As a small business owner, one of your primary concerns is cash flow. You need money not only to start your business, but also to grow. Fortunately, small business funding and financing options are available.
One report from the National Small Business Association found that at the end of 2017, three-quarters of companies were able to secure adequate financing to support their endeavors. Owners used these funds for things like:
- Starting a business
- Buying or renting real estate
- Purchasing inventory
- Buying new equipment
If you’re an owner interested in growing your business, you may be curious about where to start. Below, you’ll find everything you need to get started. We’ve included a list of some of the different financing options available. We’ve also included a few blogs you can add to your reading list to support your future funding needs.
14 small business financing options
You’ve used trusted accounting software and forecasted your future growth. You know how much money you’ll need to expand your operations. Now how do you go about securing those funds? Consider these 14 business financing options.
1. Short-term loans
A short-term loan is one of the most straightforward possibilities for small business lending. When you take out a loan, you’ll receive a lump sum of cash upfront. You’ll then have to repay the loan amount, plus a fixed interest rate, over a predetermined period of time. The repayment term for a short-term loan ranges from 3-18 months.
Nearly any small business can secure a short-term loan, regardless of credit history or annual revenue. This is one of the things that sets them apart from traditional bank loans. Lenders have much more flexibility when it comes to defining the terms of the loans. So, if you don’t have the best credit history, you can expect to pay much higher interest rates. But, it’s a way to go about securing working capital when you may not have other options available.
2. Small Business Administration loans
The U.S. Small Business Administration (SBA) doesn’t offer these loans directly, but they do guarantee the loans to lenders. Thus, the SBA encourages banks and alternative lenders to loan money. Lenders are encouraged to provide these small business loans because they know that if a company defaults, they won’t lose all their funds.
The application process for an SBA loan is lengthy. But, you’ll also find that SBA loans typically have very low interest rates, which could make the application worth your while.
3. Term loans
Term loans are best for more established companies. The total loan amount can be much higher than those of short-term loans. They also tend to have lower interest rates and longer term lengths. They’re better for those with stable revenue and a good credit history.
4. Business credit cards
A business credit card probably won’t allow you to finance your entire operation. But, they’re a useful tool to help build your credit. You can use the cards to pay for everyday business expenses. Make sure you pay attention to interest rates, as many cards have compounding interest that can spiral quickly if you’re not careful.
5. Business lines of credit
A business line of credit is very similar to a credit card in that you have access to a pool of money you can draw from when necessary. You’ll only pay interest on the money that you use and don’t repay on time.
6. Invoice financing
Invoice financing entails using one of your outstanding invoices as collateral. The lender will advance you cash after taking out fees. The lender does so, anticipating that you will repay your invoice. You will only want to consider this option if you’re a business-to-business company that sends invoices routinely. You may also see this referred to as accounts receivable financing.
7. Equipment financing
Equipment financing is an asset-based loan. Similar to invoice financing, you’re securing funding to help make a payment, anticipating that the revenues you receive will outweigh the interest.
For example, let’s say that you can’t afford the cost of computers upfront. But you know that adding computers to your company will increase revenue by 10%. You secure equipment financing for 5%, meaning you pay the upfront cost plus 5% interest on the computers. You can pay for the computers over time as your revenue stream begins to increase.
8. Merchant cash advances
A merchant cash advance is a debt-based financing option that involves a merchant giving you cash in exchange for a percentage of your daily sales. You’ll find that merchant cash advances are very accessible but very expensive. If you have poor or no credit history, this may be one of the only options available.
9. Angel investors
Angel investors are a form of equity financing. These investors are individuals who can dedicate time and money to helping your startup. If you’ve ever seen the show “Shark Tank,” the “sharks” are angel investors. You’ll likely have to give up equity in your company to secure these funds, entering you into a long-term partnership.
The process of finding an investor, hammering out details of an agreement, and receiving the capital could be lengthy, as well. If you need cash quickly, this is probably not the best choice.
10. Venture capital
Obtaining venture capital is the same, conceptually, as finding an angel investor. The only difference is that you’re receiving funding from an entire firm, as opposed to one individual. Venture capitalists are very strict with who they work with, often targeting “disruptors” in the industry.
Right now, tech disruptors are the main focus of many venture capitalists. So, if you’re a mom-and-pop hardware store looking to open operations in another county, you’re probably not a candidate for venture capital.
11. Family and friends
This is the tried and true method of business financing. You can secure funds from friends and family on a debt-based perspective, offering to repay the funds over time, or you can do so from an equity-based perspective, offering a stake in your company in exchange for funds. Asking loved ones for money can be awkward, but they are also the ones most likely to understand your character, vision and passion.
12. 401(k) financing
If you have a 401(k) from a previous job, you can borrow against it or dip into it to help fund your small business. However, this is a risky proposition. If your company does not succeed, you’ll have drained a significant portion of your retirement savings. This decision could set you back years.
Over the past few years, crowdfunding has become increasingly popular. Crowdfunding involves receiving microloans from individuals across the country. You won’t need to worry about debt or equity financing, but you may need to offer the donors some sort of perk. Consider early access to product releases or special packages. Kickstarter and GoFundMe are examples of popular crowdfunding sites.
14. Small business grants
Small business grants are advantageous because you don’t have to repay the money. There are no interest rates associated with the funds. Once they hit your bank account, they’re yours. However, securing these funds can be challenging.
For one, the application process is lengthy. You’ll need to provide in-depth business plans, years of tax returns, and explanations of the type of work you’re doing. Often, grants are earmarked for non-profit organizations or organizations focused on scientific and technological research. But, if you’re in one of these types of industries, grants can allow you to grow your operations with few strings attached.
The 5 best blogs for small business financing
The loan industry is fluid, especially when factoring in things like interest rates, which can change frequently. Keeping up to date on the current funding situation sets you up to address your business needs better. Not only will you put yourself in the best position to secure funding now, but you’ll also allow yourself to craft a business plan for your future financing needs.
To better understand the small business funding and financing options out there, here are five blogs that show you what’s available, how to best take advantage of funding, and what the winning strategies are for scoring the capital you need to grow your company.
1. Bloomberg Businessweek
The “Small Business” section of the Bloomberg Businessweek website has bloggers who regularly cover money issues. The site contains updates of news and studies that affect small business financings.
Another section answers business owners’ questions on everything from fixing strained business partnerships to putting your business up for sale. This site is an excellent resource, whether you have a new or existing business.
2. Business Credit Blogger
Good credit — and lots of it — is key to every small business. Blogger Marco Carbajo’s goal on his site Business Credit Blogger is to show you how to build credit while keeping your personal credit score and business credit score separate.
Besides highlighting good credit cards for small-business owners, he also writes about how to find business-friendly creditors and how to use net 30 accounting to build good credit.
3. National Federation of Independent Business
The National Federation of Independent Business, a nonprofit that lobbies for small business owners in Washington, offers business information, resources, and discounted professional services and products. You don’t have to join: Articles on the “Small Business Financing” page are free. Pick up good money advice here, like advice on preparing a stellar loan application.
4. Venture Hacks
If you’re planning to travel the treacherous road of venture-capital funding, or just need useful money-raising tips, serial Silicon Valley entrepreneurs Babak Nivi and Naval Ravikant share their advice online on the Venture Hacks site. Not only do the two write frequently, they also link to the best advice from other startup-funding pros. Recent posts focus on how to get rich and 11 angel investing lessons.
5. U.S. Small Business Administration
Although the Small Business Administration doesn’t necessarily have a blog, it does offer a ton of free resources to business owners. For instance, you can find a self-paced course on financing options for your small business. These short courses can provide you with a crash-course of information to help you familiarize yourself with popular business topics.
Secure funds for your small business
Whether you’re someone looking to open your own business, or are an experienced owner looking to expand operations, one thing remains the same — you need capital to do so.
Fortunately, there are many small business financing options available. From short-term business loans to equipment financing, you should be able to find the right type of funding for your business.