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Comparing the Best Small Business Financing Options for 2020

Editor's note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

Small Business Financing: An Overview

On the whole, small business financing can seem like a simple concept: It’s the act of finding the capital necessary to start, run, and grow your small business. With this in mind, however, when you dive into the details—considering when you need financing, how much you need, how to find it, and all of the business financing options (like small business loans, for example) that are available—things become much more complicated.

Luckily, we’re here to help. In this guide, we’ll walk you through the ins and outs of the most common small business financing options, including those that fall under the categories of debt financing, equity financing, and creative financing. Plus, we’ll also discuss how to determine if you need financing as well as important points to keep in mind throughout your search.

In summary, the best small business financing options of 2020 are:

  1. Short-term loans
  2. Term loans
  3. SBA 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. Family and friends
  12. Crowdfunding
  13. 401(k) financing
  14. Small business grants
  15. Competitions

Let’s get started so that you’ll have all of the information you need to find and secure financing for your business.

Check Your Business Financing Options

Small Business Financing: The Basics

We’ll begin 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, funding your business out of pocket generally doesn’t make much sense.

Instead, the majority of business owners turn to outside small business financing—which could mean debt financing, equity financing, or something even more creative.

On the whole, debt financing will be the most common and most accessible option for many business owners—debt financing is what you typically think of as any kind of loan—you borrow money from a lender and pay it back with interest. Equity financing, on the other hand, refers to finding investors to finance your business in exchange for equity, or ownership, in your operations. Finally, creative business financing methods include things like crowdfunding, grants, and competitions.

Let’s discuss each of these small business financing options in more detail:


Best Debt Business Financing Options

One of the most straightforward and accessible ways to finance a business is to use debt financing.

As we mentioned, debt financing is a system of business financing where you borrow money from a lender—and then pay it back, plus interest, over time.

Although it might seem counterintuitive to spend money in order to access the money you need, debt-based systems are the basis of financing for businesses and individuals. Even though you’ll be taking on debt to acquire capital, using debt financing also gives you the ability to expand, innovate, and explore new paths for your business.

On the whole, the best debt financing solution for you will depend on your specific business—including factors like when you need capital, how much you need, what your credit history looks like, and more. Nevertheless, the following eight types of debt financing solutions are going to be some of the top small business financing options out there.

Short-Term Loans

The first option on our list: short-term business loans. What’s a term loan? 

In essence, a term loan is very likely the product you think of when you imagine any type of debt-based financing.

With a term loan, you receive a lump sum of cash that can be used for almost any business purpose. You make daily, weekly, or monthly payments back to the lender that provided the loan (including interest) until the loan is paid off. Typically, short-term loans, as per the name, must be paid back within three to 18 months. It’s a pretty straightforward arrangement—and one that’s easy to plan your business’s financials around.

Short-Term Loan Requirements

On the whole, businesses of all sizes can qualify for short-term loans. 

Additionally, compared to some other products, short-term loans will be easier to qualify for—making them a notable small business financing option for less-established companies or those with less-than-desirable credit. 

With flexible requirements, however, short-term loans are going to be one of the more expensive types of term loan—due in large part to their accessibility. Lenders need to protect themselves against the losses of investing in borrowers with less time in business, lower credit scores, and smaller annual revenues by lending at higher rates.

Therefore, although short-term loans for bad credit exist, they will definitely be expensive. 

You can look for a short-term loan through alternative lenders, like OnDeck, for example, and complete your application for this type of business financing online.

Short-Term Loan Rates and Terms

As we mentioned above, terms for short-term loans typically range from three to 18 months.

These loans (ranging from $2,500 to $250,000) are most generally designed for quick fixes and immediate emergencies—but, unfortunately, they tend to be as expensive as they are speedy.

This being said, although you may be able to find a short-term loan with an interest rate as low as 10%, typically, it’s much more common to see interest rates upward of 14%.

Moreover, depending on your qualifications (if you have bad credit, for example) you could get a short-term loan with an APR much higher than 14%.

Plus, because short-term loans must be paid back in such a short amount of time, you’ll usually see daily or weekly payments required with this type of business financing.

Term Loans

Traditional term loans, sometimes called medium-term loans, or simply business term loans, are better for more established businesses. In comparison to short-term loans, they’re available in larger amounts, but are slower to fund, with longer term lengths and lower interest rates.

Essentially, this is the catch-all debt-based small business financing product for business owners with some experience, annual revenue, and good credit scores.

 

Term Loan Requirements

As we mentioned, to obtain a business term loan, you’ll need to be decently well-established—with at least a handful of years in business, a substantial annual revenue, and a good credit score.

In this case, if you can, you’ll want to secure a term loan from your local bank. Generally, bank loans for businesses will have the lowest interest rates and most favorable repayment terms.

This being said, however, only about 20% of small business owners can qualify for a bank loan. If you’re among the remaining 80%, however, you still have options, as many online alternative lenders also offer term loans.

Term-Loan Rates and Terms

Overall, the terms on these small business financing products can last between one and five years and interest rates can range from a low of 7% to a high of around 30%. Plus, like a short-term loan, you can use a medium-term loan for a variety of business purposes.

Additionally, although they’re not quite as speedy as short-term loans, you can still qualify and receive the funding for a medium-term loan within days.

Generally, however, you’ll see the fastest funding times with these types of loans from online lenders, as opposed to banks.

Why is that?

First, online lenders use technology to process loan applications and underwrite their loans in a much faster, more efficient process. Second, they tend to require less documentation than a bank would—saving you time during the application process and the lender time during loan processing.

And finally, online lenders might have less strenuous qualification requirements (at least compared to a bank). This is not to say that qualifying with a medium-term online lender is easy—typically term loans are one of the hardest business financing options to qualify for—however, many alternative lending providers will work with more small business owners than a bank would necessarily consider working with.

SBA Loans

Of all the small business financing options on our list, SBA loans are perhaps the most desirable product.

What do you need to know about SBA loans?

First, it’s important to establish that despite their name, SBA loans are not loans that are provided by the Small Business Administration (SBA).

Instead, the SBA encourages actual lenders (like banks) to loan money to small businesses by guaranteeing large portions of those loans. Therefore, these loans present a lower risk to lenders—if your business takes out an SBA loan but defaults on it, the lender won’t lose all of their money.

This being said, of all the products out there, SBA loans will generally offer the lowest interest rates and most favorable repayment terms. They will, however, require a lengthy application process and are usually slow to fund.

SBA Loan Requirements

With an SBA loan, you can expect extensive documentation requirements and a heavy reliance on your personal credit.

Since even the smallest of small businesses can technically qualify for an SBA loan, whereas they might not be eligible for a medium-term loan, the business owner’s personal history and habits matter a great deal. 

Just like with a term loan, however, you should also have been in business for a while and have a decent annual revenue to qualify for business financing with an SBA loan.

Additionally, it’s important to note that there are a variety of SBA loan programs, such as the 7(a) program, microloan program, and 504/CDC program. The right SBA loan program for you will depend on your business; however, the requirements will then also vary based on the specific program you apply for.

SBA Loan Rates and Terms

Like term bank loans, SBA loans have high maximum amounts, long terms, and low interest rates, but a slow processing speed—usually anywhere from two weeks to upward of a month. 

This being said, however, you can expect interest rates to range between 7% and 13%, terms to range from five to 25 years, and amounts of up to $5 million.

Ultimately, the rates and terms of these small business financing products will not only depend on your qualifications, but also on the specific SBA loan program.

You can find SBA loans through SBA-certified lenders, which include both banks and online lenders.

Business Lines of Credit

If you’ve just started exploring your small business financing options, then you might be unfamiliar with a business line of credit.

In essence, 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 credit.

As perhaps the most versatile and flexible 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).

Business Line of Credit Requirements

In terms of qualifying, the requirements for a business line of credit—short-term or medium-term—will be pretty comparable to their loan counterpart.

In other words, short-term lines of credit will have similar requirements as short-term loans—meaning they’ll be more easily accessible for newer businesses and businesses with less-than-ideal credit. 

Medium-term lines of credit, on the other hand, will require a longer time in business, greater annual revenue, and better credit.

Moreover, although you’ll be able to work with an online lender to receive a short-term or medium-term line of credit, the best business lines of credit will come from a bank.

These lines of credit, often referred to as long-term lines of credit, will have the greatest limits, lowest interest rates, and highest qualifications.

In this way, the “term” on a line of credit doesn’t refer to the length of repayment, but instead refers to the qualifications that are required and terms you’ll receive with your business financing product.

Business Lines of Credit Rates and Terms

Ultimately, as we explained above, the rates and terms you receive with a business line of credit will largely depend on what type of line of credit it is and what your qualifications are.

On the whole, however, lines of credit can range in amount from $10,000 to over $1 million and interest rates can range from 7% to 25%.

Just as is the case with term loans, you’ll likely have to meet fewer requirements, but face higher interest rates when working with an online lender, as opposed to a bank. A short- or medium-term line of credit with an online lender, like Kabbage or Lending Club, will often be much faster to fund though.

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.

Plus, there are a number of business credit cards on the market to choose from—each of which has different benefits and can accommodate a range of business owners and their needs.

Business Credit Card Requirements

Just like any of the small business financing options we’ve discussed thus far, many of the requirements for a business credit card will depend on the specific card you’re applying for.

Generally, however, you can expect card issuers to check your personal credit score, as well as ask for other basic information about you and your business. It will typically be a much simpler process (and much easier to qualify) for a business credit card than a business loan or line of credit.

Additionally, there are also business credit card options designed specifically for business owners with average or poor credit—making this an even more useful method of business financing.

Plus, you’ll be able to find different business credit cards from a variety of major banks and financial institutions—and you’ll more than likely be able to apply online and receive a decision almost instantly.

Business Credit Card Rates and Terms

Using a business credit card will help you separate your business and personal finances—which is an important part of building business credit—and they’ll offer you flexibility and speed that even a business line of credit might not be able to match.

Plus, business credit cards often come with valuable bonus rewards, cash back savings, and a variety of perks for your business. Plus, some business credit cards offer a 0% introductory APR period for a certain number of months—sometimes even a year.

With these cards, you’ll essentially have access to free small business financing during that time, as you’ll be able to borrow up to your credit limit without having to pay interest on any balance you carry within the 0% 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.

All of this being said, some business credit cards will require an annual fee, whereas others won’t charge you anything to access this financing for your business.

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. 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.

Equipment Financing Requirements

When it comes to asset-based lending, you’ll generally have more flexible requirements than with other types of debt financing. Because the value of the asset, in this case, the equipment, acts as collateral, a borrower will care more about the price of the equipment than your borrowing and credit history.

After all, if you default on the loan, the lender will simply reclaim the equipment, meaning this type of small business financing is less of a risk for a lender than a traditional loan would be.

This isn’t to say, however, that typical requirements (time in business, annual revenue, credit history) aren’t important, it just means you may be more likely to qualify for equipment financing than for a term loan if you don’t have great credit.

With this being said, though, since equipment financing can only be used for a particular purpose, it’s only going to be sufficient as a financing option for businesses that are specifically looking for capital to buy equipment. Therefore, you’ll also have to make sure any online or other lenders you’re looking into actually offer this type of financing.

Equipment Financing Rates and Terms

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

Additionally, your equipment financing will last for the expected lifetime of that tool or machinery (or shorter), so you won’t need to pay for longer than you’ll get use out of that new equipment.

This being said, in a traditional equipment financing agreement, after the loan payments end, you’ll own that equipment outright. On the other hand, however, you may consider equipment leasing, in which you essentially rent the equipment for a specified period of time. Although this is generally more expensive than typical equipment financing, it also will likely mean lower monthly payments for your business.

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. Also called accounts receivable financing, this kind of business financing can usually sync up with your accounting software—making it extra quick and convenient. 

Invoice Financing Requirements

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.

Beyond this basic requirement, you’ll need to present some evidence that your customers actually settle their payments, which will typically come from invoicing track records in your accounting software, or your customers’ business credit history.

Once again, since your invoices serve as collateral with this type of financing, lenders may be more flexible when it comes to your requirements—annual revenue, credit score, and time in business. This being said, however, these are still requirements that you’ll need to consider.

Invoice Financing Rates and Terms

There are a few different variations of invoice financing, but 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.

Sometimes a lender will give you 100% of that invoice and a weekly repayment schedule; other times your lender will “buy” the invoices from you—which means they’ll chase down your customers for payment, so late payments won’t affect your business.

This being said, however, although invoice financing is typically fast to fund and can be acquired from online lenders like BlueVine, it may have higher fees than traditional debt-based financing.

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 sales, plus a fee. Although merchant cash advances tend to be fast, they’re also exceptionally expensive solutions to finance your capital needs.

Merchant Cash Advance Requirements

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 business financing options are willing to pay a premium for merchant cash advances, simply because they are their only options.

Merchant Cash Advance Rates and Terms

As we mentioned above, a merchant cash advance is a lump-sum loan that you pay back by offering a piece of your daily credit card sales to the lender until the debt gets cleared. Although it’s a quick and easy option—you can often receive that funding within a day or two, and with minimal paperwork—merchant cash advances cut into your daily cash flow (and usually do so at a high rate). Until you pay back your loan, you just never get a break.

Although merchant cash advance companies use “factor rates” instead of interest rates, you can convert their fees. Merchant cash advance APRs usually range from 15% to 80%, which can really affect your business’s financials.


Best Equity Business Financing Options

Now that we’ve explored these debt financing solutions, let’s discuss equity financing in greater detail.

On the whole, equity financing is very different from debt financing and is generally not as accessible for most small business owners.

Instead of borrowing money and paying it back with interest, equity financing is when you give up some ownership of your business—in exchange for financing and, sometimes, guidance from an investor.

Just like any other small business financing option, there are distinct advantages to using equity financing for your business, but there are also downsides to consider too.

Therefore, let’s break down the different equity financing options that are available, so you can determine if any of them are the right solution for your business.

Angel Investors

One of the first small business financing options you have under the umbrella of equity financing is working 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.

Venture Capital

The next 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.

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 small business financing option, 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.


The Best Creative Small Business Financing Options

Finally, although debt and equity are the two main categories of business financing, there are a few other options you might want to consider. After all, if you get creative, you never know what kind of success you may have.

Therefore, you might think about these four additional (and more creative) ways to finance your business:

Crowdfunding

For new endeavors, you might think about using sites like Kickstarter and IndieGoGo to fund your latest projects.

With these crowdfunding sites, 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.

401(k) Financing

If you’ve got some work experience under your belt, you might be able to dip into your 401(k) in order to help finance a business.

You can also accept 401(k) payments from friends and family if they’re willing to donate, too.

The costs of this kind of business financing run high, though: If your business fails, much or all of your retirement savings go down with it.

Therefore, with this kind of alternative financing, 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.

Small Business Grants

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.

Competitions

Finally, 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.


When Do You Need Small Business Financing?

So, as you can see, between debt, equity, and creative financing solutions, there are a variety of small business financing options out there.

However, whether you’ve just started your company or have been in business for a few years, you may be wondering how to know when you need financing.

Although the reasons why you may need funding will often be unique to your business, there are a few different reasons that come up again and again—and these reasons are the catalysts that often lead small business owners to start exploring their financing options.

Let’s take a look:

 

You’re Just Getting Started

Got a great business idea, but no way to get things moving?

Small business financing can help you get off the ground so you can produce, sell, and be successful.

Plus, there are more startup fees and costs of starting a business than you might have expected, so you could need financing to cover those necessary costs.

When you’re just starting your business, however, you’ll want to keep in mind that your options may not be as vast as they would be if you had a revenue and credit history to show. Therefore, you’ll want to look specifically at your startup funding options.

Late Payments Cause Cash Flow Gaps

If you’re a B2B business that relies on invoice payments, things can be difficult if your customers submit payments late. Therefore, if your cash flow is suffering due to late payments, you may look for small business financing to help you fill the gaps.

In this case, invoice financing may be particularly useful, or you may look for a “when you need it” option, like a line of credit, to cover times when you’re waiting for payments from customers.

Your Business Is Seasonal

If you own an ice cream truck or a bathing suit retail store, then you’re probably not making as much in the off-season. There’s nothing wrong with that—seasonal businesses are a tried-and-true model.

However, if during the off-season you need extra cash to make payroll, maintain equipment, or pay marketing bills, it may be worth looking into your small business financing options.

Specifically, a line of credit, where you can draw and use funds as needed, may be a particularly worthwhile solution to support the finances of your seasonal business.

Unexpected Costs Come Up

Whether it’s a major snowstorm ruining your inventory, a burst pipe flooding your office, or a competitor opening up next store, you’re bound to run into some unexpected—and maybe even debilitating—emergencies as a small business owner.

To help prepare yourself for possible emergencies (and hopefully allow you to recover more quickly) you might consider your small business financing options.

After all, regardless of the specific emergency, extra capital is one of the best insurance solutions you can have in your back pocket.

You Want to Seize a New Opportunity

On the flip-side, you might be surprised by a golden opportunity: some new piece of equipment, a game-changing employee, a chance to expand your business or purchase a competitor’s business.

Whatever the new opportunity is, it may be a once-in-a-lifetime chance that could radically change your business, its growth, and your potential for success.

This being said, however, you may not always have the cash on hand to take advantage of an opportunity when it presents itself.

Therefore, even if you’re thoughtful and careful with your capital, you may decide that finding some outside business financing is necessary to afford a big (but worthwhile) expense.

You Want to Grow Your Business

Similarly, you may find yourself in a situation where you can’t afford the upfront costs of a purchase, but you know it’ll pay dividends soon enough.

For example, you might think about a bigger oven or an extra delivery van—you’ve proven that what you have works, and you know that scaling up will lead to more cash, but you just don’t have the money you need on hand right now.

This is where small business financing comes in—you spend more now to make more in the future.


Exploring Your Small Business Financing Options: Things to Keep in Mind

Now that we’ve explored the common situations that indicate you may need financing, as well as what your options are for different financing products, you should have a better sense of how to compare solutions and find the financing that is right for you.

However, before you dive into pursuing one—or many—of these forms of small business financing, it’s worth acknowledging a few fundamental caveats beforehand. Here are some crucial things to know about the three types of business financing, so that you’re familiar with what you’re getting yourself and your business into:

Debt Small Business Financing

Financing a business with loans and debt is one of the most common ways to get the working capital your business needs to grow.

And you’ll want to know what the process will be like before you get deeply involved in the search for small business financing.

Therefore, if you’re considering financing your business with a business loan or other debt-based product, you’ll want to keep these five things in mind.

Shop Around to Find the Best Deal

First and foremost, there’s a wide variety of small business financing options through debt for you to explore.

As we’ve seen, your choices don’t just range from small and pricey to big and affordable. There are alternative kinds of loans that fit all sorts of different business types and funding needs, from invoice financing to merchant cash advances. Plus, within the four product types we explored earlier, there are even more variations, like factoring or invoice-based lines of credit.

This being said, you always want to remember to explore all of your options. There’s bound to be a debt-based financing solution that suits your goals—perhaps even many—so you’ll want to choose the one that will be best for your business.

Personal Credit Score and Time in Business Really Matter

When you’re looking for debt-based business financing, business and personal credit are extremely important. If you’re looking for financing outside of a bank, your personal credit history will be even more important.

In fact, your credit score is the factor most strongly correlated with loan APRs.

Generally speaking, the better your credit score, the cheaper your small business financing options will be.

Plus, for business financing through debt, older is better: A longer time in business means you’ve weathered more storms, and therefore, are less of a risk for lenders.

This being said then, just staying in business will make you eligible for longer terms and more affordable rates. Along these lines, you’ll want to keep an eye out for your big time-in-business thresholds—the two-year mark is especially important to lenders—and avoid getting stuck in cycles of short-term debt.

You’ll Need to Manage Your Money Wisely

Of course, debt financing does involve taking on debt. And debt, managed poorly, can be trouble for your finances.

As we mentioned, your credit score is an important part of getting small business financing through debt—and unfortunately, getting behind on loan payments is a quick way to hurt your credit score and incur late fees on your loan.

Ultimately, it’s important to make your loan payments in full, on time, every time. You’ll want to plan out your financial situation before you take on any debt, make sure the debt you’re considering is worth the cost, and never get careless with your business cash.

Although debt financing can help you grow and expand beyond your means, it can also come back to be a large problem if you’re not mindful of your financial decisions.

Watch out for Prepayment Penalties

Finally, some kinds of loans come with prepayment penalties—which, as the name implies, means you’ll face a penalty fee for paying off your loan early. 

Essentially, lenders give out money to make even more, so letting you off the hook for all those interest payments you’d skip by paying off the loan early is bad business for them.

This being said, sometimes a prepayment penalty comes in the form of a flat fee, or other times it’s that you’re only forgiven a certain amount of interest by paying early. Regardless of your lender’s system, you’ll want to make sure you fully understand the consequences of paying your debt off early, whether it’s because you solved your problem or you’re aiming to refinance.

Ultimately, you can easily calculate the pros and cons of taking a prepayment penalty, so you just want to remember that they might be a possibility if you’re considering paying off your loan early.

Equity Small Business Financing

Small business financing through equity generally takes longer than through debt, and it often happens early on in your business’s lifecycle—or at regular intervals throughout.

It also tends to offer more capital. Whereas you might take out a small loan of $15,000, investors typically think in terms of millions—and in being partners for the span of your business’s life, not just a few years.

In return for that money, however, you’re offering investors a percentage of your business—which is usually accompanied by some decision-making influence.

On the one hand, it might not be a great feeling to give up some control over your business.

On the other, plenty of investors want to offer their wisdom, experience, and guidance.

Therefore, one of the most important things to remember with equity financing is that you should make sure you’re comfortable with outside investors having partial control over your business. The human aspect of financing a small business comes into play much more with equity vs. debt.

Creative Small Business Financing

Considered as a whole, these alternative, more creative means of obtaining small business financing will be more unpredictable and less secure options.

There will be fewer precedents and fewer answers for any troubles you might come across if you crowdfund, tap into your 401(k), or enter a competition to finance your small business. Plus, there are a number of variables that will contribute to your ability to actually receive financing through any of these methods, even more so than with debt or equity-based financing.

Therefore, you’ll want to be prepared for the unexpected when investing in these solutions and consider the fact that they may not always pan out.


Choosing the Best Business Financing for Your Needs

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 can ask the following questions to figure out the right way to finance your small business:

  • How much money do you need?
  • Do you need that 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?

Although the answers to some of these questions are simple calculations or easy decisions, others will deserve long, considered answers.

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