The Best Small Business Financing Options of 2019

Need to start, run, or grow your business? Here are your best business financing options.
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Small Business Financing: What Is It, and Where Can You Get It?

Zoomed out, small business financing is a pretty simple concept: Business financing is, simply, the act of finding capital necessary to start, run, and grow your small business. Up close, things can get trickier, and learning the ins and outs of your business financing options can be a lot easier said than done.

But that’s precisely what we’re here for.

The top small business financing options of 2019 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

With this guide, we’ll cover the details on all 15 of these business financing options and walk you through just how to choose which one can best address your business’s needs.

So buckle up, and get ready to become an expert on finding and securing financing for your business:

Check Your Business Financing Options

Covering the Basics of Small Business Financing

Whether you call it business financing, business funding, or whatever other jargon the industry has come up with, small business financing is the money you need to help start, run, and grow your company—and, of course, the act of coming up with that money.

While you could technically pay the upfront costs and cover any cash flow gaps with your own money, out of pocket, it generally doesn’t make much sense to do so.

Instead, most successful business owners turn to outside small business financing—whether that means debt, equity, or something even more creative. We’ll explain what each of those paths might hold for you, and what to know about them, in just a minute.


8 Ways to Finance Your Small Business Through Debt

There are a few different ways to get the capital you need to start, grow, or manage your business. One of the most straightforward ways to finance a business is to use debt financing.

Let’s start with the fundamentals of debt financing:

Debt, or credit, is a system of business financing where you borrow money from a lender—and then pay it back, plus interest, over time.

You’re spending money for the chance to spend money, which might sound like a raw deal… Until you realize that it’s money you wouldn’t have had in the first place.

Debt, while a scary word to plenty of people, is actually a good thing: it lets you expand, innovate, and explore. Savvy small business owners know how crucial financing a small business with debt can be.

We’ve categorized debt business financing into eight major types for you.

#1. Short-Term Loans

First things first:

What’s a term loan?

When you think of debt financing, you probably already imagine a term loan.

You get a lump sum of cash and you use it to grow your business, making daily, weekly, or monthly payments back to your lender until the loan is all paid off. It’s a pretty straightforward arrangement—and one that’s easy to plan your business’s financials around.

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Requirements

Businesses big and small can qualify for short-term loans:

They have some of the laxest requirements in small business financing, or at least of the term loans.

In fact, short term loans are expensive in part because of 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 hiking up their rates. Short-term loans for bad credit exist, but they will be expensive. 

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Rates and Terms

With terms between 3 to 18 months, short-term loans are pretty aptly named. They’re made for quick fixes and immediate emergencies—but, unfortunately, they tend to be as expensive as they are speedy.

It’s a reality of the lending industry that fast cash is pricey cash, and short-term loans are no exception.

They’re smaller in loan amount than their bigger cousins—the traditional term loan, up next—and generally are faster to apply for, but they can carry interest rates of 14% and up.

Depending on your qualifications, you could get a short-term loan that’s much, muc h higher than 14% APR—think triple digit APRs.

#2. Term Loan

Traditional term loans, sometimes called medium-term loans, are for more established businesses: they’re bigger and slower to fund, with longer term lengths and lower interest rates than short-term loans.

Basically?

They’re the catch-all small business financing debt product for business owners with some experience, annual revenue, and good credit scores.

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Requirements

You might be able to score a term loan from your local bank—and if you do, congratulations!

Only about 20% of small business owners can qualify for a bank loan, which tends to be the longest and most affordable small business financing option out there.

But not to worry. Medium-term loans are still available through online alternative lenders, if that’s the product you’re interested in.

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Rates and Terms

Their terms can last between 1 and 5 years, and though they’re not quite as speedy as short-term loans, you can still qualify and receive the funding for a medium-term loan in a maximum of 10 days.

Online, medium-term lenders can fund these term loans faster than a bank can for a few reasons.

First off, they use technology to process loan applications and underwrite their loans in a much faster, more efficient process.

Secondly, 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 lenders is easy—they tend to be the hardest small business lenders to qualify with. However, they will work with more small business owners than a bank would necessarily consider working with.

#3. SBA Loans

Let’s start with the basics…

What should you know about SBA loans?

The Small Business Administration isn’t a lender—instead, it’s an arm of the government that helps small businesses get bigger loans than they’d qualify for otherwise.

How?

Great question.

The SBA encourages actual lenders to loan away money to small businesses by guaranteeing large portions of those loans. If your business takes out an SBA loan but defaults, your lender doesn’t lose all that much of their money.

Essentially, they’re incentivized to take more risks by financing a small business, because there’s less danger in doing so.

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Requirements

You can also expect some pretty 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.

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Rates and Terms

SBA loans resemble bank loans with their high maximum amounts, long terms, low interest rates, and the processing speed of a particularly drowsy turtle—when compared to that short-term loan, at least.

The cold hard facts:

You can expect interest rates between 6 and 13%, terms up to 25 years (though generally less), amounts up to $5 million, and time to funding starting at about 30 days.

#4. Business Lines of Credit

If you’re new to the world of small business financing, then a business line of credit might be a totally unfamiliar product.

What is a business line of credit, and how can you use one for small business financing?

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.

(That’s why it’s called a revolving line of credit.)

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Requirements

In terms of qualifying, the conditions 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, while medium-term lines of credit will have similar requirements as term loans.

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Rates and Terms

Also called a medium-term line of credit, this kind of business financing has similar amounts ($10,000 to over $1 million) and rates (7 to 25%) to a traditional or medium-term loan.

Meanwhile, short-term lines of credit are to medium-term lines of credit as short-term loans are to medium-term loans.

In other words…

A short-term line of credit has a lower maximum funding amount, higher interest rates, faster time to funding, and easier qualification criteria than a traditional line of credit does.

They’re relatively new in the debt business financing space, which is a good thing—some business owners can now secure a line of credit, even an expensive one, whereas before they wouldn’t have been able to.

#5. Business Credit Cards

While the jury’s out on whether or not you should use a credit card to finance your entire business, don’t forget that a business credit card is one way to finance a business—and it’s got some distinct advantages that makes it a great small business financing option.

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Requirements

One of the biggest advantages of using business credit cards for business financing? You’ll just need your personal credit score to access them. In fact, if you have personal credit even as low as 580, you’ll still be able to access cash back rewards and unsecured, revolving credit.

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Rates and Terms

Using a business credit card will help you separate your business and personal financials—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 come with valuable bonus rewards, cash back savings, and a variety of perks for your business.

For most business credit cards, each time you swipe the plastic you’re earning points and rewards on your purchases—which you can then funnel back into your business.

And some business credit cards offer 0% introductory APRs for a certain amount of months—sometimes even a year.

In a lot of ways this is like free small business financing for up to a year—you can borrow up to your credit limit, without having to pay extra interest on top of what you pay back.

#6. Equipment Financing

Equipment financing is different from term loans and lines of credit in one very important way:

It’s an asset-based loan.

Equipment financing is a good option if you can’t afford the price tag of a piece of equipment upfront, but you’re confident that the revenue you’ll get from the use of the equipment outweighs those interest payments.

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Requirements

Whereas traditional debt-based small business financing uses 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.

In other words, asset-based lenders care more about how much that new piece of equipment will cost than about your credit score…

Which is a good thing if you don’t have a stellar track record.

A lender might be more willing to lend to you if have collateral to back against your loan because—in the worst case scenario you can’t pay back your loan—the lender can simply seize the collateral and liquidate the assets to recoup their losses.

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Rates and Terms

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

Plus, 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.

And after the loan payments end, you own that equipment outright—as opposed to leasing, which is another alternative to consider.

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

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Requirements

To be able to access invoice financing, you’ll need to be a B2B company that invoices their customers. Beyond that, you’ll need to have some evidence that your customers typically pay up, which will typically come from your invoicing track records in your accounting software, or your customers’ business credit history.

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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 those 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, or 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.

#8. Merchant Cash Advances

In the world of debt business financing, merchant cash advances tend to be fast but exceptionally expensive solutions to your capital problems.

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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.

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Rates and Terms

A merchant cash advance is a lump sum loan that you pay back by offering a slice of your daily credit card sales to the lender until the debt gets cleared. While it’s a quick and easy option—you can often receive that funding within a day or two, and with minimal paperwork—MCAs cut into your daily cash flow. Until you pay back your loan, you just never get a break.

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


3 Ways to Finance Your Small Business Through Equity

Compared to debt financing, equity financing is a whole different ballgame when it comes to small business financing.

Instead of borrowing money and paying it back, plus interest, equity financing is when you trade a bit of your business ownership away—in exchange for some cash, and maybe guidance from an investor.

There are some distinct advantages to using equity financing for your business, but there are downsides to weight, too.

And it’s important to note that not all businesses will choose to pursue equity financing (or have a shot at it).

Here’s what you need to know to decide whether equity financing is the right small business financing option for you.

#9. Angel Investors

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

An angel investor might offer you a whole lot of money before your business is making any 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.

With equity, you’re receiving experience, expertise, resources, connections, time, energy, and attention… Not just money. But you’re giving more, too.

#10. Venture Capital

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 swapping 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).

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.

But it’s a worthwhile option to investigate if equity-based business financing is what you’re after!

#11. 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 if you’ve clearly got a successful endeavor in your hands, then why wouldn’t a friend or relative invest?

Our caution here is over the potential cost: Friendships, and even family relationships, have been ruined by far less than fights over small business financing.

If you’re following this path, tread lightly—make sure all terms, conditions, and expectations are absolutely clear, agreed upon, and written down with no ambiguity.


4 More Creative Small Business Financing Options

Debt and equity are the two main categories of business financing, but there are a few other options you might want to consider. Here are four more ways to finance your small business if more traditional means don’t quite do they job:

#12. Crowdfunding

For new endeavors, you might think about using sites like Kickstarter and IndieGoGo to fund your wild, crazy, innovative moonshot projects.

By letting others decide whether your business is worth their money, you forgo the obligations of debt and equity business financing in exchange for the kindness of strangers.

(And, of course, those strangers’ expectations—crowdfunding usually promises some sort of deal, like early access or special packages, to a business’s supporters.)

Plus, if no money comes your way, then you can rest easy knowing maybe your idea just wasn’t meant to be.

#13. 401(k) Financing

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

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

While the benefit of avoiding taxes is hard to beat, the costs of this kind of business financing run high: if your business fails, much or all of your retirement nest egg goes down with it.

Think carefully about the pros and cons, hire a tax attorney to help you navigate the legalese, and make the most informed decision you can.

#14. Small Business Grants

Small business grants do exist, although they’re few, far between, and usually pretty specific.

If your business is involved in scientific or technological research and development, urban restoration, or health advocacy, you might be surprised at how much you qualify for. If not, there’s still no harm in checking out a list of grant opportunities anyway!

(This is especially true if you run a women-, veteran-, or minority-owned business, since there are plenty of special small business financing opportunities for those communities.)

#15. Competitions

Finally, some large companies hold competitions—think Shark Tank—that entrepreneurs can take advantage of to get business financing or attract the public. If your business idea revolves around an especially inventive or exciting product, consider applying for contests and competitions in your area. You might be the lucky one to win it big!


6 Reasons Small Business Financing Might Be Necessary

Why do small businesses looking for financing?

Well, there are a whole bunch of reasons why you could need funding for your business.

Maybe it’s to stock up on inventory for your busy season, finance a business expansion, or just to cover regular, recurring expenses.

There are many reasons.

But despite this, there are actually a few different reasons that frequently come up for small business owners.

These are just six examples—there are plenty of reasons to pursue small business financing to start, manage, or grow your company.

Whether you’re looking to grow, protect yourself, or recover, outside funding is in every successful business owner’s toolbox.

You’re Just Getting Started

Got a great business idea, but no way to start 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 to starting a business than you might have expected, so you could need financing to cover those necessary costs.

Late Payments Cause Cash Flow Gaps

Your customer says they’ll need to pay you back a bit late—again.

If your business relies on customer invoices to keep the wheels turning and the lights on, then a series of delayed payments can really put a stop to your activity. Small business financing could help you work around those cash flow gaps.

It’s That Time of Year

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

But it just so happens that, in your off-season, you might need to extra cash to make payroll, equipment maintenance, or those marketing bills.

Since your cash flow is tight, external business financing would be the way to go.

Expect the (Unpleasantly) Unexpected

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

The cash cushion provided by business financing could help you bounce back quicker…

Or at all.

Extra capital is just about the best insurance you can have in your back pocket.

Expect the (Pleasantly) Unexpected

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

Whatever it is, these chances don’t come knocking on your door every other day. But you might not have the cash saved up to spend on that business move.

Even if you’re thoughtful and frugal with your capital, you could still need some outside business financing to afford a big expense.

Spend Now to Earn Later

You can’t afford the upfront costs of a purchase, but you know it’ll pay dividends soon enough.

For example, 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.

That’s where financing a small business comes in.

It’s perfectly fine to spend beyond your means… As long as you know it’ll be worthwhile to do so.


No Business Financing Option Is Perfect

Before you dive into pursuing one—or many—of these forms of small business financing, be sure to take in a few fundamental caveats beforehand. Here are some crucial things to know about the three types of business funding, 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 a unique (but common) way to get the 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.

If you’re considering financing your business with a business loan of some sort, keep these 5 things in mind.

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Shop Around to Find the Best Deal

First and foremost, there’s a whole wide world of business financing through debt for you to explore.

Your choices don’t just run the gamut from small and pricey to big and affordable, as we’ve seen. There are alternative kinds of loans that fit all sorts of different business types and funding needs, from invoice financing to merchant cash advances. And within those eight categories we explored earlier there are even more variations, like factoring or invoice-based lines of credit.

Make sure to explore all your options!

There’s bound to be one that suits your goals.

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Personal Credit Score and Time in Business Really Matter

We’re talking business and personal credit, with an emphasis on personal if you’re looking for small business financing outside of a bank.

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.

Before you know it, just staying in business will make you eligible for longer and more affordable rates. 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.

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You’ll Need to Manage Your Money Wisely

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

Like we said, your credit score is an important part of getting small business financing through debt—and making delinquent payments is a great way to hurt your credit score and incur late fees on your loan.

The moral of the story?

Make your loan payments in full, on time, every time. 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.

While debt financing can help you grow and expand beyond your means, it can also come back to haunt you if you’re not thoughtful about your financial decisions.

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Watch Out for Prepayment Penalties

Finally, some kinds of loans come with prepayment penalties—which are more or less exactly what they sound like.

Simply put, lenders give out money to make even more, so letting you make off with all those interest payments they were expecting is bad business for them.

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, 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.

The pros and cons of taking a prepayment penalty aren’t too hard to sit down and calculate—just don’t forget about them!

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, not just a few years.

In return for that money, 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.

Just 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 than it does with debt.

Creative Small Business Financing

Considered as a whole, these alternative, more creative means of getting your hands on small business financing will be the road less traveled. As a result, 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. Be sure to think on your toes and be aware of the unpredictable nature of creative small business funding.


Which Business Financing Options Are Right For You?

Does your well-established restaurant need some financing to open a second location? An SBA loan might be the way to go. Do you have a wild idea to disrupt the coat hanger industry? You probably want to look for angel investors or crowdfunders.

Here are some questions to ask yourself when you’re trying to figure out the right way for financing a small business:

  • How much money do you need?
  • Do you need that business financing now, soon, or just in the near future?
  • Are you alright with sharing your business equity?
  • How will your business fare with daily, weekly, or monthly loan repayments?
  • Does your product have that crowd-pleasing pizzaz?
  • 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?
  • Finally, what kind of business do you want to own?

Some of these are just calculations or easy decisions, but others deserve long, considered answers.

Think carefully: the business financing you look for will shape the company you run. Good luck!

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. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.