Small Business Financing: Your Options

Along the journey of business ownership, every business needs funding to grow and become sustainable in the long term. Getting the right business loan can make all the difference in accessing enough capital to buy equipment, hire employees or cover daily expenses. These loans can come from a variety of sources, including banks, online lenders and alternative business financing such as crowdfunding. Take a look at all the options you have to get financing for a small business.

1. Bank loans

Who it’s best for: Businesses with strong credit

Where to get bank loans: Traditional banks, such as the bank where you do business banking

Chances are, when you think of business loans, you think of a traditional, brick-and-mortar bank. You can apply for a business loan with most traditional banks.

But banks focus on providing loans to creditworthy businesses, so be prepared for strict qualifications to apply. Common requirements for traditional banks are:

• Minimum credit score: 670+
• Minimum annual revenue: $100,000 to $250,000
• Minimum time in business: 2 years

In exchange for a strong credit history, banks typically offer some of the lowest interest rates for business loans among lenders. They also tend to stick to conventional types of financing and often offer a variety of loans, such as term and equipment loans and business lines of credit.

Pros and cons

Pros:

• Low starting interest rates
• Bank branches for in-person support
• Variety of conventional loans

Cons:

• Strict requirements to qualify
• Not ideal for startups
• May have to apply in person

2. Online loans

Who it’s best for: Businesses with fair-to-bad credit or needing funds quickly

Where to get online loans: Fintech lenders without bank branches

Online loans are offered through lenders that don’t have branches and typically don’t offer business bank accounts. Because of relaxed eligibility guidelines, these loans are usually more accessible to startups or businesses that need to rebuild credit. Typical requirements for online loans include:

• Minimum credit score: 550 to 660
• Minimum annual revenue: $50,000 to $250,000
• Time in business: 6 months to 1 year

Online loans also have fast funding speeds, as quick as 24 to 48 hours. This makes them ideal if you need funds quickly to cover a cash flow gap or emergency expense.

Online lenders may specialize in specific types of business loans, including alternative financing like merchant cash advances. Repayment terms tend to be five years and under, shorter than traditional banks that can go as long as 10 to 25 years.

To offset the convenience of a fast, online loan, many online lenders charge high interest rates — upwards of 99 percent or higher. So you’ll need to factor in the higher cost of borrowing when going with this small business financing option.

Pros and cons

Pros:

• Relaxed eligibility requirements
• Welcomes startups and bad credit businesses
• Alternative financing options
• Fast funding in 24 to 48 hours

Cons:

• Interest rates can be high
• Repayment terms typically 5 years or less
• Fewer loan options than traditional banks

3. Small Business Administration (SBA) loans

Who it’s best for: Businesses that don’t qualify for conventional loans

Where to get an SBA loan: SBA-approved or preferred lenders

Small Business Administration loans are term loans or lines of credit partially guaranteed by the U.S. government and offered through approved SBA lenders. They offer competitive interest rates and long repayment terms that you might not qualify for with a traditional business loan.

Because SBA loans are competitive, lenders often add strict criteria that business owners have to meet. For example, you may need a minimum credit score of 670 and two years in business. Lenders also have to get SBA approval to guarantee the loan, slowing down funding time to 30 to 90 days.

The SBA offers several types of SBA loans, including:

Pros and cons

Pros:

• For businesses that don’t qualify for other loans
• Competitive interest rates
• Variety of loan types
• Fee and interest rate limits set by SBA

Cons:

• Strict guidelines to apply, based on lender
• Funding can take 30 to 90 days
• Lender must be SBA-approved

4. Community-based lending

Who it’s best for: Minority business owners, startups and businesses with bad credit

Where to get community-based loans: Certified Minority Depository Institutions (MDIs) or Community Development Financial Institutions (CDFIs)

Community-based loans are provided by lenders with a mission to support and develop certain communities. They focus on underserved markets like minority business owners and businesses in financially at-risk areas.

CDFIs are financial institutions that aim to develop businesses in target markets, including minority and low-income areas. They must offer training and education to support their communities. CDFIs are certified by the CDFI Fund, which offers lenders training, financial awards and specialized lending programs like its Small Dollar Loan Program.

Minority Deposit Institutions are organizations that are mostly owned (51 percent) by people of color and serve minority communities. MDIs also should have a board of directors made up of mostly minority individuals. They’re often located in a minority community and may offer bilingual services to promote an equal playing field for financial understanding.

Pros and cons

Pros:

• Supports minority and underserved businesses
• Relaxed credit requirements
• Offers extra resources like mentoring and bilingual services

Cons: 

• Few community-based lenders
• Must qualify for that lender’s target community
• Limited loan options and sizes

5. Business credit cards

Who it’s best for: Any business, including startups and those that don’t qualify for conventional business loans

Where to get business credit cards: Banks or your preferred credit card issuer

If you need to cover small expenses or don’t qualify for a business loan, a business credit card is a solid place to start. You typically need a good credit score of 670 or higher, but they’re otherwise easier to qualify for than a business loan. They typically don’t ask for proof of revenue and don’t require your business to be in the market for a certain length of time.

Business credit cards typically offer APRs in the 18 percent to 28 percent range. While you can find business loans with lower interest, business credit cards are easier to qualify for and let you earn cash back or rewards with every purchase. And if you pay off your card in full each month, you’ll have a 21-day grace period to pay off the card without accruing interest.

Pros and cons

Pros:

• Use for expenses any time
• Easier to qualify for than loans
• Earn cash back or rewards
• Payment due 21+ days after billing cycle

Cons:

6. Small business grants

Who it’s best for: Startups or underserved businesses needing free capital

Where to get business grants: Governments, private corporations and non-profits that provide business grants

If your business meets qualifications, business grants are the ideal choice to get funding that you don’t have to pay back. That doesn’t mean grants are easy to apply for and win.

Your business has to match the grant’s specific criteria, such as being a minority business owner. You then have to compete with other businesses that also meet the criteria, possibly showing a detailed business plan or presenting your business idea and goals.

If you get the grant, you may have to report business results to the organization. You also have to be patient about waiting to hear back from the company giving the grant. If you have a unique business or selling proposition and think you have a good chance at getting a grant, grants can be worth the work involved.

Pros and cons

Pros:

• Free money that doesn’t require repayment
• Focuses on underserved groups like minorities, women and veterans
• May offer education and resources

Cons:

• Must meet specific requirements
• Getting a grant is competitive
• Not a quick source of funding
• Limited grants available

7. Crowdfunding

Who it’s best for: Businesses that can stoke public or investors’ interest

Where to get crowdfunding: Crowdfunding platforms like Kiva and Kickstarter

Crowdfunding is a form of business financing that raises funds from interested private investors or customers. These may be angel investors with enough capital to invest in a risky venture or crowdfunding platforms that take small investments from multiple people.

Crowdfunding can be a simple, one-off fundraiser in which you raise money that you don’t have to repay. Or it may involve giving investors equity in your business or rewarding them with gifts, profits or the product itself.

Getting funding this way works best for businesses with a unique product or businesses that have a network of investors they can tap and easily generate interest in their business idea.

Pros and cons

Pros:

• Ideal for startups and one-time funding
• No strict requirements to be eligible
• Can start relationships with investors

Cons:

• Doesn’t work for ongoing needs
• Need to engage interest in your business
• May have to report business results

Bottom line

If you’re a small business in need of financing, you have options. Bank and online loans may offer the lump-sum funding you need, while lines of credit and credit cards are a better option for ongoing funds. Before agreeing to small business financing, be sure to compare various lenders to make sure you get the best rate and terms for your business’s needs.

Frequently asked questions

• What are possible sources for small business loans?

  Small business loans are usually funded through traditional banks and online lenders. If you’re looking for an SBA loan, you’ll need to find a lender approved by the U.S. Small Business Administration. Similarly, community-based lenders will need to be certified by their specific designation, such as a Community Development Financial Institution or Minority Deposit Institution.

• Where can I apply for financing for my small business?

  You can get small business loans from brick-and-mortar banks, online lenders or community-based lenders that focus on underserved communities. Some lenders specialize in certain types of loans or industries, such as semi-truck loans or merchant cash advances.

• What kinds of financing are available for small businesses?

  Small businesses with fair-to-excellent credit can get conventional loans, including term loans, business lines of credit and equipment financing. Businesses with bad credit may qualify for alternative financing, like invoice factoring, asset-based lending or merchant cash advances.