Are you seeking financing to operate or expand your small business? There are more options for small business financing than ever before, thanks to a number of creative web-based businesses offering new alternatives such as crowdfunding and peer-to-peer lending.
Here’s our updated guide to 10 business financing options that you should know when considering the best way to grow your business.
Want to dive deeper? We’ve got you covered, with links to our best, most in-depth guides to each type of funding.
1. Bank loans and SBA Loans
The first type of financing most of us think of—traditional bank loans—are available in many forms (short-term, long-term) and for a wide variety of purposes (working capital, expansion, equipment purchasing, commercial real estate).
Small Business Administration (SBA) loans are a popular subtype of bank loans. These loans are made through banks, but the SBA guarantees a large portion of the loan, which makes banks more likely to lend to small business owners than they otherwise might be. SBA loans are attractive to many small business owners, and can be very difficult to get.
- Considering an SBA Loan? Be prepared with our super-detailed Guide to Understanding SBA Loans.
2. Credit card financing
You can often finance purchases of equipment or materials using credit cards, or even use credit card cash advances in a cash crunch. However, credit card financing can be risky, and should only be used for short-term needs. Make sure you can pay off the card in time to avoid hefty finance charges.
- Using credit cards for business expenses? Just be sure to avoid these Top 3 Common Business Credit Card Mistakes.
3. Business line of credit
Similar to a home equity line of credit, a business line of credit gives you access to a certain amount of capital which you can use as needed. You don’t have to tap into the line of credit until you actually need it. Once you borrow from it, you start paying it back, and as you make payments (with interest) your line of credit is gradually replenished.
- 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. Or the company you’re buying the equipment may offer its own financing program.
- 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 lets you turn your invoices into quick cash, which can be helpful if your customers typically pay in 30 to 90 days. The factoring company buys your accounts receivable invoices at a discount and then pays you immediately for a percentage of the invoices (typically about 80 to 90 percent). Once the factoring company collects on the invoices, they give you the balance of the invoice amount, minus a flat fee.
- 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 solutions that we offer at Fundbox. It’s similar, in some ways, to factoring, but differs in other important aspects. Similar to factoring, Fundbox advances 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. But, unlike with factoring solutions, Fundbox advances 100% of your invoice value. Plus, you maintain your relationship with your customer.
- Learn more about how you could get invoice financing with Fundbox.
8. Purchase order financing
Similar to factoring, in this type of financing you are advanced cash against the promise of future orders. Purchase order financing is often used to buy inventory or materials to fulfill large orders when you don’t have immediate cash on hand. However, you’ll need to have a firm order in hand to make it work.
- Curious about PO financing? Start with our Guide to PO Financing.
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 for you.
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 donation in return for something from your business, such 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.