Business Funding

Traditional banks. When considering where to get business funding, your local bank might be your first idea. You can get funding from banks — but many small businesses are denied loans from traditional lenders because they often have strict requirements you need to meet in order to be approved.

U.S. Small Business Administration. An SBA loan is a long-term financing option secured through a federal agency called the Small Business Administration. The SBA does not directly fund loans. Instead, they work with banks and private lenders to deliver a guaranteed portion of the loan. It can be difficult to get approved for an SBA loan and it’s often a long process.

Crowdfunding. When crowdfunding for small business, owners use online fundraising platforms like Kickstarter and GoFundMe which allow users to campaign for funds from everyday people. Entrepreneurs often reward their contributors with products or a stake in the business.

Small business grants. Small business grants are lump sums given to a person, business or corporation. They’re usually given by government organizations, but sometimes they’re sourced from private businesses and corporations. Grants do not require repayment, so they’re challenging to come by.

Loans from friends and family. A loan from friends or family could provide your business with the funds it needs. Make sure to get a clear idea of when and how they’d like to be paid back. Mixing business and personal life can cause issues if you’re not on the same page. Another option could be to offer them equity in your business.

Angel investors. An angel investor is a high net worth individual who provides business funds to startups in exchange for equity. These individuals may have a personal connection to the business owner or they may have been connected through networking. This is usually a one-time investment to help the business get started unlike venture capitalists, who tend to stay involved.

When considering what type of funding fits your business needs, you need to evaluate both the funding option and the lender.

Consider the lending product. Before applying, make sure you know how much you need. If you borrow too much, you could be overpaying. If you borrow too little, you’ll need to go through the application process all over again. (Multiple credit inquiries in a short period of time could hurt your business credit score.)

The repayment structure should also fit with the way your business works. If you have sufficient cash flow throughout the month, a weekly payment may be a good fit. If you bill your clients monthly, a monthly payment may work better.

Consider the lender. You’ll also need to evaluate different lenders when looking for business funding. You’ll want to know what kind of interest rates they offer, what their eligibility requirements are, and if their products fit your needs. Each lender will offer diverse products and have different requirements. Some lenders place value on good credit while others care more about annual revenue. Researching different business loan providers and their requirements before putting effort into an application will give you insight into which lenders you’ve got the best chance of qualifying with.

The requirements needed to secure funding will vary from lender to lender. Traditional lenders like banks will typically have stricter requirements. They’ll usually want borrowers to demonstrate a good track record, and they will evaluate your business and personal credit scores, annual revenue, your business plan, what industry you’re in, and how long you’ve been in business. The applications can be time-consuming and sometimes confusing. It may also take a while to get approved and get your funds.

Other non-traditional lenders, like online business lenders, may have less stringent business loan requirements. Most of these lenders will still evaluate your business based on time in business, credits scores and revenues — but it’s typically much easier to get approved. The application process for online lenders is also usually much simpler and you can get the funds you need fast.

With small business financing, you typically have two options: debt financing and equity financing. Debt financing is when you take out a loan or line of credit with a bank, credit union or direct lender. A short-term small business loan is an example of debt financing. You borrow money from a lender and pay it back to them directly.

Equity financing is when you sell shares in your company to raise funds. This could be for a new business trying to get off the ground, or to fund growth for an established company. By selling shares in your company, you’re giving investors a little piece of ownership. You won’t repay these investors directly — instead a portion of your future earnings will go to them. How much will depend upon what percentage of the company they own.