Small Business Financing

Anne Miller

Anne Miller

Senior Author

View All Posts

Anne Miller

Senior Author

View All Posts

Contents

Small Business Financing Options

There are a number of reasons you may be looking to get financing for your small business. Whether you’re planning on opening a new company, or need to invest in expanding your current operations, financing is typically the most effective way to get the capital you need. The world of modern finance has provided countless solutions to funding your business – it’s all about finding the option that is best for your situation.

Many people don’t know how to obtain financing for a small business – they’re not sure if the process is separate from the consumer credit sphere. While it is mostly a different process, you should make keeping your personal credit score in good shape a priority – lenders may use it as part of the decision-making process.

You should remain aware of a few different things if you are considering financing your business. Don’t let a lowest interest rate offer result in you not considering other financing options. There are many different things that should go into the decision-making process when financing for a small business. Depending on the industry you’re in — term times, payment dates, and fees may have a large impact on the viability of your loan. You should make sure that the type of financing you receive is perfect for your business.

Traditional Financing Options for Small Businesses

If you find that you are ineligible for a particular form of finance, don’t let it discourage you. There are many different ways that you can fund you company. You will find that many lenders have specific requirements, and it would be impossible to be eligible for every form of credit. It is important to have a broad understanding of the different sources of small business financing – it is the best way to ensure that you are sourcing the right type of funding for your business.

This portion of our guide will overview the traditional ways that businesses finance their activities, both during and at the start of operations.

Traditional Business Loan

Small Business FinancingThis is the most common form of business financing. Traditional business loans are typically provided by large lenders or banks. They provide you with a set amount of time that you have to pay back the loan (term) at a particular interest rate (APR). Most traditional business loans require collateral – many small business owners will sign over rights to the company or its assets in return for a traditional business loan. For this reason, it is considered a secured form of debt.

While having a secured loan may sound intimidating, it definitely has its benefits. Those who attain small business loans traditionally have much lower interest rates – hence their popularity. For this reason, it is recommended that you attain a traditional business loan for major purchases. In addition, this form of loan is the most common form of small business acquisition finance – those purchasing businesses for upfront capital tend to need lower interest rates than what other forms of finance can provide.

Revolving Forms of Business Finance

This is another form of traditional credit that many companies use to help finance parts of their business. Because it traditionally comes at a high interest rate, business owners often use it to fund smaller purchases. It is not advised that you use revolving credit to purchase or start a business – as the interest payments may be too hard to pay back.

Revolving credit is different from traditional loans in that it doesn’t require you to secure the debt against any form of asset. In addition, you don’t have to pay back the debt over a fixed term. Instead, you are offered a credit limit from which you can draw capital from – you don’t have to pay any interest on the money you don’t access, nor do you pay back any money you don’t use. For this reason, it is seen as a very flexible form of credit.

One of the most popular consumer versions of revolving credit is a credit card. In terms of small business, the two forms of revolving credit that are available are business credit cards and business lines of credit. An outline of each of these credit types is provided below.

Business Credit Card

Business credit cards have become increasingly popular in recent years, especially with business owners that have a number of employees. Like traditional credit cards, business credit cards are a form of revolving credit. They’re a great way to help finance ongoing costs in your business, as you don’t need to continue to reapply for credit every time you need more money.

In addition, many business owners use business credit cards to allow employees to make purchases on behalf of the business. This can greatly improve the efficiency of your business as you won’t have to constantly reimburse staff for purchases they make for the company. This is especially true for those who have a large employee base. As with all revolving forms of credit, business credit cards typically have high interest rates which make them an unaffordable form of credit for many large purchases. Another downside to business credit cards is that they typically charge high cash advance fees, meaning you won’t be able to use them for cash in your business.

Business Line of Credit

The second most popular form of revolving credit for small businesses is a business line of credit. This is similar to a credit card, but has some slight variations. With a line of credit, you don’t have a card attached to your limit, instead you have an account from which you can withdraw money or transfer people money. It is an attractive form of finance because it provides you with cash for unrestricted use.

Unlike business credit cards, business lines of credit give you cheap access to cash. But unfortunately, you will not be able to have a card facility to make purchases with, which can be inconvenient at times.

Alternative Financing for Small Businesses

If you feel that you don’t have substantial of enough credit to apply for traditional forms of finance, you may want to consider an alternative form of finance to help you meet your funding needs. This is especially true for people who may have a bad credit history, or don’t have enough assets to sign over as collateral. We’ve outlined the most popular forms of alternative financing for small businesses below.

Microloans

Microloans are a unique form alternative financing that are provided by various nonprofit community organizations. They provide their borrowers with a maximum of $50,000 – although the average loan is normally around $13,000. These microloans for small business are supplied to community organizations by the United States Government Small Business Association (SBA). They are given with the purpose of helping small business owners finance their operations – they typically have very low interest rates. Some community organizations will have specific eligibility requirements, so make sure to check out their information before contacting them.

401k Small Business Financing

Using your 401k to finance your small business is a moderately complicated task, but it can be a great option if you find yourself unable to use other forms of finance. Many small business owners use their 401k to finance their businesses when interest rates are too high to justify using commercial lenders.

To use your 401k to finance your business, you need to understand the correct way to do it. First, you must set up a C Corporation. You then have this C Corporation retain stock but not issue it – then you transfer your 401k into the corporation. You shape it so the assets of the 401k can be used by the C Corporation. After this you begin to issue the total stock in the corporation to a profit-sharing plan in exchange for cash. It’s a creative way to get around the normal restrictions that your 401k has.

It must be stressed that while this is an affordable way to finance your business, it is also an extremely risky one. You are potentially putting your entire retirement at risk by using your 401k to finance a business. For this reason, you should never enter a risky business environment or risky industry if you’re planning on using your 401k to finance it.

Factoring

Factoring is considered finance by many business owners, but it more of a form of funding in reality. Many people refer to factoring as invoice financing for small business. We’ve mentioned it in this article because it is a common way that people attain credit for their companies. Factoring is a unique form of funding that allows you to take advantage of your business’ invoices without actually having to take on any debt. For this reason, it is considered an attractive option by many business owners.

Instead of taking out a loan, you can sell you invoices to a factoring company in exchange for upfront capital. They will then own the rights to collecting the invoice directly from your client. If you tend to work in a business environment where you are exposed to various seasonal gaps in cash flow, this can be a great option. Businesses often use factoring if they have clients who take considerable time to pay bills. Most factoring companies will give you up to 80% of an invoice upfront, it’s an awesome way to get funding without having to take on a liability on your balance sheet. The only downside to factoring is that your clients will know you are selling forward your invoices – this could potentially have a negative impact on your image

Small Business Financing Tips

If you’re looking for some advice on how to approach small business financing, the first thing you should do is make sure that you have enough time to make the right decision. The number one mistake that new business owners make is rushing to a decision over finance. By rushing into commitments that are not suited to your business, you’re making an active mistake that could end up costing you down the line. We’ve outlined a few more tips for financing small businesses below:

  • Don’t Use Unknown Lenders – One of the biggest mistakes new business owners make is using unknown lenders. You need to make sure that the lender you are using has an online presence so you can get a good idea of their track record – you’d be surprised about how horrible an experience can be if you use the wrong financier. Hidden costs and charges can surprise you if you’re not wary.
  • Avoid Personal Liability – This isn’t always doable, but you should attempt to avoid as much personal liability as possible. Some lenders may try and get you to sign over personal assets in order to secure loans, try and find a creditor who allows you to secure purely through business assets. This is another good reason that you should attempt to have capital to put down when you sign the loan – it reduces the likelihood that you will have to sign over personal assets.
  • Monitor Your Business Credit Score – Credit scores aren’t just for personal use, your business has one too. Make sure to make payments on time and monitor your score to make sure it’s correct. One of the best ways to save money financing your small business is to have a good business credit score. This is because lenders are more likely to offer you low-interest finance options if you have a good track record of borrowing.

In addition, always compare quotes between lenders. You need to ask prospective creditors questions upfront – if something seems off, make sure to speak up. In addition, ask for a full breakdown of the total cost of the loan. A loan may offer a lower interest rate, but this could end up being more expensive if there are hidden fees or administrative charges. If you ask for it, lenders will give you a full break down of every aspect of the loan, which will include a total cost of the financing – this is the figure that you want.

Remember – every business is different and has different financing needs. Don’t take someone else’s word for it, assess your business and determine the credit options that will allow for smooth business operations and maximum profit.

FAQ

For entrepreneurs across the country, sometimes turning their idea into reality is the hardest part of starting a business. Many people hit a small roadblock when it comes to financing their business. With so many different options available and the financial impact varying greatly among different methods, business finance isn’t a walk in the park. From conventional term loans to equity crowdfunding platforms, our aim is to touch multiple business finance topics to help you get a better grasp of the different sources of finance and how they work. 

Small Business Financing Explained

In today’s economy, it’s almost unheard of for a business owner to fund a company using their own personal capital. In turn, many individuals turn to banks, credit unions, private equity investors, and government-backed institutions to acquire funds. The below questions will help you understand what small business financing is and it’s crucial role in the marketplace.

blank
What is small business financing?
Small business financing is when a startup or business with a small number of employees seeks out capital to fund business expenditures. Small business can either use debt or equity financing methods.
What is financing a business?
Financing a business is when business owners either issue debt or offer investors a share of equity in the business in exchange for capital. Debt has to be repaid but equity does not.
How do I get money to start a business?
There are hundreds of ways to get money to start a business. Some of the most common ways include taking out a conventional bank loan, selling personal assets, and getting a home equity loan.
How do I get a government loan for a small business?

In order to quality for an SBA loan, you must have equity invested in your business and tried to receive funds from other lenders. You must then search for a lender and then apply to be considered for the loan. 

How do you finance a business purchase?

You can finance a business purchase by using debt acquired through a loan or use funds that you’ve already invested into the business. Another option is to use funds received from a venture capital investor.

What is funding of a business?

Funding of a business is when small or large-sized seeks capital from investors to purchase equipment, property, inventory, and other assets. Funding can come of the form of debt or equity.

What is the concept of business finance?

Business finance refers to the money needed to both carry out and expand business operations. The two main types of business finance include long-term and short-term debt.

What is factoring in business finance?

Factoring in business finance is when a creditor sells their accounts receivable (the amount the debtor owes) to a third party at a discounted rate. The new owner of the AR is then responsible for collecting the debt.

What sources of finance are available to businesses?

Both debt, equity, and hybrid sources of finance are available to businesses. The financing options can be either short or long-term and come from external or internal parties.

Why do businesses need finance?

Business needs finance so they have sufficient working capital to fund their operations, expansions, and other expenditures. New businesses maybe not be able to generate cash flows that cover these costs.

What is debt financing in business?

Debt financing in business is when a private investor, seller, bank, or finance company issues debt to the business in exchange for capital. The business must then make monthly repayments to the creditor.

What options does a business have while financing its operations?

A business can use various methods to finance its operations, both traditional and non-traditional. Some options include angel investors, SBA loans, crowdfunding, credit cards, and conventional bank loans.

How Small Business Financing Works

Even though the use of the funds is for commercial purposes, the process behind small business financing isn’t too far off from financing you use for your car or home. Just like when you get a mortgage, lenders analyze your credit score, financial history, and ability to make repayments. This information is important to private equity investors as well. We’ve answered the below questions to outline how small business financing works.

blank
How can I finance my business?

You can finance your business by taking out a bank loan, launching a campaign on a crowdfunding website, seeking out funds from family and friends, or by going the venture capital route.

Can you get a loan to buy a business?

Yes, you can certainly get a loan to buy a business. Many entrepreneurs opt for an SBA loan because they come with private interest rates, but you can always take out a term loan or get a business line of credit.

How do I get funding for my business?

You can get funding for your business by applying for a grant that you quality for. The best part about a grant is that you don’t have to pay it back.

What are the primary ways to finance your business?

The primary ways to finance your business would include taking out an SBA loan, a traditional term loan, or contributing your own personal funds to the business in the form of owner’s equity.

How long are business loans financed for?

An SBA loan can may have a term length between 5 to 25 years. A traditional bank term loan ranges from 3 to 10 years and a short-term loan can last anywhere between 1 to 5 years. If you’re a veteran then you can use a VA business loan calculator.

Can you sell a business that is in debt?

Yes, you can sell a business that is in debt. In some cases, the buyer will assume ownership of the debt. You can also deduct the amount of debt from the sale price using escrow.

What are the two main types of finance?

The two main types of finance are debt and equity. Debt finance is when a company borrows funds without giving up any ownership. On the other hand, equity requires the business to sacrifice ownership interest.

Can you get a business loan with no money down?

Yes, you can get a term loan without making a down payment or an SBA microloan. Loans that don’t require a down payment might require a collateral to lower the risk for the lender.

How to finance your business idea?

You can finance your business idea by getting a traditional term loan, a SBA loan, or by raising funds through venture capital where you sell pieces of ownership interest to investors.

Sources of Small Business Financing

The various sources of small business financing with new hybrid instruments hitting the market each year. Many entrepreneurs opt for loans that are provided by institutions backed by the Small Business Administration (SBA). While some people forget, business owners can be sources themselves if they contribute their own personal funds to the business. Take a look at the below questions to get a grasp of the different sources of small business financing.

blank
What are the best financing options for a business?

Many small business owners apply for small business grants because they don’t have to pay the money back. Another popular financing method is to use an angel investor because they not only provide financial assistance, but also bring expertise.

Who can finance my business ?

Banks, credit unions, private investors, and sellers can all finance your business. The first step is to determine whether or not you can commit to long-term repayments or if you’re willing to give up equity.

What is a source of finance?

A source of finance is a leasing company. Leasing companies buy assets for the lessor and rents them out over a set period of time. Businesses use this type of financing for assets they wouldn’t be able to afford otherwise.

Do you need good credit for owner financing?

While it’s not always a “need,” most owners prefer a good credit score before lending money against a home. Each individual owner has different metric they use for approving the debtor.

What are the types of business finance?

The two main types of business finance are debt and equity. Debt is any form of financing that the business owner needs to repay. On the other hand, equity gives the investor ownership interest in the business.

Do SBA loans require down payment?

Yes, SBA loans do still require a down payment. While it can vary by the lender, SBA 504 and SBA 7(a) loans mandate a down payment of at least 10%.

What are the three types of finance?

The three types of finance are debt, equity, and specialty capital financing. Debt financing is paid back over time while equity is buying ownership in the business. While specialty financing is a form of debt, it’s from non-bank lenders.

How to manage business finances effectively?

A business can manage their finances effectively by carefully recording their daily transactions, forecasting future cash flows and expenses, and by not taking on more debt than they can handle.

Financing Different Types of Businesses

A determining factor on what type of financing you use depends heavily on the type of business you own. For example, businesses that spend a lot of capital on equipment might choose equipment finance or equipment leasing. On the other hand, an innovative internet startup might go with a venture capital company to acquire capital. Certain industries might even qualify for special grants to start a business that you don’t even have to pay back.

blank
How can you finance your business assets?

You can finance your business assets by taking out a short-term loan where you pledge collateral to a bank or finance company. These loans are intended for urgent capital needs.

How to finance a food truck business?

Depending on the amount of the initial investment, you could use a microloan to finance a food truck business. The Small Business Administration (SBA) along with various nonprofit organizations issue microloans.

How to finance a business with bad credit?

Having bad credit doesn’t exclude you from raising capital. Nonprofit organizations, crowdfunding platforms, and friends and family are probably the best sources to finance a business with low credit.

How to finance a business plan?

Both new and veteran entrepreneurs can finance a business plan by using a crowdfunding site. With the help of crowdfunding, you’ll be able to illustrate your plan to hundreds of different investors.

How to finance a business with no money down?

If you’re lucky to find a seller willing to offer 100% financing, you could get a business with no money down. In addition, some microloans don’t require a down payment.

How to finance a trucking business?

Since the trucks are the costliest part of starting a trucking business, you could acquire capital through a finance lease. Finance leases are when a leasing company buys an asset for a business then rents it to them.

How to finance a house flipping business?

A popular financing option for house flipping companies are hard money loans. Banks and other financial institutions offer these types of loans using the backing of real property.    

How to finance a bed and breakfast business?

You could finance a bed and breakfast by taking out an SBA or term loan, purchasing an existing business with owner financing, or going the equipment financing route to help you pay for furniture and fixtures.

How to finance business growth?

A business can finance their growth by using both short-term and long-term loans. If capital is needed for a one-time time expansion, a short-term loan would be sufficient.

How to finance a franchise business?

You can finance a franchise business by taking out a loan with the franchisor. While not all franchisors cover the entire cost, they could issue debt to cover expenses like the franchise fee or equipment.

How to finance business start up?

An increasingly popular way to finance a startup is through a crowdfunding platform. Crowdfunding is when you get small amounts of money from many investors in exchange for a promise. Read more about other start up business loans.

How to finance property development business?

Some of the various ways to finance a property development business include a traditional commercial mortgage, buy-to-let mortgage, auction financing, and development finance. You could also buy a property development business through owner financing.

How to finance a restaurant business?

Since a lot of the initial costs are for equipment, you could use equipment financing to finance a restaurant business. Equipment financing is when you’re issued a loan that’s for the exact amount of the equipment you wish to purchase.

How to finance a vehicle for a business?

Many businessowners finance vehicles by using a commercial auto loan issued by a bank, credit union, or finance company. The type of loans typically last for at least 72 months.

Owner Financing

Owner financing is a convenient way for buyers to receive financing through the seller of the business. Many people choose owner financing when they can’t receive enough funds from a bank or credit union. It’s important to keep in mind that owner financing usually only covers a portion of the purchase amount. Like a bank, the two parties will need to negotiate repayment terms. To understand how owner financing works, take a look at the below questions.

blank
What does owner financing mean when buying a business?

Buying a house through owner financing is when the seller acts as the lender and gives money to the buyer to help purchase the home. The two parties must sign a promissory note and agree on a repayment schedule.

How does owner financing work for a business?

Owner financing for a business is essentially the sale of a business that is financed through the seller (similar to a loan). The buyer of the business makes payment to the seller until they own it outright.

Is owner financing safe for the buyer?

Yes, owner financing is safe for the buyer. The buyer enters a legal agreement with the owner of the property or business. In fact, there’s more risk involved for the lender than the buyer. 

What is seller financing for a business?

Seller financing for a business is when an individual or entity purchases a business and finances it through the seller. The two parties must create a repayment plan that typically lasts between 5 to 10 years.

How to buy a business with owner financing?

You should first research the business a prepare a personal financial statement to illustrate your financial condition. You then need to negotiate a purchase price and repayment terms. Sellers don’t usually finance the whole sale, so you’ll need another loan.

Are there closing costs with owner financing?

Yes, owner financing doesn’t completely rid of closing costs. You’ll still have to pay title policy fees; however, you won’t have to pay origination fees that comes with standard mortgages.

How does seller financing work for a business?

Seller financing is when the owner of a business gives the buyer a loan to buy the business from them. The loan can either enough to cover the cost of the whole business or just a portion of it.

Anne Miller


Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.

 

View All Posts

 

Get Approved Today