Unless your business can meet all its financial needs without breaking a sweat, you’ll want to access capital through external financing at some point. Besides, even large and successful businesses sometimes seek capital infusions to meet long-term and short-term financial obligations.
Most people naturally picture loans when thinking about business financing. But typical business loans are just one of the many ways you can fund a business. Entrepreneurs have dozens of financing solutions at their disposal, all with wildly different terms, structures, pros, and cons. The only trick is finding the best financing option for your business or need.
This article explores the various types of business financing you can access today. But first, let’s get the basics out of the way.
Business financing basics
Small business financing comes in three main flavors: debt, equity, and non-debt financing:
- Debt financing
The lender loans you some money, and you have to pay it back with interest within the agreed period. Traditional bank loans, SBA loans, mortgages, equipment loans, lines of credit, and business credit cards all fall under debt-based financing.
- Equity financing
A lender or investor gives you money in exchange for shares, ownership, or equity in the business.
- Non-debt funds
Non-debt funds are any capital injections that you don’t have to pay back at all. These could be personal savings, sponsorships, contributions, donations, or grants. Many entrepreneurs fund their businesses themselves using personal savings, earnings from other jobs, and contributions from friends and family without taking on any debt. This is known as bootstrapping.
While bootstrapping is an admirable funding approach, it's not always sustainable in the long run. Bootstrapping can stall business growth by limiting the cash flow to what the owner or the business itself can manage to keep in circulation.
However, some financing deals have complex structures that blur the lines between debt, equity, and non-debt financing. With that in mind, let’s go through the top 10 financing options for small and medium-sized businesses:
1. SBA loans
The U.S. Small Business Administration (SBA) is an independent federal government agency whose purpose is to assist, support, and protect the interests of small business owners across the country. It does so through education and training, voicing small business policies, government contracting, and, crucially, financing. Below is a summary of the financing options offered by the SBA:
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Each SBA financing product has its own terms and conditions. But generally, your business must meet the following requirements to be eligible for SBA funding:
- Registered in the U.S.
- Physically located and operating within the U.S.
- Meets SBA’s definition of a small business.
- You must have reasonable equity or investment in the business.
- Must have tried alternative funding before seeking SBA’s assistance.
2. Traditional bank loans
These are the typical business loans you get from banks and other financial institutions. Unfortunately, it can be difficult for SMBs to access such loans due to the strict requirements imposed by banks. For instance, your business has to have good credit, a long operation history, enough collateral, healthy cash flow, and a low debt-to-income ratio to qualify for a bank loan.
3. Merchant cash advance
In this scenario, the lender extends a lump-sum amount upfront, and the borrower repays the loan by offering a percentage of their sales. The lender can either take a cut of debit/credit card sales or make periodic withdrawals from the borrower’s bank account as repayment.
Cash advances are a quick and easy way to get funding. Plus, the requirements and repayment terms are very flexible (depending on the lender). But they can be expensive, and those frequent repayment deductions can seriously hurt the business’s cash flow.
4. Asset financing
You can leverage asset financing to purchase high-value business resources such as cars, equipment, machinery, and land. Alternatively, you can pledge the existing assets as collateral to get a business loan. Asset financing is a broad term covering various asset-based funding solutions such as:
- Hire purchase
- Equipment lease
- Contract hire
- Finance/capital lease
- Operating lease
- Asset refinance
Many entrepreneurs go for asset financing to spread out the cost of expensive purchases and avoid straining the business's cash flow. It’s also a low-risk way of purchasing high-maintenance and depreciative assets.
5. Business credit cards
Business credit cards are much like personal credit cards, except they have business-friendly terms, limits, reporting, and perks. They provide the business with a low-interest revolving line of credit it can use to keep the lights on.
6. Commercial mortgage loans
Commercial real estate or mortgage loans are used to finance the purchase, development, or construction of an income-generating property. It could be an office building, convenience store, hotel, parking lot — you name it. You can also borrow a business loan against your commercial property’s equity.
The lender may look at your business credit, business plan, the projected income or savings you’ll earn from the property, and the value of the investment before approving your business for a commercial real estate loan.
7. Venture capital and angel investments
Venture capitalists (VCs) are individuals or organizations that invest in companies, usually start-ups, showing high growth potential in exchange for equity. VCs generally use funds pooled from other companies or ventures. An angel investor also funds small businesses in exchange for equity. But unlike a VC, an angel investor will put their own money on the line while focusing more on building the business than profiting right away.
Both venture capital and angel investments are equity financing solutions. While you don’t have to repay the investors in cash, taking an investment means giving away a portion of your business, maybe even some leadership or managerial control, too. Sometimes that's a compromise worth taking. But first, you have to convince the investors to take a chance on you and your business.
8. Crowdfunding
Crowdfunding is a unique way of raising business capital from the general public. A typical crowdfunding campaign aims to source small contributions from a vast network of people, usually via social channels or crowdfunding platforms such as Kickstarter, GoFundMe, and Indiegogo.
You can offer ownership stakes or exclusive deals such as discounts, early access to products and services, or rewards in exchange for the funds. Crowdfunding raises billions of dollars every year, although only 22.9 percent of crowdfunding operations are successful.
9. Peer-to-peer lending
P2P lending, also known as "social" or "crowd" lending, is a form of financing that connects businesses directly to individual investors and lenders over the internet, cutting out the middleman (loan brokers and financial institutions).
Loaning features, procedures, and options vary from one P2P lending platform to another. But they all follow the same basic premise of matching lenders and borrowers.
P2P lending is a great way to access business financing without putting up with the bureaucracies of big lending institutions. In fact, the SBA acknowledges P2P lending as an ideal financing alternative for small businesses.
10. Grants
Federal and state government agencies, as well as NGOs, offer various grants to support small businesses and start-ups. Grants are not loans or debts. However, not every business qualifies for a grant. Check your eligibility for federal or SBA business grants to see whether they’re worth considering. You can also check with your local state government and business welfare organizations for grant eligibility.
Find the best financing option with Lendzero
The financing industry is full of endless possibilities. However, these opportunities will remain out of reach if you don't know how or where to look for them. But who has the time to endlessly search the internet and call lender after lender just to see what's out there? No one. That’s why we’ve decided to make it easier for entrepreneurs to explore all the financing options available to their businesses.
Lendzero is an online platform that lists all the loan and financing products your business qualifies for. No more calling and haggling with lenders either. We pre-qualify your business and pre-negotiate with lenders for every financing listing. Sign up today and discover all the exciting financing possibilities that await you.
