What Type of Funding is Available for Small Businesses?

One of the most obvious hurdles for starting a small business is how you will fund it. Regardless of what you have to offer, your business can use funds for basic operations, marketing, salaries, and more.

Funding options for small businesses include:

  • Bank loans
  • Credit union financing
  • Online loans
  • SBA loans
  • Small business grants
  • Crowdfunding and investors

Not every option is best for every business. You should do your research to learn what you need for each type of funding, what to expect from the process, and how it can help your small business get off the ground. Keep reading to learn the basics of each type and where you can find them.

Bank Loans

What Type of Funding is Available for Small Businesses?

The most obvious choice for small business funding is a bank loan, but this option is best for businesses that have collateral and strong credit. 

While you can pursue a bank loan without this background, you are unlikely to receive a loan. Most banks are equipped to point you in a better direction, and they can be a great launching off point for all businesses.

There are several types of lending options available with traditional banks, including:

  • Term loans
  • Business lines of credit
  • Equipment loans
  • Businesses credit cards

Bank loans usually have lower interest rates and competitive terms, but they are hard to qualify for. In most cases, you cannot secure a loan with poor credit, and banks are unlikely to take a chance without established revenue. Businesses younger than two years may have issues.

Start by contacting your personal bank to see if they offer small business loans. They are more likely than a foreign bank to work with you, and you can keep all your finances in the same space.

If this is not an option, look to local banks for assistance. These financial institutions appreciate opportunities to develop the economy in their community, and they may be more inclined than a larger name to fund your business venture.

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Credit Union Financing

Credit unions are similar to banks, and they also offer options like term loans or business credit cards, but there are a few key differences to note.

Unlike banks, credit unions have nearly doubled their small business funding in recent years, and you might have a better chance with funding through a credit union than a bank.

Most credit unions offer a more personal experience, and some can offer better rates and loans than a traditional bank can.

Credit unions almost always require you to be a member to request funding, but you can sometimes do this at the same time. You can use MyCreditUnion.gov to browse options in your area, but you should also look for credit unions linked to your employer or organizations you are a part of.

In certain cases, credit unions can help you get your funds quicker than a bank. They have faster approval times and work with underwriters instead of committees, so you are not waiting days or even weeks to get word back on the process.

While credit lines offer similar loan options, they also tend to offer lower loan amounts than banks. You may not get as much funding, but you do have access to more favorable rates and lower fees.

Online Loans

Online loans cover a lot of ground, but they are generally preferred for anyone:

  • With poor credit history
  • Wanting faster funding
  • Unable to go in-person to request funding

More than half of medium or high-risk applicants have better success with online lenders, and most applications are decided within 24 hours. You can also find plenty of useful option, including:

  • Term loans
  • Lines of credit
  • Invoice financing

Online lenders are more convenient, but they come at a higher cost. Some annual percentage rates climb up to 100 percent, but you can easily look around online for options that work for you. There are plenty of lenders available, but make sure you verify their credibility before filling out any sensitive information.

Many banks allow you to apply online, but other options for applicants with strong credentials include Credibility Capital and Funding Circle. They can offer the rates you would get from a bank or credit union with the convenience of applying online.

If you have shaky credit, there are still trusted options out there. Many online lenders will offer you a small business loan, but BlueVine, OnDeck, and FundBox are preferred for these situations.

SBA Loans

What Type of Funding is Available for Small Businesses?

The U.S. Small Business Administration has a solution for businesses that would benefit from bank loans but do not quite meet the criteria. While the SBA does not offer the business an alternative loan opportunity, it does offer lenders a federal guarantee on your loan.

This guarantee makes it far less risky for a bank to lend you funds, and they can show more leniency with criteria.

An SBA loan may also have a more favorable rate than you would achieve otherwise, and it is worth looking into even if you qualify for bank financing.

There are many different SBA loan options. The SBA 7(a) loan is the most popular and versatile, and it is available in amounts up to $5 million. SBA 504 loans can be used for fixed assets, such as real estate, while SBA microloans can cover funding gaps.

You still need to prove business viability, included:

  • Good credit (FICO 690+)
  • Strong annual revenue
  • 2+ years of operation

Because SBA loans are valuable, you should expect plenty of competition. There are countless forms to fill out and document requests to fulfill. Most banks and credit unions offer SBA loans, but you can also look to the SBA website to match with appropriate lenders.

Small Business Grants

A small business grant differs from lending because the funds do not need to be repaid. They are a worry-free way to advance your business, but grants are more difficult to obtain.

You can find grant opportunities from:

  • Non-profits
  • Government agencies
  • Corporations
  • Business owners
  • Industry leaders

Grants are fantastic for startups or businesses that do not qualify for other types of funding, especially if you have a compelling product, service, or backstory.

It takes a lot of research and effort to complete the grant process, and you may not be able to use it to apply for other grants or funding opportunities. On the other hand, the effort is invaluable if the grant is awarded to your business.

The most well-known database for grants is grants.gov. The Local Economic Development Administration branch of your Small Business Development Center is another popular option for assistance finding the right opportunities for your business.

Keep in mind that grant writers are available to create solid and effective proposals for you, but using one is another cost for your small business.

Crowdfunding and Investors 

Another way to fund your small business without acquiring debt is through crowdfunding and obtaining investors.

Crowdfunding lets you trade potential products or services in exchange for financial contributions to the start of your business. You may or may not need to have an established business, but you need to be able to attract attention with your proposition.

Popular crowdfunding platforms include:

Another way to trade business for funding is through investors. Some will be fine with overseeing your business as it grows, while others may request equity in exchange for their investment.

You can find equity crowdfunding opportunities through:

Other places to find investors include:

  • Friends
  • Family
  • Businesses in your community

Crowdfunding and investments are a great option for promising small businesses, but you should have an invaluable product or service to offer and a drive to match. When you bring others into your business there is a larger obligation to perform, and failing to do so can ruin your credibility in the long run.

Any agreements you enter are also legally binding, and you may not be comfortable sharing your business in a longer term.

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Frequently Asked Questions

Can you start a small business without money?

How Much Insurance Do You Need For Your Accounting and Payroll Business?

You can start a small business without money, but this is a much steeper hill to climb. Most businesses still require funds for marketing, bills, licensing, and more. Without proper funding you risk foregoing legal requirements or creating subpar products. Even a small loan can make a world of difference, but it should not stop you from following your dreams.

Does personal credit affect small business funding?

Personal credit can affect what is available to fund your small business, especially if you do not have business credit. If your personal credit is poor or non-existent you can supplement with references and offer collateral, but you should expect it to impact your opportunities.

What do I need to make a small business funding request?

Most lenders and investors require a well-developed business plan to accompany any funding requests you make. These outline your business in detail, as well as how much money you need, how you intend to use it, and how you intend to pay it back.

Please note that the contents of this blog are for informational and entertainment purposes only and should not be construed as legal advice. Any action taken based on the information provided in this blog is solely at your own risk. Additionally, all images used in this blog are generated under the CC0 license of Creative Commons, which means they are free to use for any purpose without attribution.