Small Business Funding – How to Find Funds for Small Businesses

Small business funding resources are crucial to the success of many independent ventures. Outside funding can help businesses meet expenses, overcome challenges, or take advantage of new growth opportunities.

However, many entrepreneurs aren’t sure where to begin looking for these funding options.

Securing business financing is one of the key steps to start a business. Wondering how to start? Our list below features several types of funding resources that may benefit various small businesses.

Small Business Funding Options – Where to Find Funds for Small and Medium Businesses

Exploring the various funds for small businesses is crucial in identifying the right financial support.

How do you start a business with no business financing? Luckily, there are many small business financing options. Here are the 17 best ways to finance your business:

1. Traditional Bank Loan

A traditional bank loan is a lump sum term loan. Usually, no collateral is required, and the payback time is fixed. The term loan’s interest rate is fixed when the business loan is finalized, and the monthly payback amount doesn’t change. A typical term loan is 7 years.

Alternately, the term loan may be calculated for a time period based on 75% of the estimated life of the business equipment.

Best for: business owners who are purchasing fixed assets that will help the company increase revenue.

2. Short Term Loan

A short-term loan is one of the top small business financing options and usually costs less than a traditional business loan. The payback time for this type of financing is usually from 12 to 84 months. The interest rate for short-term loans can be fixed or variable.

A series of short-term loans, cleaned up in timely payments, can help a small business owner with their credit score.

Best for: Those starting a small business who are in need of capital while waiting for alternate funding.

Learn more about: Short Term Loans

3. Commercial Real Estate Loan

Commercial real estate loans for businesses come in two forms, real estate purchase or business construction loans. Loans have fixed or variable interest rates, and terms are usually from 7 to 10 years. The loan amounts start at $50,000.

Best for: Purchase of real estate, especially owner-occupied. Lenders will loan money up to 80% of the value of owner-occupied real estate. Also a good financing option for a construction loan. Lenders may offer interest-only construction loans, which allows a business to keep cash flow steady until the loan morphs to a term loan.

Learn more about: Commercial Real Estate Loans

4. Line of Credit

Line of credit loans offer the greatest variety of financing options. The interest rate is typically variable, and lenders may require assets for loan collateral. As a rule of thumb with line of credit lenders, the interest rates are higher for loans without collateral. The lower the loan amount, the higher the interest rates.

Best for: business owners who need cash flow to cover short-term expenses, such as inventory or payroll.

Related reading: Business Line of Credit

5. SBA Loans

Through the Small Business Administration, the government provides a guaranty, ensuring payment of a substantial part of the business loan, offering added security to lenders. Lenders who participate in the SBA loan program like this security. The program includes so many loan choices that it is one-stop shopping for business financing.

SBA loans do require additional paperwork. You may have heard that as a common complaint. However, the paperwork is straightforward and available for download before you meet with lenders.

The Small Business Administration (SBA), supported by initiatives like the Economic Development Administration, is focused on aiding small businesses in their growth and development efforts. The additional paperwork required for an SBA loan helps an applicant complete a complete loan package.

Best for: A business that seeks to borrow a large amount. Because an SBA loan is guaranteed, a business can borrow more money with longer repayment periods.

Learn more: Types of SBA Loans

6. Online Loans

A faction of the online loan market gives the process a bad name. You may have a negative feeling from advertisements for companies that are no more than loan sharks with a website.

Reputable online lenders are great options for business financing, but it’s crucial to remain vigilant against fraud by conducting thorough research and choosing well-established platforms. Some banks, such as Wells Fargo, Chase Small Business, and Capital One, offer online business loan options.

With corporate giants like Verizon entering the FinTech space, the convenience of online loan applications has significantly increased, offering more options to entrepreneurs seeking business financing. FinTech providers include companies such as PayPal Working Capital, Kabbage, OnDeck, Biz2Credit, and more.

An online loan that consolidates debt may help a business improve its overall credit score. When a traditional lender considers small business financing, the lender would rather see one creditor than a number of creditors. Also, “paying off” those creditors may improve the business credit score.

Best for: Borrowers with bad or unestablished personal credit ratings who need quick cash flow can benefit from online lenders.

Learn more: Online Lenders

7. Merchant Cash Advances

Here’s how a merchant cash advance works. In exchange for a percentage of you daily credit or debit card receipts, a financing company advances cash to you. You’ll establish a merchant account where credit and debit card payments are deposited. The financing company will be paid from the merchant account.

Does it sound like robbing Peter to pay Paul? Well, not if your business has a valid projection of future earnings tied to credit and debit card sales.

The MCA financing option can have high fees. You can shop MCA companies online. MCA companies do not require a high credit score.

A business can typically borrow from $2,000 to $250,000, depending on its past records of credit and debit card sales. A business owner with a credit score of 500 or better can usually qualify for merchant cash advances.

Best for: A small business with a poor credit score or an unestablished credit score that needs quick cash flow.

Learn more: Merchant Cash Advance

8. Accounts Receivable Financing

Typically, a business can’t consider unpaid invoices to be an asset. Lenders want to see money in the bank.

Lenders that provide Accounts Receivable Financing look at outstanding amounts as invoiced goods and services. Those amounts are considered assets. Although they haven’t been paid, there’s a payment schedule (due dates).

Lenders that back Accounts Receivable Financing for a business use software called Invoice Factoring. The software syncs the invoices between the business and the Account Receivable Financing lender. When the business is paid, the lender is paid via the software.

Best for: A small business that is seasonal (or has defined short-term cash income periods) and needs working capital in the meantime.

Related reading: Purchase Order Financing and Accounts Receivable Factoring

9. USDA Loan

Farmers and ranchers who need capital can borrow up to $10 million from the USDA. Interest rates are typically from 5 to 9%.

This type of business financing has a specific source, the USDA Business and Industry Loans Guarantee program. The applicant must live in a rural area, defined as an area with fewer than 50,000 inhabitants.

The applicant must have a good credit score and at least 10% equity in the farm or ranch. For those starting a business, the requirement is 20% equity.

One of the best things about a USDA loan is that through the program, the applicant gets mentorship and advice. In addition to discussing a loan, the advisors may help the applicant develop a business plan.

In alignment with the USDA’s efforts to support rural and agricultural businesses, the Environmental Protection Agency provides additional resources and funding opportunities for projects focused on sustainable farming and environmental conservation.

Best for: Farmers and ranchers who need capital for renovation, modernization, real estate purchases, or inventory/supplies.

Note: For emergency relief, businesses connected with farming and agriculture should explore the SBA Limited Economic Injury Disaster Loan program, designed to provide aid in times of economic distress. In early May 2020, this program changed from general to specific. The program was launched as a program for all small businesses, but it is now only for farm and agriculture businesses. A business may get up to $2 million with a 3.75 interest rate.

Learn more: USDA Loans

10. Equipment Financing

An equipment financing loan can be structured as a term loan, line of credit, or a combination of the two. Flexible loan structures create more flexible repayment plans than traditional loans.

Little or no down payment is required. The lender may allow the applicant to include the cost of installation and sales tax in the overall loan amount. This helps a business retain working capital while expanding.

Best for: A business that needs a vehicle fleet, such as delivery trucks. This type of small business loan can also be used to purchase packaging machinery and/or refrigeration units.

Learn more: Equipment Financing

11. Business Credit Cards

A credit card dedicated to business use is a must. The business credit card report can make tracking expenses easier and compiling information needed to file taxes.

However, a business credit card can do more. It’s much easier to qualify for a business credit card than it is for a loan. Because interest rates are high, using a business card for a loan should only be for short-term financing.

Timely payments of the business credit card can help a company build a credit history. You may also earn reward money.

Best for: A business that needs to manage cash flow. The credit card payment can be set up to match the business’ billing cycle.

Learn more: Business Credit Cards

12. Microloans

SBA microloans are for minority, female, Veteran, and/or low-income business owners. The SBA provides loans and business grant options directly to eligible nonprofit microlenders, who then lend the loans to the business owners.

Startups can often use these business grants.  The money can be used for training and technical assistance.

Best for: A business that fits the applicant’s basic qualifications and needs $50,000 or less. Microloans are a good option for a startup business.

Learn more: Microloans

13. Crowdfunding

In simplest terms, crowdfunding is a way to get small amounts of money from a large amount of people. Crowdfunding is done through the internet.

There are four basic types of crowdfunding:

• Equity: The owner sells a piece of the business to an investor or investors
• Donation: Just as it sounds, people give money to the business.
• Debt: The owner gets money from individuals and owes them the money.
• Rewards: For a set donation amount, the donor gets products, services or gifts.

Best for: start up businesses, entrepreneurs.

Learn more: List of Crowdfunding Sites

14. Peer-to-Peer Lending

Peer-to-peer lending is similar to Equity crowdfunding in that a private investor is used. But with Peer-to-Peer lending, the owner isn’t selling a piece of the business. Instead, the owner is getting a loan from a peer.

The Peer lender gets a return on the investment. Because the Peer lender is taking all the risk, the lender wants a good return on the investment. Interest rates are often high.

How does it work? Websites such as Upstart and Prosper facilitate peer-to-peer lending. Business people join the website as either borrowers or lenders.

The Peer-to-Peer Lending websites have software to calculate the borrower’s credit rating.

Best for: A business owner who is shopping for loans using the internet and comparing rates.

Related: Peer to Peer Loans

15. Trade Credit

With Trade Credit, the business selling goods or services extends credit to the buyer. The Trade Credit agreement the parties sign allows the buyers to pay at a mutually agreed upon later date.

Since the buyer doesn’t pay at the time of sale, a Trade Credit helps keep the operating cash-free.

Trade credit is most often used by businesses involved in international trade. A U.S. business may get a Standby Letter of Credit or Commercial/Import Letter of Credit from a U.S. bank. The bank that issues the letter is backing the business. The letter improves the business’s credit rating overseas.

Best for: A business that is involved in international trade.

Related: Trade Credit

16. Equity Investment

Think Shark Tank. Equity Investment takes the form of angel investors, venture capitalists, or private equity. Despite the popularity of the Shark Tank show, this type of investor is a rarity. Angel investors make up the smallest percentage of this limited method of achieving business loans.

Working with an investor or a consortium of investors involves selling a portion of your business equity in exchange for capital, aiming for mutually profitable returns and strategic growth. To stand out from other companies, an owner must have complete knowledge of all the business numbers and a stellar business plan.

Best for: A young company with a lot of growth potential seeking venture capital.

Related: Size of Angel Investments

17. Startup Funds

Some lenders previously mentioned offer financing for startup companies. To cover all the bases, we’ll add Community Development Finance Institutions.

CDFIs are nonprofit lenders. They don’t require as much collateral as a traditional loan.

A CDFI has an advantage that is huge for some applicants. Of course, as all lenders do, the CDFI will want your credit score. But here’s where the advantage lies – the CDFI may listen to your reasons for a bad credit score. You might get the loan anyway.

Best for: A business owner with bad credit which can be explained by personal or family issues, such as illness or accident.

Related: Small Business Startup Loans

Evaluating Your Business’s Financial Health Before Seeking Small Business Funding

One of our main tips for starting a business is to look at your business’s financial health before applying for funding.  This step is critical because it not only prepares the business for potential scrutiny from lenders and investors but also aids in identifying the most suitable funding option before you start business.

Tip: Consider using financial management and analysis software with database functionalities for this step.

Key Areas to Assess:

• Cash Flow Analysis: Understand the inflow and outflow of cash in your business. Analyzing cash flow helps determine your business’s liquidity and day-to-day operational efficiency.
• Debt-to-Income Ratio: This metric is vital to understanding the financial obligations of your business compared to its income. A lower ratio typically indicates better financial health and can make it easier to secure funding.
• Profitability Analysis: Assessing your profit margins when you start a small business (and throughout running the business) provides insights into the business’s ability to generate income relative to its expenses and costs. Consistent profitability is often a key factor considered by funding sources.
• Overall Financial Stability: This involves a comprehensive look at your business’s assets, liabilities, and equity. Understanding your balance sheet in detail can help in making informed decisions about the type of funding that is appropriate for your business.

How Can You Streamline Your Application Journey?

The process of applying for business funding varies significantly based on the type of funding you are pursuing. Each funding source has its own set of requirements and application processes.

Tips for a Smooth Application Process:

1. Understand Specific Requirements: Each funding type, whether it’s a bank loan, an SBA loan, or an online lender, has unique requirements. Make sure you understand these and have the necessary documentation ready.
2. Prepare a Solid Business Plan: Many lenders require a detailed business plan. This should include your business model, market analysis, financial projections, and how you intend to use the funds.
3. Organize Financial Statements: Have your financial statements, such as income statements, balance sheets, and cash flow statements, in order. These documents are crucial for lenders to assess your business’s financial health. Accurate financial reporting is essential for internal management and plays a critical role in securing funding, as lenders closely scrutinize a business’s financial health.
4. Anticipate Lender Concerns: Be ready to address potential concerns, such as credit history or cash flow issues. Having explanations or strategies to mitigate these concerns can strengthen your application.
5. Seek Professional Help if Needed: Don’t hesitate to consult with a financial advisor or accountant to ensure your application is comprehensive and well-prepared.

Seeking Expert Guidance

Navigating the world of business financing can be complex, especially for those not well-versed in financial matters. Seeking expert advice can significantly enhance your chances of securing the right funding.

Tips for Seeking Expert Guidance on Funding:

• Consult Financial Advisors: A professional financial advisor specializing in funding for small businesses can offer personalized advice based on your business’s specific needs and financial situation.
• Use Resources from Business Development Centers: Small Business Development Centers (SBDCs) and other similar organizations offer free or low-cost advisory services, including help with financial planning, small business fund options, and loan applications. Many types of funding have tight competition, so seeking advice is very important.
• Join Business Networking Groups: Networking with other business owners can provide valuable insights and experiences related to different lenders and funding options and give you first-hand information on things like the best places to get a small business grant.
• Leverage Online Tools: Numerous online financial management tools and platforms can help with financial planning and understanding various funding options.

Ensuring Sustainable Growth Post Funding – Your Budget and Beyond

Financing is just one step in the process of starting a small business. Effective financial management after funding is crucial to ensuring the sustainability and growth of your business.

Strategies for Effective Post-Funding Management

• Create a Detailed Budget: Outline how you plan to use the funds. A detailed budget helps track spending and ensures that the funds are used effectively for business growth.
• Plan for Reinvestment: Consider how the funds can be reinvested in the business to generate more revenue. This could be through expanding operations, hiring key personnel, or investing in marketing.
• Manage Increased Cash Flow: Effective management of increased cash flow post-funding is crucial. Allocate funds wisely to areas that yield the most return.
• Prepare for Future Financial Needs: Always keep an eye on the future. Regularly review your financial situation and plan for future funding needs, whether for expansion, new projects, or contingency funds.

By incorporating these strategies, small business owners can not only secure funding but also utilize it effectively to pave the way for long-term success and stability.

Small Business Funding Frequently Asked Questions (FAQs)

What Small Business Funding Factors do Lenders Consider?

Lenders involved with small business financing have similar requirements as lenders who are loaning you money to buy a house or car.

Lenders consider many factors in making a financing decision. However, these are the top factors:

• Creditworthiness – Most lenders want to see a credit score of 650 or higher. They will want those scores from others who have a minimum 20% ownership in the business.
• Business plan – In addition to personal financial records of owner or owners, the lender will need your business plan. An important point to note, you should explain how obtaining the loan fits into your business plan.
• Business revenues – In most cases, you will provide at least 2 years of business revenue records, including income tax records.
• Clean History—You may not have any tax liens or late payments personally or through your business.

Small Business Funding – What Options are the Best for My Business?

Your best financing option depends on how much money you need, the type of repayment terms you seek and how fast you need the money.

Your best option is the one that meets your needs at the time and is available. Here are 7 factors small business owners say they consider when deciding which financing option is best:

• How fast you need the money – Getting a line of credit loan is usually faster than getting a term loan. Getting a loan from internet sites can take as little as 36 hours.
• Programs your existing bank offers – Many small businesses approach their existing bank first. See what your bank account can do for you first. If your bank is an SBA lender, explore those options.
• A referral from a trusted source – A recommendation from a colleague or mentor can point you to a type of financing or lender.
• Is collateral required? Some businesses, such as knowledge businesses and online businesses, don’t have many tangible assets to put up as collateral. However, a business can get loans with no collateral, such as different types of term loans.
• Flexibility of terms – Interest rates can be fixed or variable. Payback terms and conditions can vary.
• Likelihood of being funded – With a poor credit score, pursuing conventional financing options’s not a good use of time. Find your best fit. With poor credit, look at online financing or merchant advances.
• Costs and interest rate—You may find a lower interest rate, but the loan may require other fees. Those additional fees could negate your interest rate savings depending on the payback time frame.

Source: The Small Business Credit Survey by the Federal Reserve Banks, page 17.

How Can I Fund a Business with No Money?

Getting a loan to start a business can be hard if you have no funds. But no funds plus determination can get you where you want to go. With no funds, there is nowhere to go but up.

You have several options to finance a business with no money. Entrepreneurs may find it hard to get a loan to start a business — a traditional business loan, that is. So startup entrepreneurs who have no funds use these alternative financing sources:

• Friends and family – Your inner circle of friends and family may be willing to back your venture.
• Personal credit cards – This is not ideal, but entrepreneurs start businesses with credit cards all the time.
• Home equity loan – Again not ideal because it can put your family at risk, but people often start a business this way. It can also help build a good credit history.

How Do I Get a Small Business Grant?

There are two programs at the federal level: Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR). However, they have limited applicability. Certain local communities and various private sources have programs.

Read more: Where to Get Small Business Grant

Image: Depositphotos.com

 

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