Figuring out how to fund a business is one of the most important initial steps of becoming a business owner. Luckily, from traditional methods, like business loans, to more alternative methods, like crowdfunding, there are more ways than ever for entrepreneurs to fund a business.
This being said, learning how to fund your business comes down to finding the right financing source based on your needs.
Not sure where to start?
This guide is here to help. We’ll break down 13 of the best ways to fund a business. Plus, we’ll review how to decide what financing source is right for your business.
The Best Ways to Fund a Business in 2020
From debt and equity financing options to more creative solutions, here are 13 of the best ways to fund your business.
First, you might consider funding a business with a term loan. A term loan is one of the traditional forms of debt financing—you receive a lump sum of capital and pay it back over time, with interest.
Term loans can be offered by banks, but they’re also offered by online lenders. While business term loans from banks will have the most desirable terms and rates, they’ll also be the most difficult to qualify for.
Therefore, many business owners turn to term loans from alternative lenders. These terms loans may be slightly smaller than a bank loan (sometimes called “medium-term loans”), but they operate in the same way.
Terms on medium-term loans typically range from one to five years and interest rates range from 7% to 30%. Because term loans are easier for less-qualified borrowers to secure, and because alternative lenders are willing to work with riskier borrowers, they’ll charge higher interest rates to offset the risk. Term loans are usually repaid monthly, with lower payments than short-term loans (as we’ll discuss below).
Ultimately, with amounts ranging from $25,000 to $500,000, and sometimes even higher, term loans are best for funding large, one-off expenses—like a renovation, product-line update, or expansion.
If you can’t access a term loan from a bank, but still want to fund your business with the best rates and terms possible, you might pursue funding with the Small Business Administration (SBA).
SBA loans are technically bank loans guaranteed by the SBA. This means that when a bank funds a business through an SBA loan, the SBA guarantees that if the business owner can’t pay the bank back, they’ll pay (at least a majority of) the balance. Because of this guarantee, the risk to lend to small businesses is much less for lenders, and therefore, SBA loans are easier to qualify for than traditional bank loans.
This being said, there are many SBA loan programs, all of which are worth pursuing depending on your business funding needs: the 7(a) loan program, the CDC/504 loan program, and the microloan program. Overall, SBA loans can range in amount up to $20 million, with terms from five to 25 years. The SBA places restrictions on interest rates for these loans, meaning they’ll be more affordable than most other types of funding. Generally, SBA loan rates will range from 4% to 13%, depending on which program you pursue.
However, SBA loans can still be difficult to secure as they require a lengthy application process with a variety of specific requirements. SBA loans are also notorious for long funding times, which can be problematic for some business owners.
Nevertheless, since SBA loans can be used for virtually any business purpose, they’re a great option for funding a business—if you can qualify.
Short-term loans function very much like medium-term loans, but per the name, they have shorter terms.
Short-term loans are usually offered by alternative lenders and provide greater funding accessibility for business owners—these loans have smaller amounts, daily or weekly repayments, terms under a year—but, they also have higher interest rates.
Generally, short-term business loans have interest rates starting at 10%, but can grow upward of 100% in the worst cases. These loans range in amounts from $2,500 to $250,000 and often fund in as fast as one day.
On the whole, short-term loans are accessible for less-qualified borrowers; however, this added risk causes the interest rates to rise in comparison to other funding options. Nevertheless, with limited documentation required, lenient requirements (even for those with bad credit or limited time in business), short-term loans often work well for borrowers who don’t qualify for any other kind of loan.
Because these loans must be paid back so quickly, they’re best for short-term funding needs, such as managing cash flow, paying off expensive debt, or financing unexpected opportunities or emergencies.
Wondering how to fund a business without a term loan?
You’re in luck—there are other debt financing products, like business lines of credit, that can provide you with funding and a different setup than a traditional loan.
A business line of credit gives you access to a pool of funds that you can draw from whenever you need to for your business. Once you repay the funds you withdrew (plus interest), your line of credit gets refilled to its original amount, and you can continue drawing from it. A line of credit is similar to a business credit card in many ways, without a physical card.
Business lines of credit are available from banks as well as alternative lenders. Once again, banks will likely offer the best terms and rates but will be more difficult to qualify for. Alternative lenders, on the other hand, will offer both short- and long-term lines of credit. The long-term lines of credit will be similar to what you can find at a bank: large amounts, comfortable repayment terms, and low rates (although not as low as what banks offer). Short-term lines of credit, on the other hand, are more comparable to short-term loans: smaller amounts, shorter repayment periods, easy accessibility, and higher rates.
Overall, you’ll find that business lines of credit can range in amounts from $10,000 to over $1 million with terms from six months to five years. Interest rates for these business funding products can fall as low as 7%, but reach as high as 25%. Compared to some term loans, business lines of credit are fairly fast to fund and require pretty simple applications.
Ultimately, a business line of credit will be one of the most flexible ways to fund a business, as you can draw funds when you need them and only pay interest on what you use. Business lines of credit can be used for almost any business purpose and are most often considered great options for covering cash flow issues, emergencies, or unexpected opportunities.
Another specific type of debt financing you might consider to fund your business is equipment financing.
Equipment financing gives you the money you need to afford expensive business equipment—such as machinery, furniture, vehicles, computers, and more.
With this type of business funding, you’re typically advanced the value (or a percentage of the value) of the equipment you’re purchasing, and you’ll pay the equipment lender back over time, with interest. In this way, because the financing is collateralized by the equipment you’re buying, equipment financing can be an easier way to fund your business—if you have the need for equipment, of course.
On the whole, equipment financing is fairly accessible with quick funding times and limited paperwork. Interest rates on this type of financing can range from 8% to 30% and terms usually are based on the expected life of the equipment.
Although equipment financing won’t be a funding option for every business, if you need to finance this specific need, it will certainly be an option worth exploring.
Like equipment financing, invoice financing fulfills a very specific funding need.
Invoice financing is designed for B2B businesses that need access to cash and currently have unpaid invoices from customers. With invoice financing, a lender advances you a large percentage of the value of your outstanding invoices, typically 50% to 90%. You can use the capital for your business how you like—to cover cash flow, buy inventory, make payroll, etc.—and when your customer pays the invoice, the lender gets repaid. As for “interest rates” the lender typically takes around a 3% origination fee and a 1% factor fee for each week it takes your customer to pay the invoice.
Once again, although this type of financing serves a very specific need, it can be a great option because, as is the case with equipment financing, the unpaid invoices serve as their own collateral. In this way, invoice financing is often very accessible for otherwise unqualified borrowers, as lenders look more to the customers’ paying habits than the business’s credit and financial history.
All of this being said, however, if you’re looking for startup funding for your new business, invoice financing will probably not be an applicable solution.
With a merchant cash advance (MCA), a financing company advances you a lump sum of capital in exchange for repayment from your daily credit and debit card sales. Through this process, you’ll repay back what you’ve borrowed, plus interest.
Generally, MCAs can range from $2,500 to $250,000 with interest rates calculated as factor fees, ranging from 1.14 to 1.48.
Overall, MCAs will seem like a reasonable funding option—they fund quickly, have an easy approval process, and can be used for a variety of purposes. In reality, however, MCAs will be one of the most expensive forms of debt financing. Because merchant cash advance companies have such low standards for borrowers, their rates are extremely high, making it difficult for many businesses to pay back what they’ve borrowed. Plus, because an MCA will be repaid daily from your merchant account, this type of financing can easily disrupt your cash flow.
Therefore, although using a merchant cash advance might be considered the easiest way to fund a business, it should be considered a last resort. Because MCAs are so expensive, you’ll want to see if you can fund your business with any other methods before turning to this product.
A venture capital firm is actually a business itself, dedicated to finding companies to invest in. Venture capitalists fund larger-scale business ventures by purchasing a percentage of the business in a startup’s “round” of business funding. In essence, a round of funding is where you offer a certain amount of ownership to different venture capital firms—in return for their money. As a business owner, you’d determine how much capital you need to raise, what percentage of equity you’re willing to exchange for the money, and then pitch to a few different venture capital firms in the hopes of finding a perfect match.
As you may imagine, this is a simplified version of the process. Finding and working with a venture capital firm will require significant planning, time, and effort. This being said, however, if you can successfully access business financing from a venture capital firm, you’ll likely receive mentorship and networking benefits from your investors, in addition to capital.
Working with angel investors is another way to fund a business with equity financing. Compared to venture capital firms, angel investors are individuals with means who invest in early-stage companies.
Just like venture capitalists, angel investors offer large sums of capital in exchange for ownership in the business. However, unlike venture capitalists, angel investors usually don’t have their own business of investing, and typically work with younger, smaller companies.
When it comes down to it then, angel investors can oftentimes be a more realistic option for small businesses, as compared to venture capitalists. This being said, however, it isn’t necessarily easy to raise capital with the right angel investor.
If you’re wondering how to fund a business with angel investors, you should start by getting a sense of the investors who fund businesses in your industry. You can start by networking and getting your name out there. Then, when you have a sense of who the players are, you’ll want to develop a business plan for funding and approach various investors to see if they might be interested in working with you.
As you may imagine, like working with a venture capital firm, attracting angel investors is often tough—it involves a long process with many details. However, if you can find the right angel investor to fund your business, you’ll likely receive additional benefits on top of the capital, just as you would with a venture capital firm.
A common way entrepreneurs get the ball rolling is by financing their business themselves.
If you have the means, of course, you may decide to self-finance your business for the first months or years until more traditional types of funding become realistic.
Along these lines, another creative option that may be worthwhile when you’re first starting out is using a business credit card, especially one with a 0% intro APR period. A business credit card will be a useful tool throughout the life of your business. When you’re just starting out, however, taking advantage of an interest-free period can be helpful to fund larger purchases when you can’t qualify for other types of financing.
With a 0% intro APR business credit card, you’ll be able to carry a balance from month to month on your purchases without accruing interest. Of course, you’ll have to pay your balance before the intro period is up to avoid facing interest charges when the variable APR sets in. Plus, you’ll also need to be cautious and not extend yourself to the point where you can’t pay back what you owe.
However, if it will fulfill your needs, this method can work particularly well for startup owners with good credit.
If you have generous friends and family, you could approach them for seed financing in your business.
This funding method is similar to having traditional investors, but with a few key differences.
When you use friends and family to finance your business, you’ll need to treat the situation with the utmost care. You’ll want to put together documentation of the agreement, and handle the process professionally.
Ideally, your friends and family will be able to give you the initial lift you need to get your business going without conflict. When you’re up and running, you can then pay them back or continue offering them ownership in the business. Keep in mind, though, a poorly managed funding situation can ruin relationships and your business—so again, you’ll want to proceed with caution.
Another popular, creative way to fund a business is through crowdfunding.
It’s important to note, however, that when you raise capital on a crowdfunding platform, you typically offer something in exchange for an individual’s donation—like an early-access sale, a discount code to your first product, or simply a thoughtful thank you note for contributing to your business.
Due to the inherent marketing aspect of crowdfunding, this funding method usually works best for interesting consumer-based products or for businesses with a large social following.
Grants can be difficult to qualify for as a small business, but if your business meets the requirements, they’re an excellent way to fund a business.
After all, if you’re approved for a grant, you’ll be accessing capital that you won’t have to pay back—so you won’t be burdening your new business with debt.
This being said, there are a variety of grants designed specifically for small businesses, including federal and state government grants, private grants, and more. Additionally, small business grants are especially worthwhile options for business owners who serve a community, operate in an underdeveloped nation, or are a part of a disadvantaged demographic—like minorities, veterans, or women.
Now that you know how to fund a business with a variety of different methods, you’re likely wondering: Which method is right for me?
Ultimately, there are a variety of reasons why you might choose one funding avenue over another. And, this isn’t a decision you should make lightly. You’ll want to take the necessary time and effort in order to sort through all of your options and reach the funding solution that will be best for your business.
To make this process easier, you should consider the following:
Generally, pinpointing the reason why you need the financing is a good way to narrow down your options.
As we’ve seen through our discussion thus far, there will be certain funding methods that are better suited for specific situations and different purposes.
For example, if you need to fund an unexpected business opportunity—say, a large order that unexpectedly comes in—using a short-term loan may be the best option. On the other hand, if you’re looking to fund your business as you first get going, you may consider starting with self-financing or a business credit card.
Ultimately, before you commit to just any business funding option, you should think carefully about why you really need the funds so that you can be sure that you have the right product for you.
Another thing to think about when trying to choose the best funding for your business is determining how much funding your business really needs—and perhaps more importantly, how much funding your business can afford to pay back.
If you need a small amount of capital, you’ll want to start with short-term loans, business lines of credit, or smaller-amount medium-term loans.
For larger capital needs, on the other hand, you might consider SBA loans, medium-term loans, and, depending on your business, equity financing.
Finally, you’ll want to think about what funding method your business can reasonably access.
In terms of debt financing, this comes down to what kind of financing you can qualify for. Typically, when you apply for a debt financing product, lenders will first and foremost consider these business loan requirements: credit score, time in business, and annual revenue. They’ll also review a number of other financial documents to determine if you qualify and what exactly you qualify for.
This being said, if you have a strong credit score, a couple of years in business, and strong annual revenue, a term loan, SBA loan, or larger and longer-term lines of credit might be your best options. On the other hand, if you have poor or average credit, have just started your business, or don’t have strong business financials, then short-term loans, lines of credit, invoice financing, or equipment financing will be your most realistic options.
Of course, as we’ve discussed, you might also consider equity financing, but only if you think your business has the growth potential to attract investors.
By considering these three factors—why you need funding, how much funding you need, and what you can qualify for—you’ll be able to narrow down your options to find the best funding solution for your business.
So, now that you know how to fund a business, what’s next?
Ultimately, your next steps will depend not only on how you’ve decided to fund your business but also on what stage your business is in. If you’re just starting up, you’ll want to get your business plan together. If you’re a well-established business, you’ll want to start getting your business’s financial statements in order.
Either way, you’ll always want to be prepared with a backup way to fund your business—just in case the first method doesn’t work out, and especially if you absolutely need business funding. This being said, whether you’re financing a business with equity, debt, or a bit of creativity—or a mix of these methods—a change of plans is always a possibility.
All in all, figuring out how to fund your business successfully comes down to understanding your options, thinking carefully, and being prepared—and by doing so, you’ll be able to move your business forward in the best possible way.