course, is the cost. With “factor rates” determining the cost of financing – instead of interest rates—understanding the cost can be confusing. Expect to pay 30% to 80% or more, so make sure you can still make a profit even after paying back the financing.
Cash flow loans
When a bank needs collateral to secure a loan, but you don’t want to risk assets, you might want to consider cash flow loans. These use the predicted amount of cash you’re expected to receive in sales or liquidated assets as the means for establishing risk. The lender can determine that you’re good for a certain amount based on cash flow alone. Interest rates and costs for these vary, but they are usually limited to those companies making revenues in the millions of dollars. They aren’t an option for startups.
If you have a network of friends and family, or eager fans or customers, crowdfunding may be an option for you. Using online platforms, you raise funds from individuals who want to back your small business, either to earn a reward or by becoming a lender or investor in your business. It is available to startups. While crowdfunding has been hugely successful for some small businesses, it’s a dense space with many people competing on the most popular crowdfunding platforms. You’ll need an excellent marketing campaign. Keep in mind that only a small percentage of projects hit their funding goal.
Costs vary, depending on the type of crowdfunding (rewards or equity, for example) and the platform you use.
Watch our webinar: How to Leverage Crowdfunding For More Financing.
The most sought-after source of business financing has to be small business grants. Grants are “free” money in that they don’t have to be paid back. Because of this, however, everybody wants them, and competition for even the most generous grant programs is often fierce.
Government grants often come to mind first, but it’s important to understand that the federal government does not give away money to start a new business. However the federal government does make numerous grants to small businesses that help the government achieve certain goals. In addition, many private companies, community organizations, and nonprofit foundations offer grants that range from a few hundred to tens of thousands of dollars. The requirements vary by group, so do your research to see if you qualify. Grants can sometimes be confused with sweepstakes or contests. If grants require you to have people vote for the winner or are randomly selected, they may not be actual grants. Watch out for entry fees, or fees to claim a grant. There are many scams associated with grants.
Tip: Check out the Targeted Advance (Grant) that offers small businesses impacted by COVID-19 up to $15,000. There are specific qualifications, and you must apply for an Economic Injury Disaster Loan to be considered for the grant; however, you may accept the grant (if you qualify) and not take the loan.
Family and friends
While mixing relationships with business can get messy, many of our loved ones are just the people to support our endeavors with a bit of financial backing. If your family and friends believe in your project, it’s perfectly OK to ask them to chip in, but do so with some guidelines. First, make it clear whether you are asking for a loan or a gift. Loans should come with a basic contract that clearly explains the repayment terms (amount to be paid, the timeline for payment, and any interest or fees.)
Family and friends can also be a source of technical or training support if they have small business experience in your field. But be careful about money that comes with strings attached. As with anything that involves loved ones, try not to let emotions get in the way. Even as your business grows, try to keep matters of money strictly professional.
If you’ve been hanging around the startup crowd for any length of time, you’ve likely heard the term “angels”. Angel investors are people who have the means to invest in a business opportunity that interests them. They are generally wealthy and will research opportunities in depth before jumping in. They might even spot the potential to join a business before it ever gets off the ground.
What’s in it for them? Equity. They want a piece of the pie, usually in the form of stock in the company. They may also want to give input on the business, offering ideas and expecting them to be implemented. For the savvy startup with few other options, angel investors present a huge opportunity for quick growth and shared expertise, but the cost is losing some equity and perhaps autonomy in how you run your company.
For even more accelerated growth, you might seek venture capital. With the same benefits as an angel investor (including equity), these firms can take your business from idea to market in exchange for shared ownership. These firms invest in phases, or “rounds,” putting hundreds of thousands, or even millions, into a company they believe has the potential to make them a lot of money. Each round has a designated letter; the first round is called “Series A,” the second “Series B,” and so on. Most of the companies attracting venture capitalists are in tech, finance, or an industry that’s poised for tremendous and immediate growth. If you own a business that could potentially “disrupt” the market, you might be a good investment for one of these firms seeking equity in the brightest innovators.
How to qualify for a small business loan
Now that you understand a bit about what each financing type has to offer, what they might cost, and what will be required of you, you can go into the application process better prepared. This will help increase your chances of being approved for a small business loan.
The lender may ask for a number of items, but the three that often matter most include:
- Credit scores. Both your personal credit score and your business credit report or score may be evaluated by lenders, depending on the type of financing you choose. (Banks and SBA loans generally require personal credit checks.) If you’re a newer business, however, you may not have much for a business credit history. That’s why it’s essential, even if you’re not in the market for a loan yet, to start to build business credit. How can you do this? Start by asking your vendors and service providers to report your on-time payments to the business credit bureaus. Then, continue to use credit to keep your score climbing responsibly. If you can get access to smaller credit products, such as business credit cards, to help you establish you’re a good credit risk, that helps too. Keep your balances as low as possible.
- Time in business. Banks like to see a minimum of two years in operation business as a way to establish that you know what your business is likely to continue. What if your business is new? There may be a way around it, using your personal assets as collateral or showing sales projections, outstanding invoices, or plans for growth. Remember, lenders aren’t keen on taking on risky projects, so the more history you can demonstrate, the more likely they are to approve you and give you the best rates for your chosen funding type. (Startups aren’t completely out of the game, but without two years of demonstrated success, it is admittedly more difficult to find funds.)
- Cash flow. Along with time in business, lenders like to see how much money you have to repay the debt. They want to see the payments coming into your business, and what you are spending – or the expense going out of your businesses. They will typically request business bank statements to verify revenues, and they will scrutinize those carefully. Some lenders may also request financial statements and/or business tax returns.
The more prepared you are before you apply, the better chance you’ll have getting approved. Your lender will need to see more information about your business than just what we stated above. Additional paperwork needed may include:
- Personal tax returns
- Business tax returns
- Last 3-6 months of business bank statements
- Business plan
- Financial projections
- Debts outstanding
- Articles of incorporation, relevant licenses, and application certifications
Having these documents before you start your financing search will make the process smoother. Traditional lenders in a bricks-and-mortar setting and those working with the SBA are likely to ask for almost all of these things, as their loan requirements are stricter and the loans much bigger. The application process may be simpler with online lenders who may check credit and/or require you to link your business bank account to verify revenues.
Small business owners can apply for financing through several different sources:
Bank or credit union: You can apply through banks or credit unions that offer small business loans. While financing through one of these financial institutions will likely carry attractive terms, keep in mind that the standards are typically higher than other lenders and the approval process can take weeks.
Online lender: If you want to find financing 24/7, or you don’t meet the high standards of traditional lenders, online lenders may offer what you need. Make sure you understand the qualifications and terms of the financing before you apply so you don’t waste time applying for financing you can’t get — or won’t want.
Business loan broker: Similar to a mortgage broker, a business loan broker will work with various lenders to try to find you financing. Make sure you understand how the broker will be compensated, and ascertain whether the broker’s goal is to help you find the best financing or just to earn the highest commission. You don’t want to be steered into higher cost financing if you qualify for better terms elsewhere. Business loan marketplace: An online marketplace will help you shop among various funding options by using your data to match you to lenders that work with borrowers with your qualifications. This can be an efficient way to shop for financing.
Determining how much business financing you need
A lender may also ask for a detailed list of why you need the funding and how it will be used. A lender may also ask for an explanation of why you need the funding and how it will be used. If this information is requested. Are you seeking funds for expansion? Are you refinancing a loan? Are you purchasing assets in anticipation of a busy season?
While it’s tempting to seek as much money as you can get your hands on, you only want to ask for as much as you need. Create a detailed list of the items you’ll purchase and the estimated cost. Will you be hiring employees? Document the projected cost to hire and how much the employee will be paid. Are you purchasing equipment? Research what equipment and an average cost to acquire that equipment. Figuring out how much you need—and how long of a repayment term you need—will be easier after you’ve updated your financial projections to estimate how much you need and when you’ll be able to pay it back.
How to understand the cost of small business financing
Unlike consumer loans where the cost of the loan is typically described as an Annual Percentage Rate (APR), small business financing typically does not require an APR to be disclosed. In addition, you may be unfamiliar with some of the terminology used, such as “factor rate.” That means it can be difficult to compare the cost of various options.
Consider using a free business loan calculator to translate the financing you’re being offered to an APR. This will help you understand how much the financing will cost.
In addition, be sure you understand:
Repayment schedule: Will payments be required on a daily, weekly or monthly basis?
Fees: What kinds of fees will be required upfront, on an annual basis, or when you access additional funds? What fees are charged if you pay late?
Credit reporting: How will this loan affect your personal credit? Will it help you build business credit? In addition you will want to know if the lender will file a UCC filing. Not sure? Ask the lender.
Business financing basics: Debt vs. Equity
Broadly speaking, funding your small business falls into two categories: debt and equity. Financing through debt comes in the form of a business loan. Loans may be secured by assets, which means a lender can take assets if the loan isn’t paid back, or unsecured, which means there is no specific collateral pledged for the loan.
Equity funding is where a business offers ownership of the company, typically in the form of shares, in exchange for money.
What is the most common form of financing for a small business?
According to the Federal Reserve’s Small Business Credit survey (2021) the most common type of small business financing is loans or lines of credit, followed by credit cards.
Those are followed in popularity by merchant cash advances, trade credit, leasing, equity investment, factoring and a category labeled “other.”
How do I qualify for a small business loan?
Every lender’s eligibility criteria is different but it will almost certainly include revenues or cash flow, time in business, industry and/or credit scores. If one of these factors is weak, others should be strong. And certain types of financing require specific qualifications. For example, it is very hard to get a bank or SBA loan with bad credit. But if your business revenues are strong, you may be able to get a business cash advance even with poor credit scores.
How to Decide What Type of Business Loan to Apply For
- SBA Loans
- Bank loans
- Merchant Cash Advance
- Cash Flow Loans
- Online Business Loans
- Construction Business Loans
- Retail Business Loans
- Restaurant Loans & Financing Options
- SBA 7(a) Loans
- SBA Express Loans
- Business Credit Cards
- Equity Crowdfunding
- Reward-Based Crowdfunding
- Equipment Financing
- Invoice Financing
- How Trade Credit Can Help Your Business
- Medical Practice Loans
- Manufacturing Business Loans
- Commercial Real Estate Loans
- SBA Microloans
- SBA 504 Loans
- SBA Disaster Loans