Starting and growing a small business is filled with many challenges and exciting opportunities. One fundamental aspect in the process is securing the right financing to fuel growth, manage expenses, and navigate economic fluctuations.
Financing is almost always a concern for new companies. But the good news is that there are plenty of financing options available to launch a small business (or fund a pre-existing one).
Small business financing includes various debt and equity based financing options like loans, credit cards, grants, investments, and equity that help launch, run, and grow small businesses.
Banks use core banking software to manage the funds and transactions involved in small business financing with their customers. The software helps banks provide effective services and comply with regulations and laws. It also ensures a smooth customer experience by offering portals or online accounts for easy customer access.
Five financing options for small businesses
Several financing options are available for small business owners to opt from, each with varying qualifications and requirements. Below are some of the most common financing options for small businesses.
1. Small business loans
Business loans finance businesses through lump-sum payments or credit lines. In return, the business owner pays off the money they borrowed over time, plus interest and fees. Many small business loan options are available for business owners who meet the application requirements. Let’s explore some of them.
SBA loans
The U.S. Small Business Administration (SBA) offers its lender federal guarantee on loans, making it less risky for banks to lend business owners capital. SBA loans make it easier for small businesses to access the funding they need with additional benefits, including competitive terms, ongoing education, lower down payments, and no collateral for certain loans.
Lenders have unique eligibility requirements, and in general, according to the SBA, businesses must also:
- Be for-profit
- Conduct business in the U.S.
- Be creditworthy
- Exhaust financing options, or in other words, have attempted to secure the requested loan on reasonable terms to no avail.
Many types of SBA loans are available. The 7(a) loan program is the SBA’s primary program for offering financial assistance to small businesses. The 7(a) loan program includes:
- Standard 7(a) with loan amounts ranging from $500,001 to $5 million
- 7(a) Small loans at a maximum amount of $500,000
- SBA Express loans at a maximum amount of $500,000
- Export Express loans at a maximum amount of $500,000
- Export Working Capital loans at a maximum amount of $5 million
- International Trade loans at a maximum amount of $5 million
Microloan
SBA funding intermediaries provide microloans of up to $50,000. Microloans are designed to help small businesses and some not-for-profit childcare centers. According to the SBA, the average microloan is $13,000. Businesses can use the funding for working capital, inventory, supplies, furniture, machinery, and other critical business equipment.
Team loan
A term loan is a common type of small business financing that the borrower repays over a designated period. Small business owners receive a lump sum of cash and make monthly payments to repay the funding, typically at a fixed amount plus interest.
Term loans are among the most common types of small business funding because businesses tend to use them for various, often long-term, investments. Those wanting to apply for term loans must have a good grasp of their annual revenue and personal credit score, as these may limit the types of term loans they can access.
Working capital loan
While term loans are generally used for long-term investments and business needs, a working capital loan is a type of short-term financing designed to cover short-term needs. These loans provide business owners with funding to finance ongoing business operations while meeting short-term obligations that could impact output (e.g., payroll, bills, and purchasing inventory).
Due to their short-term design, repayment periods for working capital loans range from a few months to a few years, depending on the loan structure and funding amount. Consequently, due to their shorter repayment periods, it’s not uncommon for working capital loans to have higher interest rates.
Business line of credit
A business line of credit is ideal for small business owners who need to borrow money but aren’t sure how much money they will need upfront. A business line of credit can range anywhere from $2,000 to upwards of $250,000. The actual borrowing amount, however, depends on credit history and other qualifying information.
With a business line of credit, a business owner only owes interest on the amount borrowed, as opposed to business term loans, where the borrower must pay the interest on the entire loan amount. Lenders have varying terms for using a line of credit, so do your due diligence and understand their requirements.
Secured vs. unsecured business lines of credit
There are secured and unsecured business lines of credit. A secured line of credit requires collateral and may have lower average rates. Because of the collateral provided, secured lines of credit reduce lender risk, which means you can obtain higher limits and lower rates. An unsecured line of credit does not require collateral, so lender risk is higher, and credit limits are typically capped.
2. Small business grants
Some nonprofits, government agencies, and corporations offer grants to specific types of small business owners and industries, or to certain niche areas. Small business grants enable owners to acquire business growth and development funding without stressing about paying back the funds later. Grants can be an excellent option for those who can’t qualify for bank financing.
While small business grants offer the benefit of funding without payback, researching and applying for grants can take time and effort. However, depending on your business needs and resources, the investment may be worth it in the long run.
3. Business credit cards
A business credit card gives you access to revolving credit, which means your credit limit is renewed as you repay the money you borrow. Beyond the ability to access funds whenever you need and a cushion when cash flow gets tight, a business credit card has unique advantages, making it a good financing option for young companies.
Business credit cards are flexible and enable small businesses to spend what they need up to their credit limit. They also help you separate personal and business spending while allowing you to earn massive rewards.
Not only do some sign-up bonuses easily exceed $1,000 when calculated as a dollar amount, but business owners can also earn ongoing rewards in cashback, miles, or points.
4. Equity financing
Equity financing refers to any capital you receive in exchange for your business’s equity or ownership. Equity financing for small businesses is typically provided through crowdfunding, venture capitalists, investors, and sometimes personal connections, including friends and family members, depending on the company’s nature.
Before you ask for money from those in your network, draw up a business plan and prepare a pitch to show why your business is a good investment. To ensure there are no misunderstandings later, do the following:
- Ask the right people: Choose those with business experience or knowledge in your industry. Also discuss whether those individuals want a passive or active role in the company.
- Clearly define the money: Will it be a loan or a stake in your business? If the lender is a shareholder, how will the money be repaid?
- Put it into a formal agreement: If you need an attorney to draw up a contract, do so. This will ensure all sides know their expectations and responsibilities.
Obtaining equity financing more formally from investors requires appealing to capital providers, which can be challenging if your business isn’t generating revenue or does not have solid proof of market fit. Investors and venture capitalists don’t want to invest in mere ideas without evidence that the company is worthwhile to obtain partial ownership of.
5. Equipment financing
Regardless of your industry, you likely need equipment to run your business. If you’re opening a pizzeria, you need an oven. If you’re running a web development company, you certainly need computers.
Equipment financing is specific to purchasing or leasing supplies for your business. Equipment often serves as collateral for the loan, which works well if you don’t have the credit history to apply for traditional loans. You pay back the money plus interest over time as the equipment helps your company generate revenue.
Five smart ways to use small business financing
You can leverage financing options for your small business in various ways. Some of the most common needs include the following.
1. Initial startup costs
One may have a business idea but require more funding to launch it fully. Financing can cover initial setup costs such as leasing an office or a retail space, purchasing inventory, hiring employees, acquiring equipment, and setting up the foundations for the business.
The same applies to business owners starting a franchise operation under an established franchisor. Even with access to the franchisor’s resources, operational guidance, marketing materials, and training, they may need funding for retail or office spaces or other equipment necessary for launch.
2. Operational expansions and growth
Suppose a small business takes off and hits the ground running in its first few months. The owners quickly realize their team needs to grow to support future work. Small business financing can help business owners grow their teams through recruiting and hiring efforts, such as networking events, employee branding and marketing materials, and, most importantly — compensation packages for new employees.
Other operational expansions and growth plans could include investing in a new physical space (such as a new office location) or entering a new market by diversifying product lines and the investment it requires to develop those products or services. Both of these endeavors require significant upfront costs that a small business may be unable to cover independently.
3. Equipment upgrades
Small business financing is beneficial for acquiring new equipment, machinery, or software systems to support and enhance business operations. For knowledge workers, that might look like upgrading laptops, providing at-home monitors to remote workers, and upgrading physical storage options. Similarly, industrial manufacturers may need to replace outdated or broken equipment for more effective delivery.
4. Marketing and advertising
When you start a small business, you may initially create its branding materials and website to launch fast while saving costs. If you go this route, you may eventually rebrand with the partnership of an advertising agency. Branding efforts can be a hefty but worthwhile investment that may require funds. You could also fund conferences, industry events, and other marketing expenses that increase brand awareness to help your business expand and become more visible.
5. Debt consolidation and refinancing
Finally, small business financing helps many business owners consolidate high-interest loans and refinance existing loans to improve their cash flow. These options allow owners to make smarter financial moves for longer-term financial planning.
Cha-ching!
Don’t let funding hurdles prevent you from launching the small business of your dreams. Loans, grants, business lines of credit, business credit cards, and equity or equipment financing are a few of your best business funding options.
Learn how to create a business plan that attracts investors to obtain the funding you need.
Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.
