Financing Options for Small Businesses - NerdWallet (2024)

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Business financing is money that helps you start, run or grow your business. You can get business financing by taking on debt, like small-business loans from traditional banks and online alternative lenders, or by offering investors equity. The right financing for your business will depend on factors such as: why you need capital, how fast you need it and your business’s qualifications.

To help you find a good fit, here’s an overview of the most common financing options for small businesses — and where to get them.

How much do you need?

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

How does financing a business work?

Financing for small businesses usually involves some form of debt; however, there are zero-debt options as well. With debt-based financing, you’ll have to pay back the funds you borrow over time, usually with interest. Zero-debt financing can come in the form of small-business grants or gifts from friends and family, or as equity financing, where you give investors equity or ownership in your company in exchange for their financial support.

>>MORE: Debt vs. equity financing

Financing options for small businesses

Bank financing

Types of bank financing for small businesses include term loans, business lines of credit, equipment loans, commercial real estate loans and business credit cards.

Bank business loans typically have low interest rates and competitive terms, but can be hard to qualify for. You’ll likely need strong personal credit, established business revenue and two or more years in operation to access bank financing.

Even if your business doesn’t have a strong enough track record or enough assets as collateral to qualify for financing from a bank, talking to someone at a traditional bank can help you figure out what application documents you need and what your best options may be.

SBA loans

The U.S. Small Business Administration offers its lenders, mostly traditional banks, a federal guarantee on your loan. This makes it less risky for banks to lend you the capital you need to be successful. In guaranteeing the loans, the SBA also connects you with favorable rates offered by traditional lenders.

There are multiple types of SBA loans available, including SBA 7(a) loans, SBA 504 loans and SBA microloans. The most popular of the SBA loan programs, 7(a) loans can be used for a wide variety of purposes and are available in amounts up to $5 million.

Although SBA loans can be easier to access compared to bank financing, you’ll still generally need to meet top criteria — a good credit score (FICO 690 and up), strong annual revenue and at least two years in business — to qualify. Plus, the application process isn’t easy; you may find yourself trapped under a heap of documents while you work through the appropriate forms.

Online loans

With traditional banks limiting access to capital, online lenders have seen an increase in popularity, especially among business owners who are facing credit challenges. In 2022, 37% of medium- or high-risk credit applicants applied to online lenders and 14% applied to nonbank financial companies, according to the annual credit survey from the Federal Reserve.

Online lenders also offer fast cash, with several of them able to approve and fund applications within 24 hours. These lenders offer a variety of small-business financing options, including term loans, lines of credit and invoice financing. The cost of borrowing, however, is generally higher; annual percentage rates can range anywhere from 10% to 79%.

Credit union financing

Like banks, credit unions offer favorable rates and loans backed by the SBA. Unlike banks, credit unions have increased their small-business lending. According to Federal Reserve data released in October 2022, lending by credit unions to small businesses increased by over 50% from 2017 to 2021.

In addition to SBA loans, credit unions can offer a range of financing options, including lines of credit, traditional term loans and business credit cards.

You’ll likely have to be a member to qualify for financing. But the co-op nature of credit unions often ties them to the community, so you may also reap the benefits of more personal relationships and name recognition.

Zero-debt financing

If you want to avoid taking out a business loan, or simply can’t qualify for any debt financing options, there are several ways to fund your business that don’t require debt.

  • Small-business grants. Small-business grants offer a way for business owners to get money that can help them grow their business, without having to worry about paying back the funds. Typically offered through nonprofits, government agencies and corporations, some grants focus on specific types of business owners or particular industries. Small-business grants can be a great funding option for startups, as well as for businesses that can’t qualify for traditional debt financing. The downside to free capital is that everybody wants it. It will take a lot of work to find and apply for grants, but time spent searching for free money opportunities could pay off in the long run.

  • Equity financing. Equity financing is any form of capital that you receive in exchange for equity, or ownership in your business. Crowdfunding, venture capital, angel investors and sometimes friends and family are sources of equity financing. Although the popularity of these services has increased in recent years, there are caveats. For one, your product or company has to be intriguing enough to catch the eye of multiple investors. In the case of equity crowdfunding, where investors gain a stake in the company, there are strict securities laws and rules to follow for investors and entrepreneurs alike. Equity financing can be a worthwhile option for businesses just starting out, but it’s not a great solution for long-term financing.

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Where to find financing for small businesses

Banks

Start by contacting a bank with which you have an existing relationship. Big-name banks, like Chase, Bank of America and Wells Fargo, all offer a variety of business financing options.

If you don’t have an existing relationship with a large bank or one that offers business financing, you can search for local banks in your community.

These institutions, in particular, are a great resource for small-business financing because they often have a strong interest in economic development in the community. According to the Federal Reserve’s 2022 Small Business Credit Survey, business loan applicants report higher approval rates with smaller banks than big-name institutions, as well as greater overall satisfaction compared to large banks and online lenders.

SBA lenders

Most SBA loans are issued by banks, credit unions and other financial institutions. Similar to bank loans, you can start your search for an SBA loan with a lender you’ve previously worked with, or a local bank in your community. National banks like Chase, Wells Fargo and Bank of America issue SBA loans as well.

The SBA website also offers a lender match tool to help connect you with financial institutions in your area.

Online lenders

There are a variety of small-business lenders out there that offer online loans — and the best option for your business will depend on the type of financing you need and what you can qualify for.

For example, if your business has strong qualifications but prefers an expedited process, Funding Circle is a great option for traditional term loans. For businesses that want a flexible line of credit, Bluevine, OnDeck and Fundbox each offer competitive products.

Credit unions

Since credit unions are often community-based, you’ll want to find a local option. You can use MyCreditUnion.gov to browse credit unions in your area.

Some credit unions also offer membership based on your employer or organizations you may be affiliated with.

For example, Navy Federal Credit Union is a national credit union that offers membership to members of the U.S. armed forces, Department of Defense and National Guard as well as their families. Navy Federal members can apply for a variety of business financing.

Grant programs

Small-business grants are offered by federal and state agencies, as well as private corporations. In addition to Grants.gov, one of the most well-known online databases for grants distributed by government agencies, your local Economic Development Administration branch or Small Business Development Center may also help you find grant programs and similar financing opportunities.

For grant options focused on different types of business owners, check out the following lists:

  • Small-business grants for minorities

  • Small-business grants for veterans

  • Small-business grants for women

  • Small-business grants for Black women

  • Small-business grants for LGBTQ+ business owners

  • Small-business grants for people previously convicted of felonies

  • Grants for nonprofits

Online financing platforms

Equity financing can be found through a number of online platforms. Kickstarter, GoFundMe and Indiegogo are good choices for rewards-based crowdfunding. For equity crowdfunding, platforms like Republic, CircleUp and Fundable are all viable options. If you’re looking for angel investors, sites like Angel Capital Association and AngelList can connect you with accredited angel investors.

What type of financing for small businesses should you use?

How you should finance your business depends on what you want to accomplish with that funding, as well as what you can qualify for. You may have a tough time getting a business loan before you’ve been in operation for at least a year, for instance.

Here’s how to figure out what business financing options might be best for you.

Funding type

Who it's best for

What you'll typically need to qualify

Business loans

Established businesses.

At least one year in business and good credit. You may have to provide collateral or sign a personal guarantee.

Business credit cards

Businesses seeking to cover small gaps in cash flow.

Fair to good credit.

Business lines of credit

Established businesses seeking to cover gaps in cash flow.

At least 6 months in business and fair to good credit.

Self-funding

Business owners who are personally financially secure.

No qualification process.

Friends and family

Business owners who have a circle of peers and family members who have enough resources to make an investment.

You should be prepared to show investors your business plan.

Crowdfunding

Businesses with a large public profile.

Significant popularity or public support.

Equity investment

Startups or established businesses planning to expand.

A relationship with venture capital funds or other investment funds.

Frequently asked questions

What is the best way to finance a small business?

The best way to finance a small business varies based on factors such as why you need capital, how fast you need it and your business’s qualifications (e.g. credit score, time in business).

If you want the most affordable type of debt financing and you have strong qualifications, a bank or SBA loan might be your best option. On the other hand, if you’re a newer business or have fair credit, an online loan might be a better route. And if you’re looking to avoid debt altogether, grants or crowdfunding might be your best bet.

What type of financing do small businesses use?

Small businesses typically use debt or equity financing — or a combination of the two. Debt financing involves borrowing money from a third party, which you then repay, with interest. Equity financing, on the other hand, means you receive money from an investor in exchange for partial ownership of your company.

Where can I get financing for my business?

Some of the most common sources of small-business financing include banks, credit unions and online lenders. Grants are also available from sources like nonprofits, government agencies and private corporations. Investors or crowdfunding platforms can offer equity financing.

Rosalie Murphy contributed to this article.

Financing Options for Small Businesses - NerdWallet (2024)

FAQs

What type of financing do small businesses use? ›

Small businesses typically use debt or equity financing — or a combination of the two. Debt financing involves borrowing money from a third party, which you then repay, with interest. Equity financing, on the other hand, means you receive money from an investor in exchange for partial ownership of your company.

What is the best source of finance for a small business? ›

This could be equity finance – investment; debt finance – loans/overdrafts; grants. They may well be willing to help lend money to a new business starting up. This can be particularly good if they don't want any interest repaid on the loan that they make to you.

Which of the following are financing options for small businesses? ›

Below are some of the most popular small business loans and other varieties of business funding, ranging from lending platforms to crowdfunding.
  • Small Business Administration (SBA) loans. ...
  • Small business grants. ...
  • Traditional bank loans. ...
  • Business credit cards. ...
  • Credit union loans. ...
  • Invoice factoring. ...
  • Crowdfunding.
Mar 29, 2024

What is the best financing option for a business? ›

Business Financing Options
  • Bank funding. The bank may be your first stop in your search for funding. ...
  • Investor. Another option may be to bring in an investor. ...
  • Family and friends. For many business owners, family and friends are a common source of capital. ...
  • Factoring.

What is the most common source of small business financing? ›

Loans are the most commonly used source of funding for small and medium sized businesses.

What is the best source for small business loans? ›

Best Business Loans Of June 2024
  • QuickBridge: Best for Fast Business Loans.
  • OnDeck: Best for Short-Term Business Loans.
  • American Express® Business Line of Credit: Best for Business Lines of Credit.
  • Wells Fargo: Best for Business Lines of Credit From a Bank.
  • Fora Financial: Best for Large Business Loans.
4 days ago

What is the cheapest source of finance in business? ›

Retained earning is the cheapest source of finance.

What financial institution is best for small business? ›

The best small business bank accounts are provided by Chase, Axos, U.S. Bank, LendingClub, and Wells Fargo. They're easily accessible with relatively low fees and minimum balances, along with generous transaction limits.

What is the most common method of financing a business? ›

Government Funding

These are the most popular forms of small business financing, particularly the SBA's 7(a) and 504 small business loans. SBA loans are fixed-rate, fixed-term loans that must be repaid. Certain loan products may also have restrictions on how small business owners can use the proceeds.

What is the most common type of small business loan? ›

Here are a few of the most popular options: SBA 7(a) loan: This loan is the most sought-after and can be used for most business purposes. You'll be required to provide collateral for any loan $50K or more. SBA 504 loan: These loans are used to finance fixed assets.

What is another source of financing for small businesses? ›

Small businesses can get money through "equity financing" or "debt financing." Equity financing means that you sell stock in your company to a buyer, who then has an ownership interest in your company. Debt financing means a loan -- you owe the person who holds the debt (usually a promissory note) the amount borrowed.

What are the primary ways to finance your business? ›

The best way to get capital to grow your business
  • Bootstrapping. The funding source to start with is yourself. ...
  • Loans from friends and family. Sometimes friends or family members will provide loans. ...
  • Credit cards. ...
  • Crowdfunding sites. ...
  • Bank loans. ...
  • Angel investors. ...
  • Venture capital.

How to choose finance options? ›

Factors to consider when choosing a financing option include the purpose of financing, the state of the business, credit history, affordability, and whether debt or equity financing is more suitable.

Which source of finance is best for business? ›

Best Common Sources of Financing Your Business or Startup are:
  • Personal Investment or Personal Savings.
  • Venture Capital.
  • Business Angels.
  • Assistant of Government.
  • Commercial Bank Loans and Overdraft.
  • Financial Bootstrapping.
  • Buyouts.

Which is a riskier form of financing for a business? ›

Is Debt Financing or Equity Financing Riskier? It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.

What is finance in a small business? ›

source of business financing (also referred to as startup financing - especially when referring to an investment in a startup company - or franchise financing) refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring ...

What is a small business loan in finance? ›

A small business loan gives you access to capital so you can invest it into your business. The funds can be used for many different purposes including working capital or improvements including renovations, technology and staffing, business acquisitions, real estate purchases and more.

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