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12 Top Small Business Funding Options for Business Owners

When looking for funding, don’t just look for cash. Look for the right people.

Jodie Fox, Director of Fashion and Founder of Shoes of Prey

Gone are the days when finance experts viewed financing and capital assistance as liabilities. The vagaries of the modern economy, coupled with intense competition in nearly every niche, have made business funding a quintessential component of successful operations in the 21st-century market. Studies have shown that over 30% of small business owners struggle with a lack of capital when running their businesses. Whether it’s for kickstarting operations, managing cash flow, paying bills, or footing expansion costs, every entrepreneur needs to have sufficient funding at hand to carry out these crucial tasks.

Business funding comes in several forms, however, it’s essential to select the type of funding plan that suits your unique requirements. Incorrect choices can often have far-reaching consequences, creating several issues in managing your business’ finances. Moreover, settling on an appropriate choice for your business’s financial needs can become complicated, owing to the many factors that determine the effectiveness of a business funding solution.

There are many options available for small business owners, including conventional business loans and grants, and credit lines. However, many entrepreneurs remain unaware of the variety of business financing solutions and end up missing out on the best.

In this article, we’ve put together a comprehensive guide that will take you through all the aspects of business funding to help you arrive at the right decision for your company.

When to Apply for Business Funding

There are a variety of reasons why small business owners require financial assistance to operate their businesses. Selecting the appropriate modality of business funding is essential to ensure you don’t increase the burden of liabilities on your business. 

Business Expansion

Most businesses often look to external financial support for sustaining key elements of their ambitions and to expand their opportunities. As your business grows, expansion becomes not only an option but also a practical requirement to help you support growing orders and commitments. If you don’t have the immediate resources to foot the large bill that capital expansion often entails. Such situations clearly warrant business funding and financial assistance. The growth in revenue and profit from your business expansion will support repayment efforts toward the capital you borrow. 

Equipment Purchases

Expansion may include not only the procurement of new real estate spaces for your business but also scaling other capabilities by purchasing new equipment or hiring a larger team of staff. From computers and office supplies to large-scale machinery, equipment purchases of all sizes are critical to operating successful and modern firms. Obtaining financing for small businesses is the ideal option to support your equipment purchase goals.

Consistent Cash Flow

Entrepreneurs look to streamline and support their cash flow to ensure their business operations remain unaffected by working capital crunches. Your business can obtain short-term business funding to ensure you fulfill your commitments to your clients, suppliers, and staff. Nearly 82% of small business owners have admitted to facing cash flow issues. These challenges can progressively affect business output.  To stabilize your company’s cash flow, you can choose from a variety of business funding options.

Maintaining Inventory and Supply

In case you operate a business that relies on high inventory turnover to remain profitable, replenishment of your stock is essential. Businesses are often compensated for their supplies long after the client receives the goods. Entrepreneurs can avoid financial strain in these periods by opting for small business funding options. 

Employee and Staff Training

Lastly, for businesses that rely on skilled and dedicated staff, the process of hiring and training employees consumes both time and resources. Intuitive funding plans can aid your strategy when it comes to talent acquisition and training. Access to a greater pool of capital helps your firm hire better employees while also offering better training programs to your workforce.  

Regardless of the reason, businesses are bound to encounter a time when they need to obtain a degree of financial assistance to ensure they’re able to compound their gains and make the best of their investments. 

4 Factors to Consider Before Applying for Business Funding

It is impossible to find a type of business financing that doesn’t have certain requirements. Businesses seeking funding support must carefully evaluate and assess these factors if they wish to qualify for them. We highlighted the key factors that each business owner should consider before applying for business funding.

1.Eligibility Criteria

All financial institutions have eligibility criteria that help them determine the most suitable clients. Most commonly, they include clauses associated with

  • monthly revenue
  • business experience
  • the nature of business
  • personal or business credit scores
  • business tenure
  • annual turnover rates
  • business bank accounts

Pay attention to the eligibility criteria mentioned by funding partners! 

Selecting financial institutions with more straightforward eligibility clauses allows you to go through a streamlined process. This might also impact the time taken to process your application, resulting in a quicker disbursement of capital.

2. Business Funding Amount

All businesses must be clear on the amount of funding they require when they’re applying for small business funding options. A thorough evaluation of your business’s financial standing is quintessential before applying for funding. While insufficient funding can lead to operational issues or become counterproductive, the latter can lead to too great a burden for businesses. Entrepreneurs must watch out for the terms and conditions associated with the funding amounts. Larger capital requirements often come with personal guarantees and collateral requirements. Be sure to discuss these terms with your funding partner before accepting their offer.

3. Interest Rates

Interest rates are one of the main pain points in conventional funding. As these rates vary between institutions and funding methods, it is important to be aware of the interest your company will pay when it takes out a loan.

Having a clear picture of the interest amount your business can afford to pay is imperative before you send in your application to the funding institution. Bear in mind that steep interest rates often cut into margins and lead to bloated liability figures.

The interest rate offered to you depends on a variety of factors, such as your business credit score, business outlook, and overall performance. Businesses must only accept funding offers with interest rates that are in line with their financial parameters to avoid increasing their liabilities.

4. Credit Score

Credit scores are metrics that determine creditworthiness. There exist both business and personal credit scores, however, how they’re calculated varies greatly. While some funding companies will only consider your business credit score, others will factor in both your personal as well as business credit score in their analyses.

With the growth in both the number and variety of business funding methods, it is now possible to get business loans with bad credit as well. This has allowed several businesses to elevate their business performance and overall profitability. Businesses can improve their credit scores by taking on small amounts of credit card debt that has a positive impact on the rating, provided the amount is paid back either on or before time. The same strategy can also be applied by new businesses looking to establish a credit rating.

Disbursement Time

Upon receiving approval from funding agencies, applicants often have to wait for the approved funds to be credited into their business accounts. This period is variable and is an important parameter that might impact your decision. Often, businesses require urgent funds and long waiting periods can impact their operations and business reputation. Watch out for long waiting times and pick a capital provider that can provide access to funds in the shortest possible duration.

Traditional Business Funding Options

Consider traditional funding options alongside various parameters that determine their relevance for your business. These options can be utilized by small business owners to grow their businesses and address several capital-associated concerns.

Bank Loans

Bank loans are among the most common methods of obtaining funding for small businesses. Applicants can visit the bank and fill out an application form, mention the amount of funding required for their business, and make sure they meet all the eligibility criteria. Banks take a few days to process the application and approve the loan amount. After the stipulated processing time, the approved amount is either credited to the applicant’s bank account, or the bank account creates a new loan account for the applicant to withdraw the funds.

Bank loans come with interest rates and other attached clauses. Business owners might also have to take the loan out against collateral and will also be subjected to credit score checks.

In recent times, banks’ bureaucratic processes, steep interest rates, and rigid borrowing requirements have made loans complicated to obtain. However, bank loans still remain a fairly popular option among businesses due to their accessibility and often attractive, institution-specific offers. If you are interested in applying for a bank loan, make sure to follow the steps below to ensure your loan application is approved.

Steps to Apply For a Bank Loan

  • Identify potential loan providers
  • Shortlist a few banks and make note of whether or not their applications are online
  • Check the eligibility criteria
  • Fill out the application form either online or in person
  • Get your documents in order, such as business plans, cash flow statements, performance reports, profit statements, and testimonials from clients
  • Wait for an approval
  • Go over the contract and the stipulated EMI with your banking representative
  • Accept the offer and wait for the funds

Popular Banks Offering Small Business Loans

  • Wells Fargo
  • JP Morgan Chase
  • Bank of America
  • US Bank
  • Citibank
  • PNC Bank

Pros and Cons of Bank Loans for Businesses

Large loan amountsStrict credit score norms
Fixed monthly paymentsCollateral requirements
Defined contracts and termsPotentially high-interest rates
Potential to develop strong relations with the bankSome banks might require an established track record, making approval difficult for new businesses
Straightforward application processTime-consuming application process

Online Business Loans

The dawn of the internet has catapulted a variety of new lenders into the market, among which are online loan providers and financial institutions that offer online loans. Online business loans have higher approval rates on average when compared to traditional banks and are also quicker to approve loan applications and proposals. This form of funding has a fixed period of repayment, albeit with fewer requirements in place.

Online loan providers are often not bogged down with the same level of bureaucratic systems as those present in banks and other large financial institutions. Moreover, online providers might also be able to provide quick access to funds due to the same reason, making business funding from an online lender a shorter and simpler affair.

These institutions rely only on an entirely digital process where the applicant must fill out the application form and turn in the necessary documents online. Further verifications might also be carried out over the Internet.

Most small business online loans rely on an entirely paperless process, with all activity occurring digitally right until the approved amount is credited into the borrower’s bank account. In spite of benefitting from the speed and automation of the digital age, the arrival of online loans and banking has unfortunately led to the rise of scams and phishing operations.

Avoiding Online Business Loan Scams

Suspicious organizations and individuals operating under the garb of online lending partners most commonly defraud business owners. On many occasions, the loan amount might be credited to the applicant’s bank account, however, the lender might end up harassing the borrower for repayment. Below are a few steps on how to avoid online small business loan scams:

  • Vigilance remains key in avoiding online loan scams.
  • Verify the firm’s history and operational records before applying.
  • Avoid answering calls or emails from suspicious loan firms.
  • Do not divulge personal information to individuals claiming to be online loan providers or representatives from these companies.
  • Use strong passwords for all of your accounts and devices.
  • Block all remote access attempts and applications.

Read more here: How to Avoid Small Business Loan Scams

Pros and Cons of Online Business Loans

Suitable for smaller amounts and short payment termsPrepayment charges and penalties
Straightforward easy monthly installment schedulesHigh-interest rates for short-term loans
Predictable payment termsMight require collateral
Might help improve business credit scoreMay require a good initial credit score
The easy and hassle-free application processMay involve different charges

Business Line of Credit

A business line of credit is a form of business funding method that relies on revolving capital. As opposed to banks that offer sums of money in a lump-sum amount, lines of credit offer money that can be spent as and when needed by the business. If your business gets approved for $50,000 in a line of credit, you will be allowed to withdraw a designated maximum amount per withdrawal as opposed to withdrawing the entire amount. While this keeps business spending in check, it also offers another advantage – businesses pay interest only on the amount they withdraw instead of the entirety of it.

However, it is important to note that lines of credit often come with steep interest rates and the rates vary based on the applicant’s business score. While business owners with a bad score will still be eligible, they might have to pay excessively high-interest rates on their credit lines.

Some of the popular financial firms offering business lines of credit include:

  • American Express Business Blueprint
  • BlueVine
  • Wells Fargo
  • OnDeck

Pros and Cons of Business Credit Lines

Pay interest only on the amount withdrawnCarries high risk if the borrower is unable to repay the amount
Applicants with bad credit scores are eligibleRequires a personal guarantee
Revolving credit systemMight need personal and business credit scores
Helps limit spending as opposed to lump-sum loansHigh-interest rates
Can help with short-term expensesLarge credit lines require collateral

Business Credit Cards

Among the most flexible options for business financing are credit cards. The rotational concept of finance allows businesses to utilize only as much as they require, allowing business owners the freedom to only pay for what they use.

As opposed to credit cards for personal use, business credit cards are meant for business purposes. These are offered to firms of all sizes, making them a good option for small business owners. Apart from providing quick access to funds, business credit cards can also be used to improve your firm’s credit ratings. They’re easier to apply to and be approved for compared to conventional bank loans. However, business credit cards do come with higher interest rates and a greater degree of risk.

These options are another form of revolving credit and business owners can use the credit card for amounts they require so long as it falls within the credit limit. More recently, a few business credit card firms have begun offering 0% annual percentage rates of interest. However, most firms will offer a rate that lies between 12% and 20% APR instead.

Some of the best-known business credit card providers include:

  • American Express
  • Wells Fargo
  • Chase Bank
  • Amazon Business
  • US Bank

Pros and Cons of a Business Credit Card

Better control over business expensesRequires personal guarantees
Straightforward application termsHigh-interest rates
Special benefits and perks from the providerLow on consumer protection benefits
Improves business credit scoreNon-payment can seriously impact the credit score
Flexible payment termsExpensive annual fees

Accounts Receivable Factoring

Invoice factoring or accounts receivable factoring is among the most business-friendly financing methods for small business owners. Some factoring companies offer dedicated accounts receivable financing for a variety of industries to ensure you receive the money your business needs. Unlike conventional funding methods, factoring involves selling your outstanding invoices to a factoring company to receive a cash advance on your receivables. Businesses can receive anywhere from 70% to 90% of the total invoice amounts.

This form of financing is especially useful for businesses that rely on fulfillment of invoices from their clients to keep operations running, and when there’s a considerable waiting period for payments to come in.

Factoring is quick and straightforward. Once you factor in your invoices, the factoring company will collect them on your behalf. This process also allows you to get quick access to funds at either manageable or no interest rates.

Pros and Cons of Invoice Factoring

Quick access to fundsPotentially high factoring fees
Easy application processCustomer relationship concerns
Applicants with bad credit scores are free to applyA slight reduction in overall profit
No collateralSolves only cash flow challenges
Rapid processing timesLoss of the ability to collect invoices internally

Business Microloans

This mode of financing allows businesses to apply for funding of up to $50,000. However, this number can vary, and some loan amounts can be higher. Microloans are especially useful for small businesses and entrepreneurs that have short-term expenses to cover. These loans are suitable if you’re finding it difficult to get access to credit sources, and if your requirements are rather small amounts. Microloans are great options for startups and other businesses that want short-term financing options.

The concept is similar to a conventional loan, where a lumpsum amount is offered to the borrower and they make regular payments either in the form of monthly installments or over a decided period. Common repayment periods range from 3 to 6 years, though some lenders might offer longer repayment terms. Microloans are often offered through cooperatives and community organizations. However, other financial institutions have also begun offering these business funding solutions in recent years. Some of the notable institutions offering microloans include

  • SBA Micro Loan Program
  • USDA FSA Microloans
  • Kiva US
  • Grameen America
  • CDC Small Business Finance Corp.

Pros and Cons of Business Microloans

Low-interest ratesRestrictive clauses and loan purposes
Little to no collateralSmall loan amounts
Quick FinancingPotential credit score damage on nonpayment
Short loan termsNo moratorium periods

Merchant Cash Advance

Merchant cash advances are a credit card transaction-based financing option that is very useful for businesses that process a large number of these transactions. This option is among the most unique and versatile forms of financial assistance. Businesses borrow an advance sum from future credit card transactions at their firm. For example, if your business processes around $100,000 in credit card sales, you might be able to borrow 20% of the amount, i.e. $20,000, in advance from a merchant cash advance provider. Your business can then settle for a stipulated repayment period spread over several months, where the provider takes out a percentage of your monthly credit card sales as repayment.

Merchant cash advances are often short-term business funding solutions that have repayment periods only going up to 12 months. This form of financing is a new business funding method, gaining momentum only in recent decades. Lastly, not only is a merchant cash advance an excellent option for up-and-coming businesses, but it is also a preferred option for investors looking for a transparent and flexible opportunity in the financing industry. FundKite has experienced underwriters that guide all applicants through the entire process. FundKite offers the most attractive merchant cash advance terms and a business-centric approach for businesses that seek easy financing solutions.

Pros and Cons of Merchant Cash Advance

Quick and easy fundingHigher fees when compared to other methods
No fixed repayment amount, all figures are in percentagesOnly for short-term loans that are to be cash flow solutions
Available to businesses with poor credit scoresRepayments might have APRs
Straightforward application processMight not have any impact on credit scores if you’re looking to improve your ratings

Alternative Funding Methods for Small Businesses

Small businesses can avail of financial assistance from other methods as well. These alternative forms of small business funding are varied and their relevance might differ based on the type of firm you operate. Some of the most common alternative funding strategies are mentioned below:

Crowdfunding for Businesses

Crowdfunding is best suited for entrepreneurs and startups that have already generated a solid business concept and idea. Small business owners have increasingly taken to crowdfunding as a potential source of much-needed capital for their ambitions.

The global crowdfunding market is expected to grow at a CAGR of over 16% until 2030. Crowdfunding allows customers of the business to pledge some money in exchange for rewards or perks. The greater the amount pledged, the bigger the reward. Most businesses often rely on popular crowdfunding platforms like Kickstarter to get their campaign off the ground.

Crowdfunding allows businesses to raise money without accruing too many liabilities. However, it isn’t without its risks and requires businesses to pay back their customers with perks or discounts. Businesses will also have to pay a fee to the crowdfunding platform hosting the campaign. Structuring and marketing the campaign is equally important, and businesses must have a clear plan for utilizing the crowdsourced money and bringing in returns to ensure the business remains profitable enough to provide the promised benefits to its many investors.

Angel Investor Funding

An angel investor is an individual who provides financial support to up-and-coming businesses in exchange for an equity stake in the company. Raising business funding through angel investors will involve convincing these individuals of your business’ capabilities along with market potential.

Angel investors are often approached when a business is looking to get started or when it’s traversing a rough patch and requires much-needed fund injection. Most angel investors usually make their offers in the initial stages of the company. These individuals often utilize their own money as opposed to pooled funds to provide small business owners with capital for their businesses.

Platforms like AngelList, Seed Invest, and Gust are popular among small business owners looking to find potential angel investors for their businesses.

Peer-to-peer Lending for Businesses

Peer-to-peer lending or P2P lending is a modern form of lending that’s carried out between two individuals. Essentially, this form of funding is a form of an online loan. As opposed to a financial institution, a simple website allows the lender to connect to the borrower and offer a loan to them.

The website has regulations that set interest rates and terms based on the applicant’s credit history and risk rating. Disbursement of the amount and repayment is often handled by the website as well. While the terms are standardized on P2P platforms, lenders and borrowers can also haggle on the rates.

Websites like Prosper Marketplace, Lending Club, Upstart, and Funding Circle are popular choices for small businesses looking for P2P lending choices.

Venture Capitalist Funding

Venture capitalists are private equity investors that offer funding to small businesses in exchange for an equity stake in the company. While this might sound similar to an angel investor, it’s important to note that venture capitalists often operate in partnerships by forming a venture capital fund they use to invest in companies. On the other hand, angel investors often function alone and use their own money.

Venture capitalists look at a company’s projections, business plans, market size, and growth potential before investing. These individuals look for highly promising firms so that they can cash out with a significant profit on their investment. Venture capitalists will often offer advice and much-needed guidance on how to grow the small business to ensure all parties involved witness growth and profit. The venture capital market reached nearly $234 billion in the previous year and is only set to grow further.

Some of the top venture capital firms today include Sequoia Capital, Accel, Industry Ventures, and Greylock.

Grants for Businesses

Grants are a type of business funding that does not involve any liability. These are offered by large organizations and institutions to small business owners looking to get themselves established in the market. This includes the federal and state governments, alongside large corporations.

Grants are especially beneficial because they are not loans and the business is not expected to pay them back. All grants have qualification criteria, and many are often highly selective. Selection often depends on the business’ potential, performance, and overall prospects.

Grants are competitive and several businesses apply for major grants, looking to get their lucky break. It is important to note, however, that grants do come with conditions on what the money can be used for. Watching out for these conditions is key for approved business owners. The federal and state governments have numerous grant opportunities that you can look into, whereas privately funded grants include the National Association for the Self-Employed, the FedEx Small Business Grant, and the Visa Everywhere Initiative.

Common Business Funding Challenges: How to Overcome Them

As a small business owner, you have an abundance of options when it comes to funding. However, you might still have to navigate several challenges when you’re seeking financial assistance. Some of the common difficulties and risks you may face are listed below:

Insufficient Business Experience

Many small businesses are often unable to gain financial assistance due to insufficient time in the business. This is a common challenge and prevents these firms from applying for funding from banks and other popular financial institutions. Most financing firms have a minimum business experience clause in their eligibility criteria to minimize risk. If you have just started operating your business and don’t have efficient experience yet,  alternative funding options like crowdfunding, angel investors, and business grants can help you find financial support.

Lack of Collateral

Several businesses function on a model that limits their ability to own collateral. This effectively limits their business funding options. Several service-based small businesses face this issue and are unable to avail of loans and other forms of funding that require collateral. A solution to this problem would be to apply to funding methods like invoice factoring or merchant cash advances as they require no collateral in exchange for financial assistance.

Unpredictable Revenue

Businesses that witness seasonal rises and drops in sales might have large variability in their revenue statements. This unpredictability often deters investors and loan providers from offering business funding solutions to these businesses. While these fluctuations are common, funding firms are still likely to pick less risky applicants. If your business encounters these kinds of hardships, then applying funding methods like credit lines, grants, angel investors, and invoice factoring might be able to mitigate this challenge.

Poor Business and Personal Credit Score

A number of small businesses are denied some amount of business funding due to unfavorable business credit scores. Moreover, a bad business or personal credit score can spell trouble as not only does it reduce the likelihood of being approved, but it also increases the rates of interest on any loans that you do qualify for.

Look to improve your scores by applying to business credit cards and other options that have an impact on your current credit rating. Many a time, businesses might also be rejected for having little to no credit history. In these cases, taking on some debt only to pay it back on time will be beneficial in helping you establish a positive credit score.

Lack of a Business Bank Account

A business account is among the most crucial components when applying for business credit and funding. Many small business owners make do with their own personal accounts, however, this often shuts them out of potential opportunities to apply for business funding solutions. Most regular funding companies require between three and six months of your business account’s statements to consider your eligibility. If you do not have a business bank account, make sure you apply for one. If you run a sole proprietorship, consider registering your firm as a limited liability company to apply for a business bank account.

How to Manage Business Funds Effectively

Cash flow management of your business is becoming a top priority when you’re approved for a business loan or funding program. Most businesses are disposed to overspend when there’s an increased availability of funds. Below are a few tips to manage business funding responsibly:

List Your Business Priorities

As a business owner, you must know what takes precedence at your firm. Decide on the areas you intend to spend money on while ensuring you retain the most important business concerns at the top of the list. Jotting down these priorities will allow you to draw up a detailed spending plan for your business.

Prepare a Spending Plan

Ensure you know the exact amount you will receive from the financier so that you can draw up an effective spending strategy for the amount. Prepare a detailed draft of the potential expenses down to the last cent to ensure you have a granular plan at hand. Also, list the purpose for spending the allocated money, and retain some amount of the funding money for emergency expenses.

Create a Repayment Strategy

Since most business finance solutions are to be repaid over time, creating a repayment strategy will be crucial for your business to manage cash flow efficiently. Repayment schedules must be updated on your firm’s calendars and payments must be made automatically to avoid missing deadlines.

Track Your Credit Score

Many businesses take on debt to establish a credit history and to improve their firm’s credit score. Keep track of this metric so you know that your firm’s credit rating remains positive throughout the repayment process.

Avoid New Loans

Ensure that you utilize the funding money to its maximum potential and are making sufficient returns on the debt you took out. Taking out additional loans to either pay off existing debt or to fund other expenses is not recommended. Ensure all loans are paid for before exploring alternative funding options for your business.