Types of Funding For Small Businesses: 12 Great Options

Let’s say your bank account lacks enough cash for payroll, a commercial real estate purchase, or anything in between. In that case, one of the many types of funding for small businesses can likely help you get what you need. But which type of financing is best for you? Find 12 options – and explanations about which might work best for your small business – below.

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12 types of funding for small businesses

Companies of all stripes often rely on the below types of funding for small businesses. That said, some of these options will be better for your business than others. Below are brief summaries of these funding sources, the types of businesses they’re best for, and how you can apply for each type of funding.

1. Equity financing

Equity financing is the sale of shares in your company to people who then become shareholders. You can privately sell shares of your business to friends or family, or you can sell them to the public as stocks.

Equity financing is a great fit for your business if you’d rather not take on debt to obtain funding. It might be a mismatch if you’re unwilling to give up some of your control over your business – technically, all shareholders get a say. You must go through an initial public offering (IPO) to sell stocks to the public, or you can make individual arrangements with friends and family.

2. SBA 7(a) loans

SBA 7(a) loans are a highly regarded class of government-backed loans. Small businesses commonly turn to them for debt financing options with low interest rates, long repayment terms, and large loan amounts. Combined, these factors result in small, regular monthly payments and a sizable upfront lump sum of money.

SBA 7(a) loans are a great fit for any small business that wants to use debt financing as a funding source. You must use SBA 7(a) loan funds for working capital, commercial real estate purchases, or debt refinancing. If you have other funding needs, SBA 7(a) loans might be a mismatch, though other SBA loans may fit the bill.

You can apply for SBA 7(a) loans through SmartBiz – check now to see whether you pre-qualify*. If you do, the SmartBiz process is especially easy and quick. And unlike many SBA 7(a) lenders, SmartBiz doesn’t require you to present a business plan.

3. Bank term loans

Small business owners who don’t qualify for SBA 7(a) loans often turn to bank loans instead. That’s because bank loans are slightly more accessible and largely resemble SBA 7(a) loans. After all, traditional banks and financial institutions fund both types of loans, therefore it’s no wonder why their repayment structures resemble one another. That said, bank loans typically have somewhat less favorable rates, repayment periods, and loan amounts.

Like SBA 7(a) loans, bank term loans are a great option for anyone who applies for them and can take on additional debt. Your allowed use cases may vary by lender. You can apply for bank term loans through SmartBiz® as well.

4. Business plan competitions

Business plan competitions are at once an unorthodox funding source and a logical choice. That’s because applying for small business loans often requires a business plan as part of your application. And creating a business plan can be a lengthy process, so why not use your plan toward as many funding routes as possible? If your business plan stands out from the pack, the people running the competition may help fund your business.

Funding through business plan competitions is a great choice for any company that has a business plan. A quick internet search is generally all it takes to find relevant competitions.

5. Business credit cards

A business credit card can be a feasible funding source if you can guarantee that you’ll repay your balance in full by its due date. In that case, you have free reign to spend any amount up to your credit limit on whatever you need. But leaning on your credit card too much can be a trap. If you fail to repay your balance on time, the high APR can lead to excessively large fees.

Business credit cards are good for any small business owner with firm control over their bookkeeping and accounting. If this sounds like you, then you’re probably in good shape not to miss payments and trigger exorbitant fees. You can generally easily apply for a business credit card with any major credit card company, and you’ll typically be approved (or declined) quickly. Your card should arrive in the mail not long afterward.

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6. Business lines of credit

A business line of credit is basically a credit card with a larger maximum borrowing limit. You don’t have to use the entire line, and you’ll never pay fees on any money you don’t use. You can rely on business credit lines to fund large purchases that you want to pay off on a “medium-term” timeline.

Business lines of credit are generally a good fit for any business that knows it can repay the money it will use for its purchases. You can apply for them through traditional banks or online alternative lenders.

7. Business incubators

Business incubators fund you indirectly – as in, they give you resources, not money. You can access them during your company’s startup phase, and you’ll get access to tools, workspaces, and expertise for which you’d otherwise pay. This newer funding model is most common in the multimedia, industrial technology, and biotechnology sectors.

Business incubators are a good funding option if you need to save money during your startup phase but can’t take out loans. They’re also a good option if you’re looking for venture capital or angel investor funding down the line. Most business incubators will connect you with these funding sources and teach you how to pitch them. Searching the internet for business incubators should bring up several websites from which you can easily apply.

8. Venture capital

Venture capitalists typically fund tech startups with the potential for massive growth. If your business checks this box, then venture capitalist funding can be a game-changer. Obtaining it means giving the investor a certain number of business shares in exchange for cash. The risk is that if your business fails, you’ll still need to entirely repay the investor. You can find venture capitalists through internet searches and reach out to schedule pitch meetings.

9. Angel investors

Where venture capitalists are typically firms, angel investors are usually wealthy individuals who are experts in their field. Otherwise, they operate mostly the same: Both entities will fund your small business in exchange for a seat at the table. While angel investors typically invest less money than venture capitalists, they’re also unlikely to ask for their money back if your business fails.

Angel investors are a great fit for companies that need large sums of cash and reliable expertise. You can find them on several websites that connect small business owners with angel investors who could potentially fund them.

10. Short-term working capital loans

Short-term working capital loans come in two main varieties. They’re available through the SBA CAPLines loan program, which offers installment and revolving loans of up to $5 million. However, the SBA only offers these loans to a narrow range of small business owners. You might more easily qualify for other short-term working capital loans such as business lines of credit or invoice financing and factoring.

11. Invoice financing

Invoice financing companies will pay you roughly 80 percent of the value of your business’s current outstanding invoices. Once you collect these invoices from your clients, you’ll pay 1 to 3 percent of your invoice total for each month of your loan.

Invoice financing is a great choice if you need cash sooner than later from a source you can probably repay. You can apply for invoice financing through SmartBiz’s custom financing solutions, but keep in mind that delayed client payments on invoices can increase your fees.

12. Invoice factoring

Invoice factoring is almost entirely the same thing as invoice factoring, with two key differences: The first and most important difference, an invoice factoring company will take over the collection process on your behalf. The second, invoice factoring companies provide you with roughly 85 to 90 percent of your invoices upfront.

Invoice factoring is reliable for the same reason as invoice financing. It’s a cash flow boost based on money you can probably say someone will pay you in the future. However, its fees are higher than with invoice financing – 2 to 4.5 percent. That fee range can present even more financial trouble for you if your clients pay slowly or not at all. You can find invoice factoring companies through internet searches and apply on their websites.

Apply for small business funding with SmartBiz

Among the above types of funding for small businesses, SBA 7(a) loans are generally the best option. Bank term loans are a solid second choice, and invoice financing, business credit cards, and business lines of credit are great options too. It’s easiest to apply for them all with SmartBiz by your side. See if you pre-qualify*, and reach out to us anytime you need assistance – we’re here to help you get the funding you need.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

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