Financing Options for Small Businesses

Business financing is money that helps you start, run or grow your business. You can get business financing by taking on debt, like small-business loans from traditional banks and online alternative lenders, or by offering investors equity. The right financing for your business will depend on factors such as: why you need capital, how fast you need it and your business’s qualifications.

To help you find a good fit, here’s an overview of the most common financing options for small businesses — and where to get them.

Financing for small businesses usually involves some form of debt; however, there are zero-debt options as well. With debt-based financing, you’ll have to pay back the funds you borrow over time, usually with interest. Zero-debt financing can come in the form of small-business grants or gifts from friends and family, or as equity financing, where you give investors equity or ownership in your company in exchange for their financial support.

Bank business loans typically have low interest rates and competitive terms, but can be hard to qualify for. You’ll likely need strong personal credit, established business revenue and two or more years in operation to access bank financing.

Even if your business doesn’t have a strong enough track record or enough assets as collateral to qualify for a bank loan, talking to someone at a traditional bank can help you figure out what application documents you need and what your best options may be.

The U.S. Small Business Administration offers its lenders, mostly traditional banks, a federal guarantee on your loan. This makes it less risky for banks to lend you the capital you need to be successful. In guaranteeing the loans, the SBA also connects you with favorable rates offered by traditional lenders.

There are multiple types of SBA loans available, including SBA 7(a) loans, SBA 504 loans and SBA microloans. The most popular of the SBA loan programs, 7(a) loans can be used for a wide variety of purposes and are available in amounts up to $5 million.

Although SBA loans can be easier to access compared to bank loans, you’ll still generally need to meet top criteria — a good credit score (FICO 690 and up), strong annual revenue and at least two years in business — to qualify. Plus, the application process isn’t easy; you may find yourself trapped under a heap of documents while you work through the appropriate forms.

With traditional banks limiting access to capital, online lenders have seen an increase in popularity, especially among business owners who are facing credit challenges. In 2022, 37% of medium- or high-risk credit applicants applied to online lenders and 14% applied to nonbank financial companies, according to the annual credit survey from the Federal Reserve^[0].

Online lenders also offer fast cash, with several of them able to approve and fund applications within 24 hours. These lenders offer a variety of small-business financing options, including term loans, lines of credit and invoice financing. The cost of borrowing, however, is generally higher; annual percentage rates can range anywhere from 10% to 79%.

Like banks, credit unions offer favorable rates and loans backed by the SBA. Unlike banks, credit unions have increased their small-business lending. According to Federal Reserve data released in October 2022, lending by credit unions to small businesses increased by over 50% from 2017 to 2021^[0].

In addition to SBA loans, credit unions can offer a range of funding options, including lines of credit, traditional term loans and business credit cards.

You’ll likely have to be a member to qualify for financing. But the co-op nature of credit unions often ties them to the community, so you may also reap the benefits of more personal relationships and name recognition.

If you want to avoid taking out a business loan, or simply can’t qualify for any debt financing options, there are several ways to fund your business that don’t require debt.

• Small-business grants. Small-business grants offer a way for business owners to get money that can help them grow their business, without having to worry about paying back the funds. Typically offered through nonprofits, government agencies and corporations, some grants focus on specific types of business owners or particular industries. Small-business grants can be a great funding option for startups, as well as for businesses that can’t qualify for traditional debt financing. The downside to free capital is that everybody wants it. It will take a lot of work to find and apply for grants, but time spent searching for free money opportunities could pay off in the long run.

• Equity financing. Equity financing is any form of funding that you receive in exchange for equity, or ownership in your business. Crowdfunding, venture capital, angel investors and sometimes friends and family are sources of equity financing. Although the popularity of these services has increased in recent years, there are caveats. For one, your product or company has to be intriguing enough to catch the eye of multiple investors. In the case of equity crowdfunding, where investors gain a stake in the company, there are strict securities laws and rules to follow for investors and entrepreneurs alike. Equity financing can be a worthwhile option for businesses just starting out, but it’s not a great solution for long-term financing.

Start by contacting a bank with which you have an existing relationship. Big-name banks, like Chase, Bank of America and Wells Fargo, all offer a variety of business loan options.

If you don’t have an existing relationship with a large bank or one that offers business financing, you can search for local banks in your community.

These institutions, in particular, are a great resource for small-business loans because they often have a strong interest in economic development in the community. According to the Federal Reserve’s 2022 Small Business Credit Survey, business loan applicants report higher approval rates with smaller banks than big-name institutions, as well as greater overall satisfaction compared to large banks and online lenders.

Most SBA loans are issued by banks, credit unions and other financial institutions. Similar to bank loans, you can start your search for an SBA loan with a lender you’ve previously worked with, or a local bank in your community. National banks like Chase, Wells Fargo and Bank of America issue SBA loans as well.

The SBA website also offers a lender match tool to help connect you with financial institutions in your area.

There are a variety of small-business lenders out there that offer online loans — and the best option for your business will depend on the type of financing you need and what you can qualify for.

For example, if your business has strong qualifications but prefers an expedited process, Funding Circle is a great option for traditional term loans. For businesses that want a flexible line of credit, Bluevine, OnDeck and Fundbox each offer competitive products.

Since credit unions are often community-based, you’ll want to find a local option. You can use MyCreditUnion.gov to browse credit unions in your area.

Some credit unions also offer membership based on your employer or organizations you may be affiliated with.

For example, Navy Federal Credit Union is a national credit union that offers membership to members of the U.S. armed forces, Department of Defense and National Guard as well as their families. Navy Federal members can apply for a variety of business loan types.

Small-business grants are offered by federal and state agencies, as well as private corporations. In addition to Grants.gov, one of the most well-known online databases for grants distributed by government agencies, your local Economic Development Administration branch or Small Business Development Center may also help you find grant programs and similar financing opportunities.

For grant options focused on different types of business owners, check out the following lists:

Equity financing can be found through a number of online platforms. Kickstarter, GoFundMe and Indiegogo are good choices for rewards-based crowdfunding. For equity crowdfunding, platforms like Republic, CircleUp and Fundable are all viable options. If you’re looking for angel investors, sites like Angel Capital Association and AngelList can connect you with accredited angel investors.

How you should finance your business depends on what you want to accomplish with that funding, as well as what you can qualify for. You may have a tough time getting a business loan before you’ve been in operation for at least a year, for instance.

Here’s how to figure out what business financing options might be best for you.

Rosalie Murphy contributed to this article.