The Best Small Business Financing Options, Compared

Updated on July 30, 2020
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How to Finance a Business: Everything You Need to Know

Small business financing can seem like a simple concept. Basically, it’s the capital that every business owner needs to start, run, and grow their small business. When you dive into the details, however—considering questions of how much you’ll need, what you’ll qualify for, and all of the business financing options (like small business loans, for example) that are available—it becomes more complicated.

Luckily, we’re here to help. In this guide, we’ll break down and compare the most common ways of financing a business, including those that fall under the categories of debt-, equity-, and creative financing. Plus, we’ll review some best practices and tips for applying and choosing the right financing for your unique business needs.

15 Top Ways to Finance a Business

  1. Bank loans
  2. SBA loans
  3. Online term loans
  4. Business lines of credit
  5. Business credit cards
  6. Equipment financing
  7. Invoice financing
  8. Merchant cash advances
  9. Angel investors
  10. Venture capital
  11. Mezzanine financing
  12. Family and friends
  13. Crowdfunding
  14. Personal savings
  15. Small business grants and competitions
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Types of Financing for Small Businesses

Let’s start with the basics—whether you refer to it as business financing, business funding, or some other term, small business financing refers to the money you need to help start, run, and grow your company—and, of course, the act of actually getting the money you need.

Although, in theory, you can pay the upfront costs and cover any cash flow gaps for your business by using your own personal money, most business owners don’t have the ability to do so—plus, financing your business out of pocket generally doesn’t make much sense.

Instead, the majority of business owners turn to external small business financing—which is often broken down into three overarching categories:

  • Debt financing: Business term loans, lines of credit, credit cards, etc.
  • Equity financing: Working with venture capital firms, angel investors
  • Creative or alternative financing: Crowdfunding, grants, competitions, friends and family, etc.

The Best Options for Financing a Business

So, when you’re figuring out how to finance a business, your options will fall into one of the three above categories. Of course, you might combine multiple methods, like mixing debt and equity, for example, or utilize multiple methods from the same category, like using two different debt financing solutions.

In any case, you can refer to the chart below for a summary of the best small business financing options:

Best Small Business Financing Options: Quick Comparison

Financing Method Interest Rates Repayment Period Speed Best for:
Bank loans
3% to 6%
Five to 10 years
Two to four weeks
Low-cost debt financing; larger financing needs for established businesses
SBA loans
5% to 10%
Five to 25 years
Average of two to three months
Financing for established businesses that can’t qualify for a bank loan
Online term loans
7% to 30%
Three months to five years
As fast as the same day
Meeting variety of debt-based financing needs; fast processes and fewer requirements than bank loans
Business lines of credit
7% to 25%
Up to two years
As fast as one day
Flexible form of debt financing to cover immediate needs
Business credit cards
13% to 25%
One month
As fast as the same day
Covering everyday expenses and building credit
Invoice financing
1% to 3% factor fee per week
Until customer pays invoice
As fast as one day
Debt-based financing that frees capital tied up in unpaid invoices
Equipment financing
4% to 40%
Five to six years
As fast as a few days
Financing equipment purchases
Merchant cash advances
1.14 to 1.18 factor fee
Paid daily or weekly from your credit card sales
As fast as the same day
Debt financing for businesses who can’t qualify for other options
Investors or venture capital
N/A
N/A
Three to nine months
Startup businesses with high and fast growth potential
Friends and family
Depends on your agreement
Varies based on your agreement
Depends on your agreement
Business owners with friends or family willing to support their business financially; those having trouble accessing traditional financing
Mezzanine financing
Varies
Varies
Varies
Established companies with solid history who want to combine equity and debt
Crowdfunding
N/A
N/A
Varies based on when people contribute to your campaign
Product-based businesses with social media appeal; supplemental financing
Personal savings
N/A
N/A
Immediate access
Business owners with sizable savings, those who can’t access traditional financing
Grants and competitions
N/A
N/A
Weeks or months depending on the application process
Financing you don’t have to repay; businesses in science or tech industry, those with innovative or new products

1. Bank Loans

Until about 10 or 15 years ago, approaching a bank was probably the most common way to go about financing a business. Both national and local banks offer credit to small business owners, typically in the form of term loans or lines of credit.

If you’re a qualified borrower—with two years of business under your belt, a very strong credit score, profitability, and have been bringing in a fair amount of annual revenue—a bank loan could be the best small business financing option for you.

When it comes down to it, bank loans will be the most ideal type of debt financing—offering the lowest interest rates and longest terms. This being said, however, bank loans are notoriously difficult to qualify for, especially those who don’t meet top loan requirements. Additionally, bank loan applications usually require extensive documentation and are slow to fund.

Despite these drawbacks, however, if you’re looking to finance your business with debt and you can qualify, it’s always worth considering a bank loan as a top option.

Use our comprehensive guide to learn more about the best bank loans for businesses.

2. SBA Loans

If you can’t qualify for a bank loan, SBA loans will be the next best debt-based small business financing option.

Partially guaranteed by the SBA and issued by SBA lending partners (like banks), these loans offer low interest rates, long repayment terms, and large loan amounts. Plus, there are multiple SBA loan programs to choose from—such as the 7(a) program, microloan program, and 504/CDC program—to meet a wide variety of financing needs.

This being said, similar to bank loans, you should have at least two years in business, great credit, and strong business financials to qualify for an SBA loan. Additionally, SBA loans will require a thorough application process and will be slow to fund.

If you can stand to wait and you’re a qualified borrower, however, financing a business with an SBA loan will be a hard method to beat.

Learn more about the ins and outs of SBA loans.

3. Online Term Loans

With both short-term and medium-term options, online term loans are one of the best ways to finance a business for those who can’t qualify for bank or SBA loans, as well as those who need funding quickly.

Generally speaking, alternative, online lenders offer streamlined application processes with flexible requirements to cater to a greater variety of small businesses.

This being said, medium-term loans will be the most akin to bank or SBA loans, with terms of one to four years, interest rates of 7% to 30%, and monthly repayments. Although these products will be faster to fund and easier to qualify for, the better your qualifications, the lower interest rates you’ll be able to receive.

As these online loans are available in larger amounts, they’re ideal for financing larger projects, such as renovations, expansions, equipment purchases, etc.

With short-term business loans, on the other hand, you’ll see the most flexible requirements—with financing options for startups and businesses with bad credit. Short-term loans will typically have interest rates upward of 14% with repayment terms (on a daily or weekly basis) of one year or less.

Of all of the small business financing methods we’ve discussed thus far, short-term loans will be the fastest to fund—with some alternative lenders offering financing as fast as the same day—making them great for quick fixes and emergencies.

Find out more about the best business term loans in our guide.

4. Business Lines of Credit

Business lines of credit actually work pretty similarly to credit cards: You’re given access to a pool of funds and you can draw from that reserve whenever you want or need. You’ll only pay interest on the money you actually take out and use, and once you repay your lender, that pool gets refilled back to its original amount.

For this reason, business lines of credit are also referred to as a type of revolving lines of credit.

As perhaps the most versatile and flexible small business financing product, business lines of credit will be ideal for companies with unpredictable or seasonal capital needs (and can also be a great “just in case” fund).

This being said, there are typically two types of business lines of credit: short-term lines of credit and medium-term lines of credit.

Short-term lines of credit are most comparable to short-term loans: they have smaller amounts, shorter repayment periods, are much easier to qualify for, and have higher rates. Medium-term lines of credit, on the other hand, are comparable to medium-term or longer-term loans: they offer more in capital, have longer repayment periods, have much more desirable rates, but are more difficult to qualify for.

Medium-term lines of credit are available from banks (which, again will be slower to fund), as well as online lenders like Fundation. Short-term lines of credit are generally available from alternative lenders like Kabbage and Fundbox.

Find out everything you need to know about business lines of credit here.

5. Business Credit Cards

Although you might not be able to finance your entire business with a business credit card, there are still a variety of worthwhile uses for this financial product. Business credit cards are a great way to pay for everyday business expenses, while also earning rewards and building your business credit.

Additionally, business credit cards tend to be easier to apply to, offer special deals on starting APRs, have high credit limits, and can be paid through easy, online portals. Plus, using a business credit card will simplify your bookkeeping—separating your business finances from your personal finances.

Moreover, just like a business line of credit, a business credit card is revolving credit—using one, however, can give you speed and flexibility that you might not find with a business line of credit.

Of course, there are downsides to financing a business with a business credit card. Typically, business credit cards finance a lower amount than a loan would. It’s also possible that the APRs are higher than the rates a traditional loan option would offer.

This being said, a popular credit card option for newer businesses looking for ways to finance their businesses are 0% APR business credit cards—which allow you to borrow up to your credit limit without having to pay interest on any balance you carry within the intro APR period. Of course, after the period expires, you’ll accrue interest on any remaining balance and a variable APR will set in based on the market Prime Rate and your creditworthiness.

Ultimately, even if you need to supplement a business credit card with another financing method, it’s always helpful to utilize one of these products.

Compare the best business credit cards here.

6. Equipment Financing

Our next small business financing option, equipment financing, is a little different from the debt-based financing products we’ve discussed thus far. Unlike a traditional term loan or business line of credit, equipment financing is an asset-based loan.

Essentially, this means that whereas traditional debt-based financing products use your borrowing and business history—like your credit score, bank statements, and tax returns—to determine what you qualify for (at what rates and over what term), asset-based loans rely on the value of the asset, which acts as collateral. The collateral, in this case, is the equipment that you need to buy—whether that is machinery, computers, or something else your business needs.

Generally, equipment financing allows you to finance up to 100% of the cost of a piece of equipment and have monthly payments with 8% to 30% interest on top.

Ultimately, equipment financing is a worthwhile solution if you can’t afford the price of a piece of equipment upfront, but you’re confident that the revenue you’ll get from the use of that equipment outweighs the interest payments you’ll face.

Use our guide to learn more about the best equipment financing options.

7. Invoice Financing

Another type of asset-based small business financing, invoice financing uses your outstanding invoices as collateral (as opposed to a piece of equipment, like with equipment financing), and the lender advances you cash (minus their fees) in anticipation of those invoices being paid.

In most cases, you’ll receive around 85% of the cash for the invoices you want to finance upfront—then you’ll receive the remaining 15%, minus fees, when your customer pays.

Like equipment financing, invoice financing will only be a small business financing option for certain types of companies with particular needs—in this case, you’ll need to be a B2B company that invoices your customers.

This being said, however, since your invoices serve as collateral, lenders may be more flexible when it comes to your requirements—paying more attention to your customers‘ repayment histories. Additionally, although invoice financing is typically fast to fund and can be acquired from online lenders like BlueVine, it’s important to note that it may have higher fees than traditional debt-based financing.

Find the best invoice financing options for your business in our guide.

8. Merchant Cash Advances

Finally, the last of the debt-based small business financing options on our list, merchant cash advances are a financing product where a company advances you cash in exchange for a percentage of your daily credit and debit card sales, plus a fee.

Although merchant cash advances tend to be fast, they’re also exceptionally expensive solutions to finance your capital needs—with APRs ranging from 15% to 80% (charged as factor rates).

Merchant cash advances are so expensive in part because they are so easy to access. Even if you have bad credit and no collateral to put up, you should be able to qualify—for a cost. Many business owners who don’t have other ways of financing their business are willing to pay a premium for merchant cash advances, simply because they are their only options.

Moreover, because merchant cash advances are paid back on a weekly or daily basis, directly from your sales, they cut into your daily cash flow, often making them difficult to repay. Therefore, you’ll always want to consider other small business financing options before turning to a merchant cash advance.

9. Angel Investors

Now, as we’ve mentioned, although debt financing is typically the most common method for financing a business, it’s not the only way. Therefore, if you want to consider equity financing instead, you might start with angel investors.

Angel investors are individual investors who have the time, money, and inclination to invest in small businesses and entrepreneurial startups by themselves.

An angel investor might be able to offer you a substantial amount of money before your business is making any profit at all, but remember, equity means sharing your decision-making power.

Unlike financing a small business with debt, equity involves long-term partnerships. If an investor’s vision for the business is radically different from yours—or if you just plain don’t get along—then that small business financing might not be worth the cost.

Additionally, it’s important to mention that many angel investors will only work with businesses that have high growth potential and plan to grow quickly. Plus, the process of finding an investor, reaching an agreement, and receiving the capital may be time-consuming, complex, and even expensive.

If you need business financing within a specific period of time, working with an angel investor to fund your business will be difficult.

On the other hand, if your business does have this kind of growth potential and can find a compatible investor, you may be able to gain not only the financing you need, but also a guiding, experienced hand to help you throughout the life of your business.

10. Venture Capital

Another option within equity financing is working with a venture capital firm. A venture capital firm is like an angel investor—but multiplied.

Instead of an individual with the means, motivation, and opportunity to invest, a venture capital firm is an entire company dedicated to exchanging capital for equity in new ideas and growing businesses.

Venture capital is generally distributed in “rounds,” with companies and firms matching up for more money in return for more equity. Startups move from their seed round through their Series A, B, and C rounds, maturing as a business until they’re ready to IPO (or offer stocks to the general public).

On the whole, most small businesses don’t really qualify as targets for venture capital business financing. These firms usually aim for technology-centric “disruptors” with much higher funding needs and faster-moving business plans, like the traditional startups you might be familiar with.

However, if you think your business can meet these qualifications, this type of equity financing is always worth considering.

11. Mezzanine Financing

Mezzanine financing is a lesser-known avenue of financing a business but can work for certain startups and small businesses.

This being said, mezzanine financing is often described as a hybrid between debt and equity financing—because it entails receiving debt financing that can later be converted into equity financing in case of default.

Overall, this type of financing can be complicated and vary between lenders and businesses. Mezzanine financing is generally reserved for well-established companies that have a solid reputation and product, as well as a history of profitability.

12. Family and Friends

Reaching out to friends and family is a pretty common source of equity funding—and business financing in general—for small businesses.

And it makes perfect sense:

You come into contact with your friends and family more than anyone else, they know your character best, and they get to watch the evolution of your business from up close. So, it may be worth asking friends and family to invest in your business to meet some of your financing needs.

Keep in mind, though, working with friends and family in this context may be more complicated than you might think. First, you actually have to find friends or family who have the means and are willing to invest. Then, you’ll have to consider that dealing with a business and its finances within the context of these relationships may put stress or strain on the relationships.

Therefore, if you do decide to pursue this method of financing your business, you’ll want to be sure to tread carefully—make sure all terms, conditions, and expectations are absolutely clear, agreed upon, and written down with no ambiguity.

13. Crowdfunding

If you think a creative method is a better way to finance your business, you might start with an option like crowdfunding.

With crowdfunding sites like Kickstarter and IndieGoGo, you submit your business and plans to the public, with the goal of raising a certain amount of money.

Then, when you receive donations, you don’t have to worry about debt or equity. However, typically crowdfunding does promise some sort of deal, like early access or special packages, to a business’s supporters.

This being said, crowdfunding will depend significantly on your marketing abilities and the public’s willingness to donate. Therefore, it might be worth exploring this small business financing option for a particular project or product development, but it may be difficult to rely on for larger financing needs.

14. Personal Savings

If you’ve got some work experience under your belt, you might be able to dip into your personal savings in order to help finance a business.

Although this a common form of small business financing, it’s risky. If you’re not taking a salary and are taking large sums of cash out of your personal account to fund your business, you want to feel confident this will pay off in the long run.

Therefore, before you decide to use your personal savings, or pull from your 401(k), you’ll want to think carefully about the pros and cons—and perhaps consult a tax or business attorney to help you sort through your options and the process if you decide this is the right solution for you.

15. Small Business Grants and Competitions

Small business grants can be a great business financing option—as they offer funds that you don’t have to pay back.

That said, small business grants can be difficult to qualify for and they’ll require an often highly competitive application process.

Nevertheless, if your business is involved in scientific or technological research and development, urban restoration, or health advocacy, you might be surprised at how many business grants (especially from the government) you may qualify for.

Plus, even if your business isn’t in one of those industries, there are still a variety of government, private, and other grants you may qualify for. If you’re willing to invest the time and effort to search for and apply for different grants, there’s no telling how much financing you’ll be able to receive.

Similarly, some large companies hold competitions—think Shark Tank—that entrepreneurs can take advantage of to get business financing or attract public awareness.

If your business idea revolves around an especially inventive or exciting product, you might consider applying for contests and competitions in your area. Just like small business grants, winning a competition may be difficult—and will likely require time and effort to submit an application—however, if you win, you’ll have access to financing without having to worry about debt or equity.

Choosing the Best Small Business Financing for Your Needs

So, as you can see, between debt, equity, and creative financing solutions, there are a number of ways of financing a business.

Therefore, after you’ve determined why you need funding and how much you need, you’ll be ready to figure out which financing method is best for you.

To help you through the process, you might consider questions like:

  • Do you need business financing now, soon, or in the more distant future?
  • Are you comfortable with sharing your business equity?
  • How will your business fare with daily, weekly, or monthly loan repayments?
  • Does your product have an appeal to attract customers?
  • Who are your customers?
  • Where do you see your business going and growing?
  • What’s your competition like?
  • Do you prefer the expertise of an investor or the freedom of a loan?
  • What’s your credit history like?
  • Can you successfully navigate the venture capital world?
  • What kind of business do you want to own?

Then, once you have an initial idea of how to finance your business, you’ll be ready to take the next steps in the process.

Qualifying for Small Business Financing

When it comes down to it, the process of financing your business will largely depend on which unique method you choose. This being said, however, if you’re looking into debt financing (and to some extent, equity financing) the next step in the process will be evaluating your business’s qualifications.

As we’ve discussed, certain products, like short-term loans, are easier to qualify for, whereas others, like bank loans, require stronger credentials. Therefore, before you start applying for financing, you’ll want to think about factors such as:

  • Credit score
  • Annual revenue
  • Time in business
  • Available collateral
  • Bank balance

Lenders and investors will look at these criteria, among others, when deciding whether or not to work with your business. As you might expect, the stronger your qualifications, the more likely you are to qualify for the best loan products and work with the best investors.

Learn more about the most important business loan requirements.

Applying for Small Business Financing

After evaluating your business’s qualifications, you’ll be ready to apply for the financing method that works best for you.

Generally, debt financing will require that you submit a business loan application with a lender, go through their underwriting process, and complete the necessary steps to reach an agreement and close the loan.

With equity financing, the process will be different—and the specifics will largely vary based on the venture capital firm or angel investors you’re working with.

In any case, it’s important to gather all the necessary materials and complete an application or inquiry in the most accurate and thorough way possible. This being said, when applying for small business financing (especially with a lender), you can expect to provide:

  • Basic business information and identification
  • Business plan
  • Business bank statements
  • Financial statements
  • Business and personal tax returns
  • Existing business debt schedule
  • Business and personal credit score
  • Ownership and legal documents

Of course, the time it takes to actually finance your small business will vary as well. Certain debt-based products can fund within the same day, whereas others take weeks or even months. With equity financing, on the other hand, the process is generally much slower—taking anywhere from a few months to nearly a year.

The Bottom Line

At the end of the day, it’s up to you (and any advisors or professionals you consult) to decide when you need financing, how much you need, and which small business financing option will be best for your company.

This being said, it’s very likely that the specifics of your business—how you operate, your industry, your growth plans—will play a role in the option that’s right for you. For example, if you’re a well-established restaurant in need of some financing to open a second location, then an SBA loan might be the way to go.

On the other hand, if you have an innovative technology idea with exponential growth potential, you might want to look for angel investors or venture capital funding.

Ultimately, as you go through the process, you’ll want to ensure that before taking on any financing, you understand all the terms and conditions, as well as compare multiple options to find the best deal for your business. To this point, generally, the best type of small business financing is not only the one that fulfills your needs, but also the method that’s the most affordable as well.

Therefore, you’ll want to plan ahead, think carefully, and make well-informed decisions—after all, the business financing you look for (and choose) will shape the company you run. 

Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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