As a small business owner, you need to know your financing options for solving cash flow problems, obtaining inventory, or expanding.
From fintech lenders to grant funding and Small Business Administration small business loan providers, there’s a finance option for every small business. But which options are a good fit for you? Here’s how to find the right lender match.
Key Takeaways
- To get a small business loan, you will need to meet minimum criteria related to personal credit scores, business credit scores, annual revenue, and the number of years in business.
- Alternative lending options can offer accessible funding for small businesses.
- Banks are known for their low-interest rate loans, but it’s typically harder to qualify for these loans than for those from online providers.
What Are the Best Business Finance Options?
Business financing options include traditional and alternative loans. See which may work for your business.
Bank loans
- Loan amounts: Vary
- Loan terms: Typically three to 10 years
- Interest rates: Averages range from about 5% to 7%
Banks are known for their low-interest rate loans. It’s typically harder to qualify for these loans than for those from online providers. The application and approval process is usually longer, and a bad credit score can be a serious hurdle.
The APR for a small business loan from a major national bank ranges from approximately 5.24% to 7%. Rates from small regional banks are only slightly higher at 5.74% to 20.99%.
This is some of the cheapest financing available to small business owners. Local banks cultivate long-term relationships with their business clients.
If you are getting an equipment loan, you might have an easier time qualifying. This is primarily because the equipment you purchase is collateral for your loan.
To get a small business loan, you must meet minimum criteria related to personal credit scores, business credit scores, annual revenue, and the number of years in business.
- Many banks offer small business loans, usually term loans. Term loans (installment loans) provide you with a lump sum. You then repay this loan over a fixed amount of time using a set payment schedule. Interest is paid back along with the principal.
- Banks also offer what they call business lines of credit. With a line of credit, you receive access to a set amount of funds, which you can draw from at any time. As you repay what you spend, your line of credit gets “refilled” to its original amount. You are charged interest only on the amount that you draw from your line of credit.
- Equipment financing works in a similar way to car financing. You can choose to purchase your equipment via financing or lease it. Equipment financing loans may require a downpayment. In some instances, you may be qualified for 100% financing.
SBA loans
- Loan amounts: Up to $5.5 million
- Loan terms: Up to 25 years, depending on the use of the money
- Interest rates: Rates depend on the type of loan and the length of the term.
The SBA (U.S. Small Business Administration) offers a variety of loan programs, including those for general use, disaster recovery, equipment, and real estate.
There are a variety of lenders offering SBA loans, including SBA 7a loans, which the government backs. Nevertheless, you get rates and fees compared to traditional lender options.
Government grants
- Grant amounts: Variable
- Grant terms: Variable
- Interest rates: None. Grants do not have to be repaid.
If your business is engaged in scientific or medical research, conservation efforts, or other activities contributing to the public good, it may qualify for government grants. One such program is the Small Business Innovation Research (SBIR) program, administered by the Small Business Administration.
Non-government grants
- Grant amounts: Variable
- Grant terms: Variable
- Interest rates: None. Grants do not have to be repaid.
Because grants are essentially free money, they are difficult to get due to the high competition. Furthermore, most grants come with stringent guidelines on what and how you can spend the grant money.
Here are some places to start your non-government grant search:
- Our list of small business grants
- Grants for veteran-owned businesses
- This list of small business associations, many of which offer grants
Investment capital
- Investment amounts: Variable
- Investment terms: Variable
- Interest rates: Variable and based on previously-agreed upon terms
The Small Business Administration runs the Small Business Investment Capital (SBIC) program, which partners with private equity fund managers.
The program provides these managers access to low-cost, government-guaranteed capital to make investments in U.S. small businesses.
The SBA does not provide capital directly to small businesses, but you, as a small business owner, can partner with private investors for business-related funding.
Non-bank online lenders
- Loan amounts: Variable
- Terms: Variable; some require repayment in just a few months, while others offer long-term repayment options
- Interest rates: 5.49% to 70%
Online lenders (sometimes called alternative lenders) provide many funding options, such as loans, invoice factoring, or business lines of credit.
So, how do they differ from traditional banks?
- Online lenders typically have streamlined application processes and fast approval times.
- With some products, such as merchant cash advances, it may be possible to receive funds within 24 hours of applying or even on the same day.
- Some online lenders (not all) have less stringent requirements regarding personal or business credit scores, amount of time in business, and revenue.
- The catch is higher interest rates and/or fees — generally speaking. Interest rates for financing products from online lenders can vary from approximately 5.49% to 70% or more.
However, realize that your interest rate will depend on multiple factors, such as your credit score, time in business, average monthly revenue, and the amount of debt you’re currently carrying.
To judge the value of an offer, it’s important to consider other factors such as repayment terms and the total amount being offered.
Equity financing
- Financing amounts: Variable
- Financing terms: Variable
- Interest rates: Variable
Selling part of your business to investors in exchange for capital is a good solution for startups and early-stage businesses that haven’t been in business long enough to qualify for traditional business financing.
It’s also a good solution for risky and long-term ventures. A downside is you’ll be giving up part of your ownership (and control) over the business. In addition, there will likely be additional reporting that’s required. Equity financing is considered to be more expensive than debt financing.
Angel investors are individuals who invest their own money in a new business in exchange for partial ownership. They typically invest in businesses that traditional investors would otherwise overlook.
Venture capitalists use pooled resources to invest in companies poised for rapid growth. Unlike many other financial products, the specific terms are highly variable. What you get from an angel investor or venture capitalist is subject to discussions between you and the investors.
P2P lending
- Loan amounts: Variable
- Terms: Variable, but typically no more than a few hundred or thousand dollars
- Interest rates: Variable, but you can expect this to be slightly more expensive than other loan options due to the risk factors
With peer-to-peer (P2P) lending, the middleman (the bank) is eliminated, and you borrow funds from other people.
In this model, there is a platform that facilitates and matches you with funders. By eliminating the bank in the middle, the lenders can earn a greater return on their investment.
Keep in mind that those who offer such loans tend to be on the risk-averse side, so if you have a weak credit history, this might not be an option for you.
Personal loans
- Financing amounts: Variable
- Financing terms: Typically at least $1,000 to $100,000
- Interest rates: Variable
If you can’t get a small business loan from a bank, consider getting a personal loan and using the funds for business-related expenses.
Your eligibility (as well as the interest rate you receive) for such loans is dependent on your personal credit history, and you can expect to receive a loan amount smaller than what you would get for a specific small business loan — they typically do not exceed $100,000.
Other financing options
Additional business financing options include invoice factoring, social finance, and merchant cash advances. However, these financing options can be risky and terms are less favorable than bank loans and online lending options.
Further Resources
- Learn all the basics in our Definitive Guide to Small Business Financing.
- Browse our list of Popular Small Business Loan Providers.
- If you are a veteran, check out our list of Best Small Business Loans for Veterans.
- If you are a woman who owns a small business, check out our page for Resources For Women-Owned Small Businesses.
- If your business is in Florida, Texas, or New York, be informed about how to easily get a business loan from your own state.
- If you have a poor (or nonexistent) credit history, see the SBA’s disclosure of requirements for eligibility where startups may be entitled to a small business loan.