Scaling a new venture will take you through some exciting milestones: your first sale, your first paid employee, your first physical location. As your business grows, you may find yourself making plans to expand your inventory, launch a new product line, or even take on a new geographic market or customer segment.
But growth comes with costs, and your business’s initial capital can get you far. But there are likely going to be cases where you’ll need some fresh financing.
Planning may be the difference between successfully scaling to the next profitable level—or growing your way into an unexpected bankruptcy. Planning involves knowing your options for business financing, should you need it.
Table of contents
What is business financing?
Business financing is securing capital from third-party sources to fund a new or existing company. Business financing is handy for seasonal gaps in sales, unanticipated downturns, and the challenges of growth and evolution. Business financing also comes in handy for entrepreneurs who are starting a new business.
Learn more: 6 Easy Steps To Start a Business With No Money
What is debt financing for a business?
Debt financing involves borrowing money from a lender, such as a bank, and paying it back over a period of time, with interest. Examples of debt financing include business credit cards, loans, invoice factoring, and bonds.
What is equity financing?
Equity financing is when you raise money by selling a portion of the ownership in the business to investors. Selling shares is an example of equity financing. Equity financing is essentially the opposite of debt financing—the former involves selling stock while the latter involves selling debts.
Business financing: 14 options in 2023
Below are some of the best options for small businesses in need of financing in 2023.
1. Bank loans
A private bank loan involves borrowing money from a bank that you can reinvest into your business. You can take out a small business bank loan or a personal bank loan, each with its own benefits and drawbacks. Borrowing for your business against your personal assets is risky, but it can be done.
The average personal loan interest rate is just over 10%, and small business loans range between 5% and 7%.
- Easy to apply. The process to apply for a bank loan is straightforward and easy.
- Fast access to funds. Some banks issue loans within a matter of a few days, faster than many financing options for a small business.
- More requirements to qualify. Many banks require a long-standing and strong credit history, which makes it especially tricky as a startup business loan option.
- High interest rates. Bank loans have higher interest rates than other business financing options, especially if you don’t have a strong credit history.
- Funding Female Founders: Small-Business Loans for Women and Where to Apply for Them
- How to Get a Loan for Your Small Retail Business
- Choosing the Right Bank for Your Business: 8 Things You Should Know
2. Online loans
Another option for financing option for a business is via online loans. These loans are offered virtually. Typically, lenders are financial services or related fintech companies, though many banks offer online loans as well. Just 11% of small businesses sought this financing option in 2021 for pandemic-related challenges. However, businesses are warming up to online loans—borrowers were more likely to apply with an online lender and less likely with a small bank in 2021, compared to 2020.
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- Convenience. When financing a business via online loans, there’s no need to visit a physical bank or storefront. You can apply for, receive, and manage the money digitally. The user interface is also usually better and more intuitive than more traditional lending options.
- Fast access to funds. Some online loans can grant you cash even quicker than a bank loan.
- Easier to qualify. Online loans often have more flexible qualification requirements than other funding options.
- Even higher interest rates and fees. Because online loans are quick and convenient, they usually come with additional costs.
- Repayment qualifications. Many online loans come with a shorter repayment period.
- Limited funds. If you need a lot of cash, you’re better off exploring a different option, as online loans tend to have more limitations in terms of maximum loan amount.
- No physical presence. If it’s important to you to be able to visit your lender and speak with someone in person, online loans don’t offer this option.
3. Small business grants
Small business grants are money given to entrepreneurs and small businesses by private, public, governmental, corporate, or individual entities. The business isn’t required to pay the money back, however, it’s typically mandated to use the funds in a certain way. The goal of a grant is to invest in a business that supports the investor’s mission and values. As such, each grant has its own requirements, and the amount of money on the table varies widely.
- You don’t have to pay it back. Small business grants are financial gifts, so the money is yours to keep and there’s no requirement to repay it.
- Contribute to a mission. Grants mainly exist to fund businesses that support the grant issuer’s vision and principles. This also gives you a sense of community.
- Competitive. Because grants are essentially free money, lots of small businesses pursue this route.
- Research and application process. It can be difficult to find grants relevant to your business—you’ll need to research the grants available as well as dedicate the time to preparing a worthy application.
- Limiting use of funds. Grants usually come with stipulations and requirements as to how you use the capital.
- Small Business Hardship Grants: Where and How to Apply
- 13 Top Grants for Black Business Owners to Consider (2023)
4. SBA loans
SBA loans are issued by the US Small Business Administration (SBA) through a variety of different SBA loan programs. These loans are a form of business debt administered by either the SBA itself or a member of its network of approved private lenders (with SBA-backed loans).
Some SBA loans offer fixed sums at a specific interest rate over an agreed repayment period and can be put toward a range of expenses. Other SBA loans are more specific in their purpose, such as commercial real estate or equipment purchases.
- Repayment terms. SBA loans often are among the most favorable in terms of repayment conditions. They also have capped interest rates.
- Free business advice. The SBA has Small Business Development Centers (SBDCs) throughout the country where you can meet with an SBA adviser. You can also solicit free advice through its SCORE business mentoring program.
- Difficult to qualify. SBA loans are harder to qualify for than other financial products from a commercial bank.
- Personal liability. If the business is unable to repay the loan amount, you’re personally liable to make up for it.
- Long, slow process. SBA loans require a lot of paperwork and often take a long time to administer funds.
5. Credit union financing
A credit union is a financial institution, like a bank, except it’s owned by a nonprofit financial cooperative made up of members rather than a commercial for-profit corporation. Credit unions offer many of the same products and services as traditional banks, and this includes capital for financing business.
Despite credit unions being a great opinion for entrepreneurs, only 13% of small businesses use them, and 5% sought financing from this source for pandemic-related assistance.
- Low interest rates. Compared to traditional banks, credit union loans offer lower interest rates.
- Easier to qualify. Credit unions are smaller than most banks, and they focus on localized services. As such, they often have more flexible qualification requirements.
- Limited locations. If you prefer to visit a physical location when dealing with your lender, keep in mind credit unions often have a smaller footprint than larger banks with several branches and regions.
- Members only. Many credit unions only lend to people and businesses already a part of their institution. If you want to pursue this financing option, make sure you open a bank account or sign up for one of the credit union’s other products or services.
Crowdfunding has become a popular method of raising money for startup businesses. It involves soliciting lots of donations from the public, rather than a large sum of money from one or a few contributors. Online crowdfunding sites, peer-to-peer payment platforms, and social media have made crowdfunding accessible to nearly anyone.
You can often sweeten the deal for crowdfund contributors by offering a free product, swag, early access, or some other perk in exchange for their donation.
- Build buzz about your brand. Crowdfunding puts your brand on the map before you even have products for sale.
- Creates a community. Crowdfunding gives your audience a unique opportunity to contribute to the business in a meaningful way. You can nurture these relationships over time to create a community around your brand.
- Difficult to raise capital this way. Crowdfunding often requires a whole marketing plan for itself, which can be a big task to add to your list when starting a business.
- Third-party site fees. If you’re using a third-party crowdfunding platform like GoFundMe, you’ll likely have to pay fees to the site you’re using. So the money you raise isn’t all yours.
Microloans are smaller loans of up to $50,000, though the average SBA microloan is around $13,000. The loan essentially matches borrowers with intermediary lenders—the lenders are nonprofit community-based organizations, each with its own loan eligibility criteria.
- Opportunity for under-represented groups. Microloans are specifically meant to be community-driven. You’ll often find financing options for women business owners, veterans, low-income entrepreneurs, and other minority groups.
- Fast access to funds. You can receive capital within a matter of days through a microloan.
- Low interest rates. Microloan interest rates vary depending on the lender, but average from 8% to 13%.
- Limited use. While you can use microloans to pay for things like working capital, inventory, supplies, and equipment, you can’t put it toward existing debt or use it to purchase real estate.
- Repayment period restrictions. The maximum repayment period is six years through the SBA, for example.
- Varying qualification requirements. Because there are different lenders, each microloan has its own requirements for eligibility.
8. Merchant cash advance
A merchant cash advance (MCA) is a business financing option businesses repay as a percentage of sales, plus a small fee. It’s best for small businesses that need working capital and accept card payments from their customers.
MCAs essentially work by selling a portion of your future sales in order to have access to cash now. The company purchasing your future sales will usually automatically collect a portion of your daily or weekly debit and credit card sales, or a fixed payment every day or week.
- Only repay when you make money. Because of the way this financing option is set up, you only repay the loan as more cash flows into your business.
- Fast access to cash. MCAs are relatively quick and easy to get compared to other finance options. You can also use it however you like.
- Easy to qualify. MCAs are readily available to many entrepreneurs, regardless of credit history.
- Won’t hurt your credit score. If you make late payments, your credit score won’t be impacted.
- Frequent payments. These eat into your cash flow and profit margins.
- High interest rates. MCAs are repaid based upon a “factor rate.” The factor rate is often set up so you pay back as much as 150% of what you borrowed.
- Don’t build credit. Though this is an advantage if you have difficulty making payments, MCAs won’t help new businesses build credit.
9. Cash flow loans
A cash flow loan is a term loan offered by banks based upon a business’s forecasted cash flow. Rather than using the business’s or the person’s assets as collateral—reflected on the balance sheet—a cash flow loan is based on the cash flow statement. They’re particularly useful for service-based businesses, selling digital products, and businesses that don’t own or hold a lot of assets. They’re also handy for businesses getting ready to launch that don’t have many assets yet.
- No personal liability. Because these loans aren’t asset-based, you don’t have to worry about your personal assets being at risk.
- Large sums of capital. You can often borrow more via a cash flow loan than a traditional bank loan.
- Short repayment terms. Many cash flow loans require repayment in less than 10 years. They’re more ideal for short-term capital needs than long-term investments.
- Requires credit and/or business history. To qualify for a cash flow loan, you’ll need to show strong financial statements to prove projected income. Many lenders also look for good credit.
10. Business credit cards
Business credit cards are similar to personal credit cards, though they often come with higher limits and business-specific features. Opening a business credit card is usually a good idea, even if you don’t need access to funds, as it can help you establish a strong credit history, so long as you maintain on-time payments.
- Fast and convenient. Applying for and getting a business credit card is a relatively easy and straightforward process, especially compared to some of the other business financing options available.
- High interest rates. Credit cards typically have higher interest rates than other funding options like small business loans. It’s important to pay it back in a timely manner so you don’t pay a lot in interest.
11. Vendor financing
Vendor financing is when a vendor lends capital to a borrower with the stipulation that said capital is to be used for purchasing products or services from the lending vendor. This is the situation when someone “rents to buy” a property. As such, it’s a good option if you’re looking to purchase a retail storefront, warehouse space, production facility, corporate office, or other business property. You might also consider vendor financing when purchasing a business from someone else.
You also see this in inventory financing. This is when retailers borrow inventory from a supplier and pay them back at a later date for it, usually in installments. This is helpful for acquiring a lot of product or material that will sit in the warehouse for some time prior to being sold.
- Steady cash flow and business operations. When it comes to inventory financing in particular, businesses can use this financing option to maintain smooth operations and avoid cash flow issues or stockouts.
- Easy to qualify. Many lenders in this type of setup don’t require long credit or business history.
- Bank hesitation. Depending on the lender, you might face trepidation. Banks in particular are hesitant to lend because collecting the collateral can be challenging in case of non-payment.
- Depreciation. While property may appreciate in value, other assets like inventory or equipment may depreciate with time, lowering the value of what you borrowed.
- High risk. Borrowing in this way means you put a lot of collateral at risk, be it property, inventory, or other assets.
- High cost. Interest rates are also higher, and vendor financing typically comes with additional fees.
12. Equipment financing
Equipment financing refers specifically to business loans taken out with the intention to purchase machinery or equipment for the business. This is a viable option if you’re looking to purchase equipment to take manufacturing in-house, cash registers and computers for a new retail store, or machinery to manage a large warehouse space. You can also use equipment financing to lease equipment or to repair, maintain, or otherwise service machinery you already own.
- No collateral. Many equipment financing options don’t require collateral like traditional loans. This decreases the risk.
- Build business credit. Equipment financing impacts your business’s credit history, which can be good for young businesses with minimal financial history.
- Very specific use. You can only use this capital for purchasing business-related equipment. Any other use of the fund is prohibited.
- Pay more than the equipment value and cost. Because interest is involved, you’ll end up paying back more than the original cost of the investment.
13. Angel investors
An angel investor is a wealthy individual who provides funding for a startup, often in exchange for an ownership stake in the company. These investors will typically put anywhere between $25,000 and $500,000 toward an investment.
- Strong backup plan. Angel investors are a great option for entrepreneurs who don’t qualify for startup business loans or are too small to interest a venture capital firm.
- Values-based. In many cases, angels are more concerned with the commitment and passion of the founders and their larger market opportunity than aggressive growth.
- Requires a strong pitch. Because a return on their investment isn’t necessarily guaranteed, you’ll need to come up with a strong pitch to get people to hand over their money.
- Give up control. Because angel investors essentially become part-owners of the company, you’ll likely have to give up some sort of control and share some decision-making.
14. Venture capital
Venture capital (VC) is a type of financing provided to privately held businesses by investors in exchange for partial ownership of the company. A VC is usually a firm of many members, whereas angel investors are typically individuals. Similar to angels, VCs typically take an equity, ownership, or stake, in the company as their form of payment.
- Risk taking. While banks and traditional lenders are risk averse, VCs are more willing to take a chance. This is especially beneficial for high-risk industries.
- Assistance. Another difference from traditional lending, VCs have a more invested interest in the success of your business. As such, they likely serve on a board and have some sort of input into business decisions and plans.
- Pressure for business growth. VCs demand aggressive and rapid revenue growth from their investments.
- Very difficult to secure. Less than 1% of companies have successfully captured VC investments.
Small business financing
Best small business loans
Some of the best small business loans available at the time of this writing include:
- Shopify Capital
- 7(a) loans from the US Small Business Administration
- American Express Business Blueprint
- Funding Circle
- Microloans from the US Small Business Administration
- OnDeck small business loans
Business financing from family and friends
You can also tap into your existing network of family and friends for business financing. However, this option should probably be pursued as a last resort—it can be difficult to mix business and personal relationships. And should your idea not go as planned or as your “investors” thought, you could ruin a lot more than finances.
How to get financing for a business
1. Improve your credit score
A good credit score indicates a strong likelihood you’ll deliver your end of the bargain, whether that’s paying back or something else. Establishing a strong credit history for your business is critical, and you should start from day 1.
TIP: Unfortunately, gender bias is rampant in small business funding, so women business owners will want to improve the likelihood of receiving funding as much as possible.
2. Have a plan
In business, there are few things worse (or with as much potential to be unsuccessful) as having to scramble for capital on short notice. Planning well ahead of your anticipated needs is the smartest course.
3. Determine how much business financing you need
Just how much to save, of course, is a matter of business judgment. Too little, and the cushion may be uncomfortably thin if and when something bad happens. Too much, and you risk starving your growth today to guard against an event that may never occur.
4. Focus on financials
The first step is to build an emergency fund for your business so you can survive the onset of recession, a sudden negative event, or even a positive event in the form of unanticipated demand growth.
5. Know your options
Don’t be afraid to shop around and get quotes from a variety of sources. You’re not locked into anything until you sign the paperwork. When you know your options, you can also use that information to negotiate better terms or rates.
6. Prepare your killer pitch
There’s going to be an application and vetting process regardless of which business financing option you use. Get ahead of the game with some preparation. Put together a folder of files containing your business plan, financial statements, product catalog, and other relevant information. Then develop an elevator pitch to hone in on why your business is deserving of the funds you’re requesting.
Business financing: planning matters
Knowing your industry and planning for the potential ups and downs you may face is a basic element in running a business, and that planning should include your anticipated needs for fresh capital and the building of an emergency fund for unanticipated needs.
Make sure you’re mentally and financially ready for this: if you are well prepared or work with financial partners that understand your business, who can make financing decisions quickly, and who can tune repayment (or equity) terms to your requirements, you’ll find it much easier to ensure your unique enterprise gets the kind of fuel it needs, exactly when it needs it.
Building a business is an incredible journey, after all. Who wants to run out of gas half way?
Business financing FAQ
What is meant by business financing?
Business financing is when an entrepreneur secures external capital to support a business need. Business financing can come from traditional sources like bank loans and investors as well as non-traditional sources like crowdfunding.
What are the types of business financing?
- Debt financing: This involves borrowing money from a lender, such as a bank, and paying it back over a period of time with interest.
- Equity financing: This involves raising money by selling a portion of the ownership in the business to investors.
- Crowdfunding: This involves raising money from a large number of people, usually via the internet, to fund a project or business.
What is the purpose of business financing?
- Weather seasonal gaps
- Survive unanticipated downturns
- Combat the challenges of growth and evolution
- Pay for necessary equipment repairs or purchases
How to get financing to start a business?
You can obtain financing to start a business through a variety of sources, including traditional bank loans, Small Business Administration (SBA) loans, online lenders, venture capital, angel investors, and government grants.