According to pre-pandemic data published by Federal Reserve Banks, 85% of small business applicants who sought funding in the past year applied for a loan or line of credit.1 However, there are many more sources of capital available to help run your business and realize its potential.
Business funding generally falls into one of two categories: Debt financing and equity financing. Debt financing means that your company takes on a debt in exchange for capital, whereas equity financing involves selling a portion of ownership or stake in your company for capital. If you’re looking to explore your small business funding options, read our guide to learn about ten sources of business capital, and where you can apply for each type.
Sources of Debt Financing
The following small business funding methods are examples of debt financing, or borrowing money from business creditors with interest.
1. Small Business Loan
Small business loans, also sometimes called term loans or short-term loans, are among the most widely used small business funding options. Funds are generally issued out to approved applicants in one lump sum, and are repaid in installments over a set time period, depending on the loan agreement. This type of small business financing is available from numerous financial institutions, including banks, credit unions and alternative creditors like online business lenders.
2. SBA Loan
An SBA loan is a certain type of small business loan administered by an SBA-approved lender, and guaranteed by the U.S. Small Business Administration. These loans have lower interest rates and longer repayment terms than other sources of small business funding due to the federal guarantee. However, in order to qualify for an SBA loan, small businesses must satisfy both the SBA and SBA-approved lender’s application requirements. SBA loans are available exclusively from SBA-approved lenders, rather than directly from the U.S. Small Business Administration.
3. Business Line of Credit
A business line of credit is a form of revolving credit that provides ongoing access to capital up to a specific dollar amount, and as borrowed funds are repaid, that amount is available again for re-use. Business lines of credit can help companies that have an ongoing need for capital, compared to one-time funding methods, like small business loans. However, the credit limit is typically lower than a comparable small business loan, depending on specific application details.
4. Business Credit Card
Like a business line of credit, a business credit card is another form of revolving credit. Business credit cards may also include additional perks, including cash back, frequent flyer miles, free management services and related bonuses. However, it’s important to use a business credit card wisely and not over-spend for the sake of bonus perks and other offers, particularly if you aren’t able to completely pay off the balance in a reasonable timeframe. Like other business financing methods, interest accumulates on an unpaid credit card balance, and you can end up spending more money in the end. Business cards are available from a variety of sources, including banks, credit unions, major credit card issuers and other business creditors.
5. Purchase of Receivables
A purchase of receivables is not a loan, but an advance on future revenue. Though term specifics vary by lender, this type of financing generally issues funds in set daily or weekly deposits. The future income can usually come from a variety of sources, including checks, cash and credit card transactions. Purchase of receivables agreements are available from online lenders.
6. Merchant Cash Advance
Similar to a purchase of receivables, a merchant cash advance provides access to future revenue, though typically only for income collected via credit card transactions. Merchant cash advances are available from sources like online lenders.
7. Invoice Factoring
Invoice factoring involves the selling of outstanding, unpaid invoices in exchange for capital. Like a purchase of receivables and merchant cash advance, invoice factoring is not a loan, but an advance on unpaid revenue. Invoice factoring is available from business creditors like online lenders.
Invoice factoring is slightly different from financing. Invoice financing allows the customer to use the unpaid invoices as collateral for a cash advance, and remain in control of managing the payment. Invoice factoring is available from business creditors like online lenders.
Sources of Equity Financing
Now, we’ll look at equity financing, which generally involves selling some type of company equity in exchange for business capital.
8. Crowdfunding
Crowdfunding is a relatively new small business funding source that involves raising funds directly from the public using specific collection administration websites. Small business crowdfunding generally falls into one of several categories:
Rewards-based crowdfunding: Small businesses who want to develop and launch a new product may use a rewards-based platform, such as Kickstarter or Indiegogo, that issue various products, gifts and/or favors at certain funding levels.
Donation-based crowdfunding: Websites like GoFundMe allow small business owners to create fundraisers and access public support through donations.
Equity-based crowdfunding: This method allows small business owners to access capital in exchange for shares of equity in the company. In order to create an equity-based campaign, head to Wefunder or EquityNet.
9. Angel Investor
Angel investors are usually defined as an individual or group of individuals that provides seed money to help very new small businesses succeed. Unlike venture capitalists, who tend to work with more developed small businesses in select industries, angel investors generally provide equity financing in smaller sums of around $30,000 to newly established companies.2 If you’re interested in seeking an angel investor, you can use the SBA tool to research Small Business Investment Companies (SBICs) in your area and industry.
Other Sources of Financing
Small businesses can access capital from other sources, including friends, family, personal savings and business grants.
10. Small Business Grant
Unlike the other sources of capital listed here, business grants generally do not need to be repaid, nor do they require equity for access to capital. Business grants are typically issued by government bodies, private corporations, nonprofit groups and other interest-based organizations to help promote an initiative, specific industry or other cause. Small business owners should also be aware of each grant program’s specific requirements, which can vary widely. This funding method may also take considerable time to research, apply and potentially access capital.
Interested applicants can check with their local chamber of commerce, industry-based organization(s) or use the U.S. Chamber of Commerce website for a breakdown of COVID-19 resources and federal, state and local grants.
Qualifying for Business Financing
Qualifying for most forms of small business financing generally depends on factors like your personal and business creditworthiness, your business’s finances, whether it can repay the loan, and other application criteria. Though rates can vary by lender and/or location, approved applicants are offered loan terms, including an interest rate for access to funding, based on application criteria. Some funding sources, including crowdfunding and business grants, may not have credit-based application requirements.
Some business financing options are harder to qualify for than others. Business bank loans, for example, typically offer some of the lowest interest rates available for qualified small businesses. Banks also require applicants to possess high minimum qualifications, like stellar credit scores and a high annual income. Applying for this funding option also requires more paperwork and processing time than other methods, like online term loans and business lines of credit.
References
1Federal Reserve Banks. (2019). Small Business Credit Survey.
2Carlson, R. (2019). Differences Between Venture Capital and Angel Investing.
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.
This content is for educational and informational purposes only, and is not intended as financial, investment or legal advice.
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