Running a small business is challenging. Sometimes, you will have to reach into your own pockets or get financing to cover business costs, and maintaining operating expenses can also require someone else’s capital. Most seasonal business owners rely on financing to stock up on inventory during the slower months so they can generate robust revenue numbers during the busy season. Money is important, and you may have to borrow it from someone, but which resource makes the most sense for your business? We will explore 12 funding options that can provide the capital your small business needs.
Is It Hard to Get Funding for a Small Business?
The level of ease or difficulty depends on how you want to get funds. U.S. Small Business Administration (SBA) loans are more difficult to obtain. They have stringent requirements, and even if you get approved, it can take over a month to receive capital. On the other side of the spectrum, you have online lenders who have more generous credit score requirements and can provide same-day funding upon getting approved.
Your credit score, business experience, revenue, and other components also impact your financing options. Lenders are more eager to hand out loans to small business owners who have good credit scores, fulfill revenue requirements, and have at least a year of experience. Some financial institutions want to see at least two years of business experience, while some online lenders may only want to see that you’ve been up and running for a few months.
The Challenge of Funding a Small Business
Receiving capital as a small business is a lot more challenging if your company doesn’t yet have an extensive resume of serving customers in a profitable way. Lenders want to feel confident that they will receive their principal back with interest before giving out small business loans. You may have to make a personal guarantee and lean on your personal credit score during the early stages of your company’s existence.
It’s also important to consider how credit scores grow over time. While there are several categories, payment history is the largest one. Your credit score goes up as you repay loans, lines of credit, and other financial obligations that get reported to the major business credit bureaus. You may have to get started with a secured business credit card and build credit that way before submitting applications for loans with high business credit score requirements. If you start your search with traditional banks, you may be disappointed due to their requirements, but online lenders provide more flexibility, and there are also a lot of them.
Conventional vs. Non-conventional Business Funding
Most business owners initially think of conventional business funding when they start searching for capital. Conventional funding comes from big-name banks, credit unions, and financial institutions. You may have done business with these entities as a consumer and use them for your personal funds, but conventional funding choices tend to have higher credit score requirements and long wait times before you receive capital.
Non-conventional business funding is usually faster and has more generous requirements. Interest rates vary more if you look at non-conventional business loans, but you can still get a great deal. Some online lenders emerged in response to inefficiencies and flaws in the traditional financial system and provided small business owners with better experiences.
Top Options for Funding for a Small Business
Business owners have more choices than ever, but it’s important to choose the right financing for your needs. Here are some of the best choices to consider.
1. Term Loans
Term loans are common for business and personal finances. Business owners receive the loan as a lump sum and then make monthly payments until the loan is paid off. Borrowers can choose a fixed-rate loan or a variable-rate loan. The fixed interest rate stays the same for the loan’s duration and makes monthly payments more predictable. Variable-rate loans start off with lower interest rates, but if interest rates rise, you could end up with higher monthly payments. However, if interest rates fall, you will have a lower monthly payment instead. As the name suggests, variable-rate loans add more variability to your monthly payment, while fixed-rate loan payments stay the same.
Fixed-rate loans are less risky, and you can always get a refinance if the interest rate falls below the one you are currently paying on your loan. You can also incur less risk by extending the loan’s duration. For example, although you pay more interest on a 10-year loan than on a 5-year loan, you spread the principal across more intervals and minimize the monthly payments in the process. Business owners seeking a quicker path out of debt should pick a shorter loan term, but most business owners prefer longer-term loans to protect cash flow.
Credit score requirements vary greatly, depending on which lender you find. A higher credit score makes it easier to borrow more money and secure a lower interest rate on your loan.
2. Line of Credit
A business line of credit is similar to an installment loan. You receive a lump sum that you can use right away, but that’s where the similarities end. Business owners only pay interest on a line of credit if they borrow against the credit limit. That means you can avoid paying interest as long as you do not borrow any money from the credit line. Some business owners get a line of credit to have extra reserves ready to go if needed. On the other hand, you’re obligated to pay interest on an installment loan the moment you receive the lump sum.
Most lines of credit have variable interest rates, which make monthly payments and debt accumulation less predictable. However, you only have to make a minimum payment each month. This arrangement helps small business owners focus on using the funds for their companies instead of contending with high monthly loan payments right out of the gate. Any unpaid balance on a line of credit at expiration converts into an installment loan. The repayment schedule usually warrants monthly payments.
3. Equipment Financing
Equipment allows companies to achieve higher levels of productivity and maintain operations, but all of that equipment comes at a cost. While equipment leasing is the easier way to go, those monthly payments never go away. Purchasing equipment allows you to own the equipment outright, but not everyone has enough capital to make that investment. Equipment financing can be a great solution for business owners who need equipment but don’t want to contend with monthly lease payments and less control over valuable assets.
Lenders let you use equipment as collateral. However, this arrangement allows the lender to take your equipment if you don’t keep up with monthly payments. Using equipment as collateral makes the loan easier to obtain and can help you secure a lower interest rate.
5. Merchant Cash Advance
Borrowers can tap into additional capital using merchant cash advances and repay the debt with a percentage of each debit and credit card transaction. You will also owe a fee on top of those debit and credit card transactions. This funding source can work for business owners with fewer options, but merchant cash advances are more expensive than most types of loans. The APRs on some merchant cash advances exceed 100%. You can find lower rates if you shop around, but they aren’t the best choice for most small business owners and startup founders.
6. SBA Loans
SBA loans are the golden standard for small business owners based in the U.S. These loans have competitive rates and terms, but you will have to wait several weeks before getting financing for most of these loans. An SBA bridge loan from an online lender can provide initial capital while you wait for your application to get approved.
The SBA also has special programs for women, minorities, veterans, and other groups. If you belong to one of these groups, it can help you secure financing for your small business.
ROK Financial can help you borrow $5,000 to $300,000 through an SBA loan. The business lending marketplace connects small business owners with lenders, providing companies with more possibilities. You will need a 675 credit score to obtain an SBA loan through ROK Financial, but they have other loans available for business owners with lower credit scores, with terms ranging from 6 months to 10 years. In addition, small business owners can find additional loans on their platform and borrow up to $5 million for their other financial products. You can request a free quote to discover how much capital you can get for your business.
7. Franchise Financing
Franchising is an attractive way to finance a business. Instead of creating their own brands and trying to build up a solid reputation over multiple years, some entrepreneurs prefer to leverage existing brands and enter partnerships with them. Entrepreneurs have to pay a franchising fee and a percentage of sales to establish their businesses with franchisors.
Launching a franchise can be an expensive but rewarding adventure, and franchise financing gives you the capital you need during the early stages. Some franchisors offer loans through their own platform or invite franchisees to apply for a loan through their network of preferred partners. However, most franchises expect borrowers to make 20% down payments before supplying them with the rest of the proceeds.
8. Asset-Based Loans
These unconventional loans allow businesses to use assets as collateral to obtain financing. While property and equipment are common types of collateral and have separate loans, these financial products cover more ground. Inventory, accounts receivable, and other assets can be used as collateral for the loan.
Lenders give you cash equal to a percentage of each asset’s face value. So you will get a higher percentage of your asset’s face value if it’s a liquid asset like an invoice than if it’s an illiquid asset like equipment.
If you want to use unpaid invoices to fund your business, you have two choices. You can use your unpaid invoice as collateral and continue collecting payments from it. Small business owners with this arrangement keep unpaid invoices and receive payments from them if they use invoices as collateral.
Some small business owners take another route and sell invoices to invoice factoring companies. The business owner receives upfront cash, and the invoice factoring company reaches out to the clients listed on your invoices. This arrangement saves you time because someone else is reaching out to clients. However, some small businesses prefer to manage their interactions with clients instead of handing invoices off to an invoice factoring company.
9. Crowdfunding
Want help from your friends, business colleagues, and customers? Crowdfunding gives anyone the opportunity to raise funds from others they can use for their businesses. Many of these campaigns have established financial goals that anyone can see by visiting your crowdfunding campaign’s page. Many campaigns also have incentives to encourage people to contribute higher amounts. For instance, a crowdfunding campaign for a restaurant may include free food, better seating, and cooking classes depending on how much someone contributes to the campaign.
A significant advantage of crowdfunding is that you don’t end up with more debt. Instead of owing money, you have to deliver on experiences and perks that your customers expect. Doing this well can result in returning customers that form the core of your business. While a business loan also provides the capital you need, a crowdfunding campaign can build more excitement for your company, and you don’t even need a good credit score or revenue numbers. However, crowdfunding takes more effort, and you will have to promote your campaign to get it in front of your audience.
10. Venture Capital
Investors look for assets that can generate positive returns, and some of them seek out small businesses. These venture capitalists can provide connections and experience that accelerate your company’s growth. You also won’t have to worry about taking on more debt. While venture capitalists can strengthen your business, they will ask for equity. These investors will look at your financials, and you will have to come up with a valuation for your business. Venture capital firms and investors usually set exit plans so they can leave positions within a few years. You will have to keep a venture capitalist’s exit plan and the contract in mind when growing your business because you will have to pay them when they want to leave.
11. Angel Investors
While venture capitalists invest money entrusted to them by a firm or a group of investors, angel investors are individuals with their own capital. The arrangement is similar, where an angel investor provides years of experience and the financing you need for a percentage of your company. You will both benefit from the company’s growth, and the angel investor may have an exit plan included in the contract.
12. Small Business Grants
There are plenty of ways to raise money for your business, but small business grants are the best choice. Business owners who receive small business grants do not have to pay them back. For example, if you get a $5,000 small business grant, all of that money is yours, free and clear to use for your business. Several corporations and non-profits offer small business grants to qualifying businesses.
This may sound too good to be true, but it’s exactly as described if you get one of these grants. Since these grants are practically free money for your business, many business owners and startup founders apply for them. You may have to compete with thousands of businesses and deliver presentations in front of panels to obtain a business grant. Some of these grants are easier to obtain than others, but if you end up with one of them, you can put the proceeds into your business without worrying about paying it back.
