Are you seeking financing to operate or expand your small business and wondering where to turn to for a small business loan? As a small business owner, you now have more financing options than ever before—thanks to a number of creative web-based businesses offering new alternatives such as crowdfunding and peer-to-peer lending. Banks? They are just the beginning.
Here’s our updated guide to 10 business financing options you should know about as you seek funding for your small business.
And for those who want to dive deeper, we’ve got you covered with links to our detailed and comprehensive guides to each type of business funding on our list.
1. Bank loans and SBA Loans
The first type of business financing that usually comes to mind when you hear the term ‘small business loan’ is a traditional bank loan. Bank loans come in many forms (short-term, long-term) and can be used for a wide variety of purposes (working capital, expansion, equipment purchasing, commercial real estate). Sometimes these loans are secured with collateral; sometimes not. The most important things to know about small business bank loans? You are going to need to demonstrate stability (in the form of revenue, for example).
As for the best place to get a bank loan, well, that depends on your business needs—each bank has its own set of offerings and requirements. Regardless of where you go for a loan though, you are likely to encounter the option to apply for a Small Business Administration (SBA) loan. A popular subtype of bank loans, a large portion of each SBA loan is guaranteed by the SBA, a government agency that provides information and resources to entrepreneurs to help them develop strong businesses.
This SBA guarantee makes the idea of lending to small business owners more appealing to some banks, but the loans can be difficult to get because of the stringent requirements (in order to qualify for an SBA loan, you need to have a decent credit score, measurable cash flow and a solid business plan, among other qualifications). Despite that, SBA loans are attractive to many small business owners because they offer a lot of options and flexibility in terms of how the funds can be used. What’s more, the SBA also offers a variety of loan options for minority business owners and those that operate in underserved markets.
Considering an SBA Loan and wondering whether it is the right type of business funding for you? Get all the specifics in our super-detailed Guide to Understanding SBA Loans.
2. Credit card financing
If you need to purchase equipment or materials for your small business, credit cards—or, in a crunch, credit card cash advances—are easily-accessible options that save you the trouble of applying for some other type of small business loan. Credit card financing, however, can be risky and you should strongly consider only using it for short-term needs. If you go this route, consider paying off the card in time to avoid hefty finance charges and look for cards that offer cash back rewards or airline miles.
Using credit cards for business expenses? Be sure to avoid these Top 3 Common Business Credit Card Mistakes.
3. Business line of credit
A business line of credit gives you access to a certain amount of capital to use as needed, typically based on your business’s cash flow and credit score (a business line of credit functions more like a credit card than a small business loan, but they are not one in the same). You don’t have to tap into the line of credit until you actually need the funds, and you won’t accrue interest on funds you aren’t accessing either. Once you borrow from it, though, you will need to start making payments on the amount you used right away. As you pay back the actual funds borrowed, your line of credit will gradually replenish (meaning you once again have access to the money).
Learn all about lines of credit in our in-depth Guide to Business Lines of Credit.
4. Equipment financing
Some lending companies specialize in financing the purchase of business equipment. Another option? Ask the company you’re buying the equipment about financing—many offer their own financing programs.]
If you’re considering equipment loans or financing for your business, check out our comprehensive Guide to Equipment Loans & Financing.
5. Merchant Cash Advance (MCA)
In this type of financing you get a lump sum advanced in anticipation of future credit card sales. Daily payments are made automatically by ACH transfer, and are typically based on a percentage of that day’s credit card transactions—so on a day when you make less, you pay less.
Want to learn more about MCAs? Check out our comparison of MCAs with other popular SMB funding options.
6. Invoice Factoring
Factoring is a system where you sell your outstanding invoices to a third party ‘factoring’ company at a discount (typically, around 80 percent of the value of the invoices). The factoring company then takes over the job of collecting payment on those outstanding invoices from customers on your behalf (they return the 80 percent to you and keep the rest as their fee). Factoring can be helpful to small businesses that operate on a net 30 to net 90 payment system because it allows the businesses to get paid immediately rather than waiting until payment is officially due. The main downside to invoice factoring? You don’t receive your full payment. However, it can help alleviate cash flow concerns in some cases.
Learn more here in our comprehensive guide to invoice factoring, and how it’s different from invoice financing.
7. Invoice Financing
This is one of the small business financing solutions we offer at Fundbox. Similar to factoring, invoice financing can help improve your cash flow by allowing you to borrow against your outstanding invoices so you don’t have to wait to get paid on a product you already delivered or a service you already provided. However, unlike factoring solutions, invoice financing through Fundbox can enable you to access 100 percent of your invoice value, up to your approved credit limit. Plus, you maintain your relationship with your customer.
Learn more about invoice financing.
8. Purchase order financing
With purchase order financing, a lender provides the funds to buy inventory or materials to a small business that doesn’t have the cash on hand to fulfill a large order. After the order ships, the lender collects payment from the customer, subtracts fees and transfers the balance of the invoice back to the business at hand. Be aware that purchase order loans don’t apply to would-be orders—you need to have actual orders on the books in order to qualify.
Curious about PO financing? Our Guide to PO Financing covers all the important details.
9. Peer-to-peer loans
Peer-to-peer lending sites are online marketplaces where businesses and individuals can obtain loans from individual investors. The online marketplace manages the transaction, serving as a kind of escrow service, and takes a fee in return. This can be a good way to get a small, short-term loan if other methods haven’t worked.
A variation of peer-to-peer lending, crowdfunding sites allow businesses to pitch their ideas (often new inventions or products) and seek financing from interested individuals. The difference is that the money isn’t a loan, but a payment in return for something from your business, most often in the form of equity in your company to these early investors, or even something as simple as early access to your product or service. If your idea sparks the public’s interest, it’s possible (though not probable) to raise hundreds of thousands of dollars through crowdfunding. And even though it sounds like a long shot, it could be an option for some small businesses to consider because the crowdfunding market is expected to grow nearly $200 billion by 2025.
The downside? If for some reason you are unable to deliver on your promise to your investors, they are going to be very disappointed.