Small Business Financing | Bankrate

As a small business owner, you have several options for financing. Taking on business debt through a loan or credit card is a common and swift method for accessing capital and building business credit. If you decide to go this route, understanding the differences among options can help you to apply for funding that best suits your situation. 

Depending on your circumstances, you may also consider applying for a grant or sourcing crowdfunding to launch or grow your business.

Business credit cards

Who it’s best for: Borrowers who need cash fast

Where to get business credit cards: Your bank; companies from which you purchase supplies

A business credit card is one of the quickest and easiest ways to secure financing. You will generally need a decent personal credit history to be approved for these cards. 

You will likely be asked during the application process to define your business structure (freelance, sole proprietorship, LLC, S-Corp, etc.), even if you still need to organize or register your business formally. 

Business credit cards offer different benefits from personal accounts, including higher spending thresholds and employee cards with customizable spending limits. Some business cards also offer year-end reporting optimized for business recordkeeping.

Pros & cons

Pros:

• Fast funding
• Easy approval

Cons:

• Annual fees common
• Interest rates may not be as competitive as for small business loans

Bank loans

Who it’s best for: Businesses that have proven creditworthiness 

Where to get bank loans: Wherever you do your business banking 

Business loans may be available through your bank, and you can apply once you have established a business banking relationship with checking or savings accounts. These loans often have more strict requirements than loans from online lenders and require a track record of financial stability. 

If you have been in business for some time and have proven that you can pay bills reliably, your bank may offer competitive loan terms and interest rates unavailable elsewhere.

Bank loans commonly have a fixed term, or a set time over which the original loan amount is repaid plus interest. You can use bank loans for expenses including real estate, equipment, vehicles and supplies. Your bank may offer a specific type of small business loan designed for the expenses you plan on incurring.

Pros & cons

Pros:

• Advantageous borrowing terms and interest rates
• High spending limits

Cons:

Loans from alternative lenders

Who it’s best for: New businesses or business owners working on their credit

Where to get online loans: Online lenders; finservs

Online loans through non-bank lenders can be an option for businesses that do not have the banking or credit history needed to acquire a traditional bank loan. For borrowers working to establish or rebuild their credit or just getting their business off the ground, this kind of loan can be more accessible than borrowing from a brick-and-mortar bank. 

Keep in mind that online loans may be easier to secure than traditional bank loans, but they may not be easier to repay. While funding can be approved and provided quickly, repayment terms may be shorter and interest rates higher — especially if you have middling or poor credit.

Pros & cons

Pros:

• Easy approval when compared with traditional lenders or bank loans
• Can offer more competitive interest rates than business credit cards

Cons:

• Interest and repayment terms may not be as favorable as those for SBA or bank loans

Small Business Administration (SBA) loans

Who it’s best for: Established businesses

Where to get an SBA loan: SBA preferred partner lenders

Small Business Administration loans may not be as easy to lock in as those from an alternative lender. Qualification guidelines are strict and the application process is lengthy and requires lots of documentation. 

That’s because these loans, while approved through private lenders, are partially backed by the federal government. The government sets fee and interest rate caps, potentially keeping borrowing costs low. The various SBA loan types can cover working capital, expansion and large purchases for small businesses.

Pros & cons

Pros:

• Flexible use; can be used for a variety of expense types
• Limited fees and capped interest rates established by the SBA

Cons:

• May take longer (sometimes weeks) to be approved and financed 
• Require a strong personal and business credit history
• Hard to qualify

Grant funding

Who it’s best for: Borrowers who want free financing; business owners from underrepresented groups

Where to get grant funding: Government-backed grants are accessible at Grants.gov; private companies and lenders offer separate application processes

Unlike loans, grants don’t need to be repaid. While some strings may be attached (such as reporting requirements or program participation), grants do not require repayment of principal or interest. That means grant funding is highly coveted and highly competitive.

Grants are not typically a quick or guaranteed funding option. Because application processes are lengthy and these funds are highly sought-after, be prepared to compete — and wait — for funds to hit your account.

Note that many grants are designated for or prioritize business owners from specific underrepresented groups, such as women and certain racial minorities.

Pros & cons

Pros:

• Funds do not need to be repaid
• Great for brand-new or high-risk businesses

Cons:

• Long timeline
• Often only available on an annual or seasonal basis
• Highly competitive application processes

Crowdsourcing

Who it’s best for: Businesses with local demand or niche interest

Where to get crowdsourcing funds: Platforms such as Kiva, Kickstarter, SeedInvest and EquityNet

Crowdsourcing financial support for your business can help you find nontraditional funding sources, including private individuals interested in the work you’re doing. If your business addresses a unique interest or need — like being the first of its kind in your area or offering a unique hobbyist product — you might consider crowdsourcing a possibility.

While crowdfunding may drum up funding from the woodwork, it’s not an ongoing source of funds. Many crowdsourcing efforts involve one-time contributions in exchange for perks or company equity.

Pros & cons

Pros:

• Can build stakeholders and long-term relationships
• May capture private interest or nontraditional funding sources

Cons:

• Not a long-term solution for ongoing needs

FAQs about business financing options

• Where can I apply for financing for my small business?

  If you are willing to borrow money, you can apply to a bank or private lender for a small business loan or line of credit. Many banks also offer credit cards.If your funding needs have a flexible timeline, you may wish to apply for a small business grant. Grant funding is often competitive, but awards do not need to be repaid. State and federal governments, nonprofits and corporations may offer grants. Crowdfunding is another option for business owners seeking financing, especially if they are willing to trade company equity for capital. Crowdfunding campaigns may be conducted on dedicated online platforms.

• What kinds of financing are available for small businesses?

  Small business term loans and lines of credit are the most common loan types for small businesses. There are also many other business loans designed for short- and long-term funding. These solutions involve the borrower paying back the principal plus any interest that accrues. For more liquid funding and potential rewards, many small businesses take out business credit cards. You can also look at less-traditional funding options, such as grants or crowdfunding.