Small business investment can aid in the launch of a new venture, the hiring of additional employees, or the opening of a new location. The form of financing that is best for your small business will be determined in large part by what you need the money for, but other considerations such as how much money you need, your willingness to take on debt, and so on will also be considered.
There are a variety of options to turn to for the money your business needs, including banks, internet lenders, investors, and more innovative outlets (such as small business grants).
Examine Your Financing Options
Financing Options for Small Businesses
Here are some of the greatest possibilities for small company financing. To learn more about each option, click the links or scroll down.
Traditional term loans are best suited to well-established companies with good credit.
- SBA loans are best for businesses that are well-established and successful.
- The best way to fund working capital is through a business line of credit.
- Business credit cards are ideal for new business owners with no previous credit history.
- Financing for company equipment is the best option.
- Invoice finance is ideal for companies who have money locked up in unpaid invoices.
- Short-term loans are ideal for businesses that require immediate capital and do not qualify for other financing choices.
- For enterprises with high development potential, equity investors are the best option.
- Small business grants are best for businesses that are community-focused or mission-oriented and need free money.
- Friends and relatives are ideal for young enterprises that want assistance to get started.
Crowdfunding is ideal for B2C start-ups.
The Standard Term Loan:
A standard term loan is likely the most straightforward sort of small business financing. You borrow a set amount of money, usually for a specified commercial purpose, and repay the loan with interest over a set period of time.
Because they are often low-interest business loans (especially if they originate from a bank), owners will need good credit and a financially sound firm to qualify.
Ideal for
Business term loans are one of the greatest small business funding alternatives for mature organizations that wish to borrow money for a long time (greater than two years) and have a predictable monthly payment.
Term loans are ideal for funding business expansions, working capital requirements, and debt consolidation.
Where Can I Get It?
You should start by applying for a bank loan if you believe a term loan is the best small business funding option for you. (This should ensure that you get the best interest rates).
If you don't qualify for a bank loan or need money quickly, you might want to look into internet lenders like Credibility Capital or Funding Circle.
Small Business Administration Loan:
The Small Business Administration (SBA) assists entrepreneurs in obtaining long-term, low-cost business loans, which are frequently the most attractive sources of capital for small enterprises.
Although the SBA does not lend money directly to businesses, it encourages lenders (such as banks) to approve small firms by guaranteeing all or part of their loans. This means lesser risk and better profit for lenders.
However, because SBA loans are so popular among small businesses, you'll need to meet a lot of precise criteria and go through a lengthy application procedure to be eligible.
SBA loans are one of the most popular sources of small company financing. Because of the qualification standards, SBA loans are best suited to applicants with good credit who are searching for long-term, low-interest loans.
Where Can I Get It?
SBA loans are granted by lenders who have been approved by the SBA, which are typically banks and credit unions. Although there is significant variance depending on the specific SBA lending program, several of the country's largest banks issue SBA loans.
It's vital to understand, however, that these lenders will assess your SBA loan eligibility. Overall, you should have good credit and a profitable business or a convincing business plan with positive prospects. If you're approved by an SBA lender, they'll also decide your loan's interest rate and payback period, as long as they stay within the SBA's guidelines.
Find some of the best SBA lenders with the help of our guide.
Business Credit Line:
A business line of credit, unlike the other two small company funding alternatives we've explored, operates similarly to a credit card: You have a certain amount of cash that you may draw on whenever you need it, and you only pay interest on what you use.
Plus, if you repay the money you withdrew, you'll have access to all of your money once more. Because of this, credit lines are sometimes known as rotating or revolving credit lines.
As a result, a business line of credit can be used to increase working capital, purchase inventory, manage seasonal cash flows, pay off other loans, and nearly any other business need. It's also beneficial to have a business line of credit on standby in case of an emergency.
Because they are constant sources of small business finance, business lines of credit are slightly more difficult to qualify for than loans, but the peace of mind they provide is well worth the effort.
Ideal for
A business line of credit is one of the greatest small business funding alternatives for firms with unexpected or seasonal capital needs, as well as those that want the freedom to draw funds as needed.
Where Can I Get It?
If you believe a business line of credit is the perfect solution for you, you may work with a variety of lenders to get the money you need.
Business lines of credit are available from many traditional banks, but you can also look into alternative internet lenders like OnDeck and Fundbox.
Credit Card for Business:
Business credit cards function similarly to personal credit cards, but they're only meant to be used for business purposes and to cover business expenses.
Business credit cards typically feature higher spending limits, lower interest rates, and better promotional deals than personal credit cards.
Although good credit is required to qualify for the finest business credit cards, there are solutions available for those who are rebuilding their credit. Even small businesses may be eligible for business credit cards. A term loan or SBA loan will be a better option than a business credit card if you need a substantial amount of money (above $50,000).
Ideal for
Finally, for any business owner, business credit cards can be a beneficial financial instrument.
However, when compared to many of the other funding alternatives on our list, a credit card will be a top funding option for business owners who don't require a large amount of capital or immediate access to cash but prefer the convenience of having regular access to credit.
Where Can I Get It?
Start with big issuers like American Express, Chase, and Capital One to see what they have to offer if you're looking for a business credit card to use for small business finance.
Financing for Equipment:
Equipment finance, as the name implies, is a sort of debt financing dedicated to the purchase of commercial equipment. The equipment itself serves as security on this form of small company loan, which means the lender is more likely to approve it even if you don't have perfect credit or financials.
However, equipment financing can be done in one of two ways: through a lease or through a loan. You are not the owner of the equipment when you lease it; instead, you are paying to rent it. You make monthly payments and may have the option to buy the equipment at the lease's end.
Equipment loans are similar to typical term loans in that they have a set repayment schedule and interest that is calculated based on the amount of money you need to buy the equipment.
Ideal for
For firms that need funds to acquire or lease a vehicle, computer, tractor, or other specialized machinery or equipment for their operations, equipment financing will be one of the greatest small business funding options
Where Can I Get It?
Some banks provide specialist equipment financing; nevertheless, like with most bank loans, you'll need exceptional qualifications to qualify. To finance your business's infrastructure needs, you can turn to internet lenders like Balboa Capital or Crest Capital for speedier funding with more flexible conditions.
Accounts Payable Financing:
Invoice finance, also known as accounts receivables financing, is a type of business financing in which lenders advance your accounts receivables by giving you a swift cash advance of around 85 percent of the invoice amount. You'll get the majority of the additional 15% when your client pays the invoice later (minus fees). Invoice financing firms take a tiny weekly percentage of your invoice amount as payment.
If your business relies on consumers paying their bills, you've certainly run into this issue: a late payment from a customer can have a significant impact on your cash flow. With invoice financing, you essentially pay a modest charge to get your bills paid right away rather than at some unspecified point in the future. Depending on how your company's cash flow operates, it may be well worth the investment.
Another advantage of invoice financing is that your credit not checked. Instead, they're more concerned about your consumers' repayment habits.
Greatest for B2B enterprises with money locked up in unpaid invoices, invoice financing is likely to be one of the best small company funding solutions.
Where Can I Get It?
If you think invoice finance will help you fund your business, seek lenders that specialize in this form of financings, such as outline or BlueVine.
Short-Term Loan:
A short-term loan is a simplified form of a regular term loan. You'll get a lump sum of company finance that you'll pay back, plus interest, on a predetermined remittance timeline. Short-term business loans, on the other hand, require you to pay off your debt faster than regular term loans—typically within a year.
As a result, short-term loans will be smaller, more expensive, and need more frequent payments (daily or weekly) than long-term loans. Short-term loans, on the other hand, will undoubtedly be one of the most accessible forms of financing for a wide range of business owners.
Small lenders frequently offer same-day business finance, and the requirements for obtaining a short-term loan are far less severe than those for other types of financing.
Short-term loans are appropriate for people who require immediate funds and are unable to wait (or qualify) for other sorts of lower-cost lending.
Where Can I Get It?
You'll probably want to look at online lenders like Credibly, Fora Financial, and OnDeck for an easily accessible, quick-to-fund short-term loan.
Self-Financing:
Equity finance is a method of raising capital by selling a portion of your company's ownership. In exchange for money from investors, you give them a piece of your company's ownership and control.
Using equity funding has advantages, particularly in terms of the investor's experience and mentorship. However, there is one major disadvantage to equity financing that typically disqualifies it as a viable alternative for small business investment owners: it is not a one-and-done transaction.
With this sort of business financing, you're committing to a long-term partnership with an investor who invested in your company's success or failure. If you're not ready to give up some control and ownership of your firm, debt financing is the way to go.
Best for High-growth enterprises with the potential to expand significantly in the next two to three years, equity funding is the best option. This form of financing is frequently a viable choice for tech companies.
Where Can I Get It?
Angel investors and venture capital firms are the most common sources of equity financing. If you're looking for smaller-scale equity investors, consider friends and family or crowdsourcing, both of which can help you fund your firm utilizing the equity model.
Grants for Small Businesses:
Many funding organizations offer small company grants that provide business investment financing that recipients do not have to repay if they are ready to put in the time to apply.
Naturally, these grants are competitive, so you'll have to put in the time and effort to identify the correct ones and apply for them. However, there are hundreds of business investment grants available—federal, state, municipal, private, and more—so if you think this funding source could help your company, it's definitely worth looking into.
Ideal for
Small company grants are a great way to get free money that you don't have to pay back. Grants also a wonderful alternative for community-focused businesses, minority- and women-owned firms, and businesses in the technology and science areas, as range of grants tailored to these fields.
Where Can I Find Them?
Small company grants are available from both the federal government and your state or local governments, according to Grants.gov. Grants are also available from non-profit organizations and private enterprises.
Family and friends:
It's a fantastic chance if you have friends or family members who can invest in your business investment or lend you money. Friends or family members are more likely to offer more favorable conditions on an investment agreement than an angel investor, bank, or internet alternative lender because of your personal relationship.
You can also propose debt or equity finance from your friend or family member, depending on how they want to construct the arrangement.
Ideal for
For fledgling firms, turning to friends or family for small business investment funding might be a viable alternative. Especially if they don't qualify for affordable debt financing yet.
Where Can I Get It?
This is self-explanatory—however, while seeking money for your business investment from friends or family, it's critical to hedge your bets and safeguard everyone's interests.
If you and a friend or family member agree to a loan, you write down the parameters for how the loan returned, in what increments, and for how long. If a friend or family member is investing in your company. You should spell down the exact proportion of ownership or profit share that person will receive. As well as the role that investor will play in future business investment decisions.
Crowdfunding:
If you're unfamiliar with these kinds of funding options, here's how it works. Small contributions from a group of people provide you with funds for your business investment needs. Each individual contribution adds up to a larger number, which equals the amount of capital you require for your firm.
You express your vision for what you'll do with the funds on a crowdfunding platform. Set a funding target, and then utilize social media and other marketing channels to urge potential donors to support your campaign. Because most crowdfunding platforms operate on an “all or nothing” basis. That is, you must accomplish your funding goal in order to get any money.
Best for Crowdfunding can be time-consuming and difficult. Therefore it's best for enterprises that not only need a little amount of money. But also have a tangible result that others will be enthusiastic to support.
B2C firms, particularly those that can offer donation incentives, are generally effective with this sort of funding.
Where Can I Get It?
The donations originate from the general public, however crowdfunding companies like Indiegogo and Kickstarter assist you in publicizing your campaign and achieving your financing goals.
Final Thoughts:
At the end of the day, determining which small business investment finance option. It is best for you is based on a variety of factors unique to you, your company, and your financial requirements.
The good news is that firms in need of capital now have more options than ever before. You'll have a number of possibilities to investigate, compare, and assess whether you're looking into debt finance. Equity financing, or a more creative funding solution.