How to Get Funding for Your Small Business: What are Your Options?

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Virtually all types of business funding fall into one of two categories: debt financing or equity financing. Debt financing involves borrowing money, while equity financing means you sell a stake in your business in exchange for money from investors. Small business owners may choose one over the other or a combination of the two, plus their own funds. The first step to figuring out the right financing mix for your small business is understanding the ins and outs of the most common types of business financing, plus creative ones like crowdfunding.

Debt Financing

Best for: Business owners who want full control over their business. If you want or need financing right away, this is also probably your best option.

Term loans

Term loans allow you to borrow a lump sum of money which is then repaid over a set period of time. Term loans typically have fixed interest rates and may or may not charge origination fees, prepayment penalties or other fees.

Best for: Businesses with at least two years of operating history and owners who want predictable monthly payments.

Equipment financing

Equipment financing is designed for purchasing or leasing business equipment. Depending on the lender, you may be able to borrow up to 100% of the equipment's value, with repayment terms extending for the life span of the equipment.

Best for: Businesses with at least six months of operating history that can meet the lender's minimum credit score and revenue requirements.

Invoice factoring

Invoice factoring (also known as receivables factoring) is a small business funding option that involves selling your outstanding invoices to a financing company. You may be able to borrow 70% or more of your receivables, and perfect credit isn't a requirement to qualify.

Best for: New and established businesses that need flexible funding and are able to meet minimum revenue requirements.

Business lines of credit

Similar to a business credit card, this form of financing is a revolving line of credit you can draw against as needed. The advantage is that you only pay interest on the amount of your credit you're using.

Best for: Businesses with at least six months of operating history in search of a flexible financing option.

Business credit cards

Business credit cards can offer convenience and the potential to earn rewards on purchases. These cards also allow you to carry a balance month to month, with interest, with the only requirement being that you pay the minimum amount due.

Best for: Startups that need new business funding and can't qualify for loans; businesses that have been operating six months or more that want to earn rewards on purchases.

Personal loans

It's possible to tap a personal loan for funding business operations, though borrowing limits may not be as high as those for business loans. Personal loans can be secured or unsecured and have fixed or variable interest rates.

Best for: Startups and entrepreneurs that don't meet the revenue, credit score or operating history requirements for other financing options for small business.


Where to find debt financing

Whether you’re looking for a loan or a line of credit, invoice factoring or a business credit card, the primary places to find them are a bank or credit union or an online lender. Banks and credit unions typically offer the lowest rates, but online lenders may provide funding more quickly and with fewer restrictions.

Bank or credit union

Banks, both large and small, can be a viable option for business funding. According to the Federal Reserve’s latest Small Business Credit Survey, 67% of small business owners who applied for funding in 2018 with large banks reported being satisfied with their experience. Among businesses that applied for funding with small banks, 79% said they were satisfied.

Banks are good places to seek out Small Business Administration loans, though you can also look to them for traditional term loans, business lines of credit, business credit cards and equipment loans. PNC Bank, for example, offers one of the best hybrid small business lines of credit for borrowers.

Pros of getting a bank business loan:

  • Favorable interest rates
  • Higher borrowing limits
  • Longer repayment terms

Cons of getting a bank business loan:

  • Startups may not qualify for new business funding
  • High credit, revenue and time in business requirements typically apply
  • Longer underwriting and loan funding times

Choosing funding from a bank could make the most sense if you have an established business. A good banking relationship could also work in your favor for getting the best loan terms and rates.

Online lender

Online lenders could be a suitable alternative to traditional banks when starting or expanding a business. The types of small business financing options you can find through online lenders include short- and long-term loans, equipment financing, merchant cash advances, business lines of credit and invoice financing.

Pros of online lenders:

  • May be easier for new businesses to qualify
  • Apply for funding in less time
  • Faster processing and funding times

Cons of online lenders

  • Borrowing amounts may be lower than traditional bank loans
  • Interest rates may be higher
  • More fees or prepayment penalties are possible

An online lender could be a good option if you have a brand-new business or you have less than perfect credit. Kabbage, for instance, does not have a minimum required credit score for its line of credit, and instead relies more on revenue and transaction history to determine how much funding you may receive. Check out more of our top recommendations for new business funding.


Equity Financing

The biggest advantage of equity financing is that you don’t need to take on debt the way you would with a loan, line of credit or another of the methods discussed earlier. Instead, you’re accepting funding in exchange for an ownership portion of your company or stock.

Best for: High-growth businesses that are set to expand quickly, most likely in such fields as technology, health care or finance. You may be better suited to this type of financing if you’re seeking a long-term relationship with one investor or a group of private investors who may also serve as mentors.

Venture capital

The most common type of equity financing, venture capital is generally cash in exchange for shares and an active role in the company by those providing it. You may be able to find venture capital through private-public partnerships like the Small Business Investment Company (SBIC) or private venture capital firms. A small business advisor or consultant may be able to connect you to one of these organizations.

Venture capital may also be found closer to home through friends, relatives, employees, customers or industry colleagues. This is different from simply borrowing from family members or asking for donations — we’ll discuss those methods of fundraising, below.

Angel investment

Similar to venture capitalists, angel investors provide cash in exchange for some type of return. Unlike venture capital, angel investment may be a one-time infusion rather than an ongoing source of financing. Angel investors may be more difficult to find and have specific criteria they’re looking for in businesses they finance.

Pros of using investors to fund a business:

  • Private investors can offer millions of dollars in funding
  • There are no credit score, operating history or revenue requirements to meet
  • Money raised from private investors typically doesn't have to be repaid, since it's a form of equity financing

Cons of using investors to fund a business:

  • Investors may expect an ownership stake in the business in exchange for funding
  • Angel venture capital funders can be very selective; obtaining funds may require more work than getting a loan
  • It may be necessary to raise multiple rounds of funding

Angel investors and venture capital firms typically focus their attention on new companies. Essentially, they're betting on a startup becoming the next big thing. The payoff for these investors comes when a company they've invested in goes public and they're able to sell their shares for a profit. The key for startup owners is being comfortable with the equity trade-off.


Other types of small business funding

There are other creative ways to raise money for your small business. These methods may require more legwork, but offer the possibility of avoiding debt without having to give up a stake in your company.

Small business grants

Grants offer the advantage of not having to be repaid, but are typically given to mission-oriented businesses. Business grants are offered by nonprofit, for-profit and government organizations, though there may be stiff competition for limited funding.

Best for: Businesses that would like to access working capital without taking on debt.

Pros of small business grants:

  • A grant doesn't create a debt obligation
  • Since there's nothing to repay, you're not handing over money for interest or fees
  • Applying for multiple grants won't hurt your credit score

Cons of small business grants:

  • Grants may have very specific conditions to qualify
  • A grant may not offer as much funding as a loan might
  • Getting approved for grants can be very competitive

If you're interested in applying for small business grants, you'll need to do your research. That means looking closely at different organizations that offer grants, which types of businesses are eligible for grant funding and what's required to apply.

Crowdsourcing

Crowdsourcing means raising money from multiple investors. For example, you might list a funding proposal on a platform like GoFundMe or Kickstarter and ask everyday people to contribute money to your cause or business. This is another way to legitimize gifts made from family and friends, and widen your circle to the larger community.

Best for: Startups and businesses less than a year old that need funding to launch or scale.

Pros of crowdsource funding:

  • Credit isn't a requirement
  • Launching a crowdfunding campaign could help raise visibility for your brand
  • Funding can be more accessible for startups compared to getting a bank loan

Cons of crowdsource funding:

  • Crowdfunding can be a competitive landscape for startups
  • Depending on the crowdfunding platform you use, you may pay a fee to list your campaign; that fee is then deducted from the money you raise.

Crowdfunding can be a good option for startups and new businesses that need money to get up and running. Make sure you understand how funds are regulated if you don’t meet your goals — GoFundMe allows you to keep all donations, but other platforms might not.

Borrowing from friends and loved ones

Your inner circle may also be a possibility for funding a small business. The advantage is that friends and family may not charge interest on borrowed funds; however, this is risky, since not repaying a loan could damage your relationship. It is also possible family members may not expect to be repaid.

Best for: Any business owner who needs capital and doesn't qualify for other funding options.  

Rebecca Lake has been writing about personal finance and business for nearly a decade. In addition to covering credit cards and investing for U.S. News, she's a regular contributor to CreditCards.com and The Balance. She's also worked with a number of banking and financial brands, including Citibank, Discover Bank and AIG Insurance.

Lake's other publication credits include a number of credit-focused personal finance sites, such as Credit Karma, Credit Sesame and CreditDonkey. As a small business owner, she's particularly interested in educating entrepreneurs, fellow business owners and side hustlers on how to build credit by leveraging credit cards and loans. Originally from the mountains of Virginia, she now lives on the coast of North Carolina with her two children. You can follow her on Twitter @seemomwrite or connect with her on LinkedIn.