6 Financing Options for Small Businesses to Consider

by Kieran Daly
October 10, 2023
6 Financing Options for Small Businesses to Consider

Small businesses often require external funding to fuel growth, manage cash flow, or cover operational expenses. Understanding the available financing options for small businesses can help you make an informed decision that aligns with your business needs and circumstances. 

Here's an informative overview of small business financing options, including traditional bank loans, alternative lending sources, crowdfunding, and government programs. 

6 Different Financing Options for Small Businesses 

You can receive business financing in different ways — from getting a business loan from a bank, using an invoice factoring service, or even applying for grants from the government. Here are some of the most common financing options for small businesses that you’ll want to consider.

1. Bank Loans 

Loans from a traditional bank or credit union are among the most common ways that business owners get loans. Traditional lenders usually offer competitive interest rates and favorable loan terms, especially for businesses that already have bank accounts at local branches. 

Financial institutions offer a variety of different types of loans, including short-term and long-term financing options. Loans can be flexible, but some may be restricted to certain types of purchases. The lender will usually help you figure out a term loan that makes sense for your business. 

However, traditional bank loans can be difficult to qualify for. If you want to apply for a bank loan, you’ll need strong personal credit. Generally that means having a credit score of 670 or above. You’ll also need a good business credit score if you have an established company. 

The bank will likely ask for a lot of paperwork, such as your business plan, financial statements (e.g., balance sheet and cash flow statement), and possibly ask for collateral. Applying for a loan can take a while so be prepared to wait. To be eligible, you’ll usually need to be in business for a while as well as have a minimum annual revenue. 

Pros of Bank Loans

  • In-person support at local branches

  • A variety of loans offered

  • Competitive interest rates 

Cons of Bank Loans

  • Strict eligibility requirements

  • Takes a while to get funding

  • Might not qualify if you have bad credit

  • Best for established businesses 

2. Financing From Alternative Lenders 

Funding from alternative online lenders, like Backd, are another small business financing option. It can be easier for a new business to get funding from an online lender, as you usually only need to have been in business for six months to two years.

Online lenders tend to be more flexible when it comes to eligibility. Depending on the lender, you may not even need to put up collateral. Some lenders may specialize in specific types of lending, such as business lines of credit, working capital advances, or merchant cash advances. 

This type of financing is usually great for startups or businesses that need to build up their credit. While it still helps to have decent credit, you don’t need to have as high of a personal credit score as with other types of funding. 

In general, alternative lenders offer shorter repayment options, usually under five years. Plus, you may be able to find out if you qualify in as little as 24 hours. 

Pros of Financing From Alternative Lenders

  • Easier application process

  • More accessible eligibility requirements

  • Can get approved for funding in 24 hours

  • Flexible repayment terms 

Cons of Financing From Alternative Lenders

  • Interest rates may be higher than traditional loans

  • May not be able to finance amounts as high as you could with bank or SBA loans 

3. SBA Loans

The U.S. Small Business Administration (SBA) is a government agency that provides resources, including funding options, to support small business owners. The agency partners with local lenders to offer microloans, SBA 7(a) loans, and SBA 504 loans

One of the most popular SBA loans is the SBA 7(a) loan. This SBA loan program allows small businesses to get funding of up to $5 million that can be used for working capital, real estate, and other funding needs.

Although SBA loans are easier to get than traditional loans at a bank, you will still need to meet certain criteria. The specific eligibility requirements depend on which type of loan you’re applying for, but in general, you will need to have a good credit score, be in business for at least two years, and have a decent annual revenue. In addition, you’ll need to show that you’ve been denied funding from banks or other financial institutions. 

Pros of SBA Loans

  • Available to businesses that can’t get funding elsewhere

  • Different loan options

  • Fees and interest rates set by the SBA 

Cons of SBA Loans

  • Can only get funding from SBA-approved lenders

  • Strict guidelines to apply

  • Can take a few months to get funding

4. Crowdfunding 

Crowdfunding is another financing option for small businesses or entrepreneurs who are just starting out. This is a bit different than applying for a grant or loan at other lenders. With crowdfunding, you ask people to contribute to your business in exchange for either paying them interest or giving them equity in your company. 

There are a few different types of crowdfunding, including debt crowdfunding where you repay debt, equity crowdfunding when investors buy stocks of your company, and reward crowdfunding, which offers benefits or goods to investors.

You can find opportunities on different crowdfunding platforms, such as Kickstarter or Kiva. In some cases, you can get angel investors or venture capitalists who want to invest directly into your business.

Depending on which crowdfunding route you take, you usually need to do a lot of marketing to convince people that your business is worth investing in. In some cases, you’ll need to provide financial information, such as a business plan or projections.

Pros of Crowdfunding

  • Ideal for startups

  • No requirements to get started

  • Helps build brand awareness 

Cons of Crowdfunding

  • Need to find investors interested in your business

  • May have to report business results to investors

  • Doesn’t always help with ongoing cash flow needs 

5. Small Business Grants 

Small business grants are a way to fund and grow your small business without needing to worry about paying back a loan. Grants are usually offered through nonprofits or government agencies. Many focus on specific industries or underserved communities. 

Grants appeal to many businesses, as you don’t have to pay them back or secure funding by giving up equity in your business. However, they can be very competitive, and there’s no guarantee that you will receive the grant. 

While grants are a great option to grow your small business as they are essentially free money, they can take a while to come through. Plus, it takes time to apply. 

Pros of Small Business Grants

  • Don’t have to pay back the money

  • May include other types of resources

  • Often focused on underserved communities 

Cons of Small Business Grants

  • Have to meet specific requirements

  • Very competitive

  • Takes a while to get funding

  • Limited availability 

6. Invoice Factoring 

If your small business provides services or products to other companies, you might be able to get funding through invoice factoring. With invoice factoring, you sell your outstanding invoices to another company, who then collects the money directly from your clients. You get the balance of invoices minus a fee. 

With invoice factoring, your clients’ creditworthiness matters more, so even if your small business has bad credit, you might still be able to secure funding with invoice factoring. However, the fees of invoice factoring are often higher than other types of funding options. 

Invoice factoring is also only available to companies that have outstanding invoices to other companies, not individuals. In addition, the factoring company will communicate directly with your clients, which you may or may not want.

Pros of Invoice Factoring

  • Can get access to funding in a short amount of time

  • Can use the funds for a variety of expenses 

Cons of Invoice Factoring

  • Expensive fees

  • Only available to some types of businesses 

Tips for Getting Financing Options for Small Businesses 

Getting small business funding isn’t always straightforward. In fact, only 47% of business owners have their financing needs met, according to the Federal Reserve’s 2021 Report on Employer Firms. 

Whether you’re struggling to get a small business loan or are just starting to look into it, here are some tips for increasing your chances of funding before you begin the application process: 

  • Create a business plan: Many lenders will request a number of documents, including a business plan. Regardless of whether you’re a startup or an established business, it’s important to have a business plan. Make sure to include financial projections, an analysis of your industry, your marketing and sales strategy, and an introduction of your team members.

  • Improve your business credit score: Having a good credit score increases your chances of getting funding. If you have no credit or bad credit, you can work on improving your score, such as by paying bills on time or getting a business credit card or secured line of credit.

  • Network with other small businesses: Another way to get financing options for your small business is to network with others in your industry to find out about funding options and grants. By getting to know other companies in your sector or region, you can find out more about the latest trends as well as gain insight into potential funding opportunities.

Find the Best Small Business Financing Options for Your Company 

Selecting the right financing solution for your small business depends on your unique situation and needs. Carefully consider factors such as interest rates, eligibility requirements, and repayment terms. 

By understanding the pros and cons of each option and following the tips mentioned above, you can make an informed choice that aligns with your business goals and financial capabilities. Ultimately, the right financing option should align with your business goals and financial capabilities. 

If you’re looking for quick and flexible financing options for your small business, then consider an online lender like Backd. With Backd, you can find out if you qualify for a working capital advance of $2 million or a business line of credit of up to $750,000 in just 24 hours. Apply today for funding.

What would you do with the right amount of capital?

Working Capital Advance

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Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

  • Draw funds anytime
  • $10K - $750K
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  • Soft credit pull that doesn't affect your credit score