Choosing Small Business Financing Options – 2018 Edition

Choosing Small Business Financing Options – 2018 Edition
Lauren Ward
on June 10, 2017
Read in 14 min

Whether you’re just getting started or have been growing your company for years, small business financing can truly take you to the next level.

But with so many options, sometimes the hardest part of getting a business loan is sifting through the facts to make an educated choice.

If you don’t know where to begin, this comprehensive guide will walk you through some things a savvy business owner should know to effectively compare small business financing options.

We’ll explore some common reasons small businesses need financing, suggest some traditional funding options, and even cover some high-tech alternatives.

Funding Options APR Do you qualify? Time in Business Annual Revenue
Funding Option
Get Started
APR
5-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 6 months
Annual Revenue
At least $100K
Funding Option
Learn More
APR
1.5% - 10%
Monthly Fee Rate
Do you qualify?
N/A
MIN CREDIT SCORE
Time in Business
At least 1 year
Annual Revenue
At least $50,000
Funding Option
Get Started
APR
6-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 3 months
Annual Revenue
No minimum

What is Small Business Financing?

Small business financing is a broad term that refers to how you go about securing the funds you need to run your company.

Most people associate financing with getting a loan at the bank, but there is actually a broad range of options to consider here.

Loans are still the most common type of business debt financing of course, but you can also use credit cards, lines of credit, and other tools to get funds. 

You’re not limited to your local bank anymore either, with alternative lenders popping up all over.

In addition to debt financing, many small businesses rely on equity financing, which typically exchanges a percentage of company ownership (and, consequently, profits) for an infusion of cash from an investor.

For a more detailed explanation of Debt Financing vs Equity Financing, check out this article on Small Business Funding.

As you’ll soon see, the right financing is often influenced by the reasons why you need the money in the first place.

When Should You Use It?

Before you attempt to get funding for a small business, think about why you need cash today and what you might need in the future.

Take a look at some of the most common needs for financing to see if any apply to you.

For Startup Costs

It’s great if you can bootstrap your startup using your own cash, but that’s often not a reality for many business owners.

Even if you have enough money to get started, scaling your business to grow effectively usually takes more cash than you have on hand.

Qualifying for small business financing in the early stages of your company can be tricky, so strengthen your chances of getting a small business loan by creating a robust business plan and, if applicable, a proof of concept.

Easy business loans are hard to come by, so don’t get frustrated if it doesn’t happen right away.

Instead, read on to learn about alternative offerings; many are directed specifically towards new businesses.

For Emergency Expenses

Just as they do in our personal lives, emergency business expenses can suddenly occur at any time.

Whether a piece of necessary equipment broke or the air conditioning in your busiest location decided to quit on a 90-degree day, there’s just no way to control every variable.

In an ideal world, you’d have some cash tucked away for such emergencies.

But for a major purchase that’s integral to your business operations, you may not have enough free cash flow to cover the entire cost.

This could be the right time to consider equipment financing.

To Seize Growth Opportunities

Just as a bad day might result in an expensive repair, a good day could provide a new growth opportunity that you were unable to prepare for.

Maybe your product went viral and you need to fill orders from a major retailer.

Or perhaps you’ve been wanting to expand your space and the unit next door is finally up for lease.

Small business financing can help you take advantage of strong growth opportunities, whether you’re prepared for them or not.

Rather than miss out on something that could rocket your small business into exponential growth, explore your financing options and see if you can make it work.

For Seasonal Businesses

Not every successful business model is busy 365 days a year.

For example, you may offer SAT tutoring services during the school year or set up a Halloween store throughout the fall months.

While these are certainly lucrative businesses that work for people across the country, they do require financial planning to stay afloat.

The right financing can help your seasonal business ride out the slow months while gearing up for your busy times as well.

For Slow Customers

It doesn’t matter how busy you are — if your invoices aren’t being paid by your clients, then your cash flow can take a huge hit.

It could be that a large customer requires a 30-day payment period, or you simply have several outstanding balances that are slow to get paid.

The reason isn’t important; what matters is how you continue to operate your business while waiting for things that are out of your control.

There are several financing options available in this scenario, like invoice financing, but the effectiveness of this solution depends on whether waiting on invoices is an ongoing occurrence or a one-time event.

For Expansion

You’ve heard the old adage: it takes money to make money.

If your small business has been experiencing growth or you see a new revenue stream that requires capital to execute, then financing can help you reach your new goals.

In fact, as an established company with a proven track record, you may qualify for some of the best business loan interest rates and terms out there.

Be sure to pull together a strong business plan to demonstrate the likelihood of your new venture’s success, just as you would as a startup.

9 Options

If you’ve determined that your cash flow problems could be successfully solved through small business financing, it’s time to figure out the type of financing you might want.

There are several different types of debt you can take on, each of which comes with different terms, fees, and requirements.

While this certainly isn’t an exhaustive list, we’ve pulled together nine different options you should know about before applying for a loan from a lender.

Funding Options APR Do you qualify? Time in Business Annual Revenue
Funding Option
Get Started
APR
5-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 6 months
Annual Revenue
At least $100K
Funding Option
Learn More
APR
1.5% - 10%
Monthly Fee Rate
Do you qualify?
N/A
MIN CREDIT SCORE
Time in Business
At least 1 year
Annual Revenue
At least $50,000
Funding Option
Get Started
APR
6-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 3 months
Annual Revenue
No minimum

1. Business Credit Cards

Utilizing a business credit card to supplement your cash flow comes with both pros and cons — just like any other type of financing.

One of the major draws is that a business credit card it typically easier to qualify for than a loan.

It also serves as a financial safety net when you need access to quick cash.

While a loan can take days or even weeks and months to actually receive funding, once you’ve got your credit card, you can use it whenever you need to.

In fact, you can even look for business credit cards that offer beneficial points or rewards systems.

When you do decide to use a card to fund your company’s operations, make sure that you can repay the debt aggressively.

Simply making the minimum payment each month can drag out the repayment period indefinitely, while simultaneously costing you a lot of additional money in interest.

It’s also important to make those payments on time each month; if you don’t, you run the risk of damaging both your personal and business credit scores.

2. Business Lines of Credit

Similar to a credit card, a small business line of credit lets you access money when you need it rather than taking out a lump sum and repaying it all at once.

To qualify, you’ll need solid company financials and a comprehensive history of success.

If you do get approved for the line of credit, you get to take advantage of lower interest rates and better repayment terms compared to a credit card.

Unlike a loan, you can get funding quickly – often as fast as just a day or two.

Plus you only pay interest on the amount of money you take out.

So what’s the downside?

When you have a business line of credit available, you’ll most likely need to send updated financials to your lender on a regular basis, to ensure them that the business is still healthy.

You might also need to provide collateral in order to get approved.

3. Short Term Business Loans

A short term business loan could be a smart option if your credit is less than perfect.

It works just like any other small business loan, except that the principal and interest are often repaid in two years or less.

Additionally, instead of making monthly fixed payments, you make daily payments in many cases.

Consequently, you’ll want to make sure that your business model can handle a short term loan.

Also note that there could be a higher APR than other options, and your loan amount may be limited.

Still, compared to a business credit card, you might find it a better option for getting the working capital you need.

Just make sure you can handle the loan terms and are capable of aggressively repaying the loan on a regular basis.

4. Term Loans

When you think of getting a traditional small business loan, you’re probably thinking of a term loan.

You get a much longer repayment term than you would with a short term loan and can make regular monthly payments.

There typically aren’t too many restrictions on what you can use the funds for, as long as your business meets all of the lender’s borrowing qualifications.

Interest rates and fees are relatively low with term loans and, unless you get a variable rate, your payment stays the same each month.

On the flipside, the application process can take a while.

Part of the reason is that because you can usually access higher loan amounts, there will consequently be greater due diligence from the lender.

5. Equipment Financing

When you need a new piece of equipment or machinery to keep your small business going, you could consider taking out an equipment financing loan.

The major benefit is that the actual equipment serves as collateral, so you don’t have to jeopardize any of your other assets to qualify for the loan.

You may receive the funds quickly, and the paperwork is limited.

However, you might need to make a down payment, so you’ll need at least some cash on hand.

It’s also important to know that depreciation of the equipment will reduce your tax deductions.

6. Merchant Cash Advances

Getting a merchant cash advance is another form of financing to consider, particularly if you or your business has bad credit.

It works by receiving a lump sum of cash to cover whatever operating costs you’re short on.

In return, you can repay the loan in one of two ways.

The first option is to repay it through a percentage of your credit card sales.

Every time a customer makes a purchase, a portion of that amount is diverted to your lender.

So you don’t have a set amount that you pay over time; rather, your repayment term depends on how your sales perform.

Alternatively, you have the option to make fixed payments either daily or weekly.

When you choose this method, your payment amount stays the same, regardless of your sales.

The cost of interest and fees may be a little more difficult to understand with a merchant cash advance, so be sure to compare APRs when considering different offers.

7. Accounts Receivable Financing

Accounts receivable financing is similar to a merchant cash advance, except that it’s a way to get cash quickly from your unpaid invoices.

Also known as invoice factoring, the invoice financier gives you the majority of the outstanding invoice amount.

When the invoice is finally paid, they’ll send you the balance, less their fees for financing.

You might pay a small percentage of the invoice amount each week the invoice goes unpaid, usually around 3%.

While the application process is relatively easy, it comes with a catch.

The invoice financing company also researches your clients to determine their creditworthiness and how likely they are to actually pay their invoices.

Your client relationships may also be affected because the financing company usually takes over the invoice collections process.

Before signing a contract, be sure to ask about cancellation fees, which can sometimes be high.

Still, if you need cash to fulfill new orders or move onto another project, invoice financing can give you the green light to do so.

8. SBA Loans

Guaranteed by the government through the Small Business Administration, these loans provide low-interest financing with long repayment terms.

There are a number of different programs that can help you depending on what you need the financing for.

For example, there are specific SBA loan programs for inventory, equipment, real estate, business acquisitions, and more.

SBA loans come with a number of perks, primarily in the form of low interest and a longer repayment term, both of which result in lower monthly payments.

There’s also a large degree of flexibility in what you can use the loan funds for.

However, you need to prepare well in advance if you want to apply for an SBA loan.

The application can take a long time, and so can the actual approval process.

You may also need to provide collateral for your loan and qualify under certain government definitions of a small business in your specific industry.

Frankly, if you need quick cash, it might be wise to look elsewhere.

But if you have the ability to plan well in advance for your business needs, then an SBA loan could be an excellent choice.

9. Personal Loans

A less commonly known solution for your financing needs is taking out a personal loan for business.

It’s a great tool if your business is less established but you have strong personal credit.

You can access a personal loan either through a traditional bank or an online lender and can typically enjoy a lower interest rate.

The application and approval processes are also relatively quick, and even more so if you go with an established online lender.

Payment terms are also long compared to other financing methods like short term loans, often lasting as long as seven years.

An obvious con is that you can’t separate your business and personal financials.

Any late payments or defaults on a personal loan you’re using for your business will have a direct adverse effect on your personal credit history.

Similarly, any collection attempts will be targeted at you, so be sure to balance the risk and reward when taking out a personal loan to fund your business.

What to Consider Before Obtaining Small Business Financing

While some financing options are easier than others, every single type of lender will perform some type of review before approving your application.

So what should you be on the lookout for before you start to shop around?

Personal Credit Score

First, take a look at your credit report and your corresponding credit score.

That’s right, as a business owner, your personal financial history is heavily scrutinized as a reflection of how well you’ll take care of your company’s financials.

Do your best to understand your credit score and take any practical steps you can to improve it.

Start off by getting a free copy of your three credit reports from AnnualCreditReport.com.

Then review each one to make sure the information is accurate.

You’ll see a variety of information on your mortgage, loans, and credit cards, and how diligent you’ve been in paying them off over the years.

Additionally, any public records will be listed, such as bankruptcies, foreclosures, or civil judgments.

That’s why it’s so important to take care of your personal finances in addition to those of your business:

Lenders see the two as inextricably intertwined.

If you’ve been on a bumpy path with your own money, here are some simple steps to begin repairing or maintaining your credit score:

Pay Your Bills On Time: Did you know that 35% of your FICO score depends on your payment history?

So if you’re perpetually 30 days behind or more on your bills, your credit score could seriously be suffering.

And business lenders take this as a huge red flag that you’re unlikely to repay any money they lend you.

Prepare by pledging to take care of all your financial responsibilities on time — even if it means giving yourself a raise!

Tackle Your Credit Card Debt: While business lenders look at all the debt you carry, revolving debt is considered more of a liability than installment loans.

Your credit score also takes into account your personal credit utilization ratio.

The more debt you have on your credit cards compared to your line of credit, the lower your score will be.

This also alerts lenders that your finances are stretched and you might not be the best at managing funds.

Bottom line: take care of your own money just as you would your business’s money and vice versa.

While the two may be technically separate, a lender doesn’t look at your application that way.

Business History

In addition to your personal credit, lenders obviously want to see a history of strong performance in your actual business.

Expect to pull together your financials like profit and loss statements and tax returns as part of any small business financing application.

You don’t necessarily need to be profitable yet depending on the type of financing, but you should be able to demonstrate that you’re on a positive growth trajectory.

It’s also better if your business has been established for a few years or more, which shows that you’ll most likely be around to pay the bills in the future.

Check out the 5 Cs of Credit for a clearer picture of the kind of criteria lenders use to evaluate a small business loan application.

Even if your business is new, you can qualify for certain types of financing aimed directly at startups.

In fact, there are several alternative ways to get the funding you need, no matter how long your company has been established.

Alternative Financing Options

While most opportunities we’ve discussed so far involve taking on debt in some form or fashion, there are ways to get funding without taking on debt.

Many of them involve giving up equity in exchange for the upfront cash to seed your business, especially if you’re a new company.

In these cases, your investors are then entitled to a predetermined percentage of your profits and proceeds if you sell your company in the future.

It may seem unappealing to give up equity, but it can be a lower-risk way to get money (and often, expertise) if you can’t qualify through traditional means.

Here are some of the most popular ways to fund your business without taking on any extra debt.

Venture Capital

Venture capitalists typically look to invest in startups with high growth potential, even if there is more risk involved.

This is a classic example of exchanging equity for capital to meet your growth needs, especially if your company has the ability to expand, but lacks the resources.

So what is a venture capitalist looking for in a startup company?

Typically, they’ll want some type of indication that they’ll recoup their initial investment in the next few years.

Many also prefer to work with companies with a defined exit strategy, since that is the quickest way to make a large return on the investment.

When looking for a venture capitalist to partner with, target individuals or companies that have expertise in your field.

In addition to funding, you can also receive invaluable expertise on how to scale your business, grow, and even sell it for a large profit.

Crowdfunding

If you don’t like the idea of giving up equity to fund your small business, try your hand at crowdfunding through a website like Kickstarter or IndieGoGo.

Typically, you offer various levels of perks or products in exchange for cash donations to your company.

It is also possible to partake in equity crowdfunding, which is expected to grow significantly as part of the recent expansion of the JOBS Act.

It’s easy to find examples of small business success stories through crowdfunding, but perhaps the biggest is Oculus Rift, whose $2.5 million Kickstarter campaign eventually resulted in a $2 billion buyout from Facebook.

Grants

Everyone loves free money, and small business grants provide even more ways to get funding for new business opportunities.

In this scenario, you typically receive a lump sum to fund your work, and rather than repaying the money, you simply report on your achievements.

Of course, there may be other stipulations depending on the exact grant terms, but repayment generally is not one of them.

While private foundations may offer grants in specific fields, the best place to start is through the federal government.

In addition to small business loans, the SBA also offers special grants like the  Small Business Innovation Research Program and the Small Business Technology Transfer Program.

Family and Friends

When all else fails, consider reaching out to family and friends to help fund your business.

No one else knows you better than your core circle, and they may truly believe in you and your small business idea.

Obviously, there’s risk of damaging personal relationships if your business doesn’t work out and you’re unable to repay them.

Minimize this risk by respecting your family and friends just as much as you would any other investor.

Provide them with your business plan, financial information, and be upfront about how much risk is involved.

Also be sure to agree on how repayment will take place, whether through regular payments like a loan or as equity in future earnings.

As you can see, succeeding in business takes more than a dream.

It takes hard work and dedication, starting with the search for small business financing.

As long as you keep trying, you’ll find a way to get the funding you need – we believe in you!

Funding Options APR Do you qualify? Time in Business Annual Revenue
Funding Option
Get Started
APR
5-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 6 months
Annual Revenue
At least $100K
Funding Option
Learn More
APR
1.5% - 10%
Monthly Fee Rate
Do you qualify?
N/A
MIN CREDIT SCORE
Time in Business
At least 1 year
Annual Revenue
At least $50,000
Funding Option
Get Started
APR
6-50%
Estimated Apr
Do you qualify?
500
MIN CREDIT SCORE
Time in Business
At least 3 months
Annual Revenue
No minimum

Lauren Ward Finance Journalist

Lauren Ward is a freelance content writer focusing on personal finance, real estate, and lending.

Her work has been featured on Huffington Post, CBS News, and Kiplinger.

She previously worked at the Federal Reserve Bank of Richmond as well as several national non-profit organizations.

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