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When you need cash to finance your business’s growth or ongoing operations, there are many small business finance options to choose from. Financing options range from business credit cards and microloans to multi-million dollar SBA loans and crowdfunding.
Read on to learn more about different ways you can finance your small business and which one may be right for you.
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Financing options for a small business
Below are some of the most popular small business financing options ranging from lending platforms to crowdfunding.
Small Business Administration (SBA) loans
The Small Business Administration (SBA) is a government agency that provides services and resources to support small businesses. As part of these efforts, the SBA partners with local lenders to offer SBA loans.
The SBA sets guidelines to make funding more accessible to small businesses while also reducing risk for lenders by backing loans up to a certain percentage. Three of the most popular SBA loan programs include 7(a) loans, 504 loans and microloans.
7(a) loans
SBA 7(a) loans are the most common type of SBA loan, and you can use funds for a variety of business needs, like accessing working capital, refinancing debt, financing business equipment or buying real estate. You may be eligible for up to $5 million in business financing if:
- Your small business operates for profit in the U.S.
- You exhaust all other financing options before applying
- You can show why you need the funds and what you would use them for
- You’ve invested money in your business and are currently making on-time payments for existing debts
Interest rates for 7(a) loans are lower than for many traditional business loans and repayment terms can range between 10 and 25 years, depending on the purpose of the loan. There are several types of loans under the 7(a) program that may feature fixed or variable rates, but most are fully amortized.
504 loans
Through the 504 Loan Program, Certified Development Companies (CDCs) provide lending for small businesses trying to grow and create jobs.
You can qualify for up to $5 million (or $5.5 million for some energy projects) if your business operates for profit, has a net worth of less than $15 million, and has an average net income of less than $5 million for the previous two years.
504 loans only require a 10% down payment, which is lower than many other business financing options. Fees are also more affordable because CDCs include them in the loan amount rather than out-of-pocket closing costs.
However, CDCs often require extensive documentation and underwriters are thorough, which can lengthen loan processing times.
Microloans
Microloans may be a good option if you want to borrow up to $50,000. In fact, the average microloan is around $13,000.
You can use microloans for various business expenses, and they are a good option if your business may not qualify for conventional small business financing. Still, eligibility requirements vary by lender, but most require collateral and personal guarantees.
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Small business grants
The primary advantage of small business grants is that, unlike loans, you don’t have to repay them. Many reputable companies offer small business grants and you can search for available programs online.
For example, you may qualify for grants from the SBA, Grants.gov, Small Business Innovation Research Program, Small Business Technology Transfer Program or National Institutes of Health Research Grant Programs.
That said, you must adhere to strict rules, application processes and eligibility requirements when applying for grants. Each program varies, but you may need to fill out a time-consuming application, wait long periods for approval or provide updates after receiving the grant.
In addition, grants are in high demand so you’ll likely face a lot of competition when applying for common grant programs.
Traditional bank loans
Some banks offer small business term loans similar to SBA loans. However, in some cases — such as for established banking clients — banks may try to provide loans with lower rates or better payment terms.
Working with a bank may also give you access to financial support and other banking products, such as credit cards or business checking accounts.
Bank loans typically offer flexibility in how you can use the funds for your business. However, certain loans may be restricted to specific types of purchases, such as financing for business equipment or real estate
It’s also important to note that banks prohibit loan proceeds from being used for speculative purposes. That means you’ll need to make a strong business case when you apply.
Business credit cards
Business credit cards are an excellent way for newer businesses to build credit, and they are often easier to qualify for than loans.
Credit cards are a continuous funding source if you make your payments regularly and leave some of your balance available. Some credit cards also have rewards, so your business could earn cash back or miles.
On the other hand, credit cards can have high-interest rates. And credit card issuers generally charge fees, whether they be annual, foreign transaction or late fees.
Using credit cards for business expenses can also expose your business to risks such as unauthorized use of funds. For example, employees may be able to access the card if it’s not secured properly and, depending on the card, it may be difficult to dispute those charges.
If you’re interested in this funding option, read our guide to the best business credit cards.
Credit union loans
Credit union loans are similar to bank loans except they’re restricted to members of the credit union. These loans generally feature lower rates and fees.
Credit unions also typically have fewer customers than large commercial banks, so they may be able to process your application faster and give you more personalized attention.
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