Common Ways to Fund a Small Business

Small businesses often need external capital to operate and grow. Luckily, if you need funding to help start, run, or grow your small business, there are many financing options available. To help you choose the right one for your company, we’ve outlined five common sources for funding a small business.

Banks or Credit Unions

Consider starting with a traditional bank or credit union. These institutions offer face-to-face, personalized service and the opportunity to work closely with a lending expert who will get to know your business’ unique needs. This ongoing support and guidance can be valuable in the long run.

Most banks and credit unions provide a wide variety of lending products—such as bank loans, equipment financing, business lines of credit, and business credit cards—that can grow with you as your business grows. Traditional institutions typically offer lower interest rates on loans compared to alternative lenders, making it cheaper for you to borrow money. For example, term loans are popular among business owners due to their low interest rates and predictable monthly payments.

However, qualifying for a bank loan, including term loans, can be challenging for some business owners. You will likely need a good personal credit score, steady business finances, and a minimum operating history of two years. Nonetheless, even if you don’t meet these requirements, speaking with a representative at a bank can still be helpful. They can guide you through the application process and suggest alternative financing options.

Banks also offer other financial products and services, like business savings accounts, checking accounts, treasury management services, and more, allowing you to manage all your financial needs in one place. If you want to work with a bank or credit union, consider a bank that prioritizes building long-term relationships with its customers. The added value of personal service from your banking partner can have a significant impact on the success of your business as it evolves over the years.

Small Business Administration-Guaranteed Loans

The U.S. Small Business Administration is a government agency committed to helping small businesses grow. Its main goal is to help small businesses get the funding they need to operate and expand. To achieve this, the agency partners with lenders to provide loans to small businesses through the SBA loan program.

SBA loans are issued by SBA-approved lending partners, which include many banks and other private lenders. These loans are partially backed by the SBA, which ensures the lender will get a portion of their money back if the borrower fails to repay the loan. This guaranty reduces the lender’s risk and may make lenders more likely to approve your loan application, even if you do not meet their usual loan requirements. This may also prompt lenders to offer longer repayment terms, which means you’ll have lower monthly payments and an easier time managing your cash flow.

There are different types of SBA loan programs depending on your needs. Each program has its own lending practices and eligibility requirements. The three main SBA loan programs include:

• SBA 7(a) loan program (up to $5MM for general business purposes)
• SBA 504 loan program (up to $12MM for real estate acquisition or new construction)
• SBA Microloan program (short-term loans up to $50,000)

While SBA loans can be easier to qualify for and may have longer repayment terms, it’s important to note that the SBA loan application process is detailed and requires extensive paperwork. Thus, the approval time can take longer.

Online Lenders

In recent years, online lending has become a popular business financing option. Applying for an online loan can be convenient, as it can be done entirely online without having an existing banking relationship. Using an online lender may be a good option for business owners with poor credit or who haven’t been in business for long.

However, it’s important to note that non-bank, online lenders may charge higher interest rates or fees than traditional banks and credit unions. You will also miss out on the benefits of receiving personalized service from a banker who knows and understands your business. Because it’s online, the overall process is more independent, and you will receive less hands-on customer service than you would working with a traditional bank.

If you prefer the convenience of an online application but the customer service that comes with a traditional bank or credit union, consider asking your bank if it offers online lending application options.

Crowdfunding

As a small business owner, you may consider crowdfunding as a way to get outside funding, especially when you’re starting out. This approach involves asking numerous people to support your business by making small contributions to it. To get started, you can register on a public online crowdfunding platform, where you can define your primary funding goals. Individuals interested in supporting your business can then donate money through the online platform.

Before starting a crowdfunding campaign, you should keep in mind that it does not guarantee a surge in cash, and it can be considerably time-consuming. Therefore, it is crucial to determine if it is the right method for your business. To increase your chances of a successful crowdfunding campaign, you must approach it with the same level of care, planning, and execution as with any successful marketing campaign.

When it comes to funding a small business, you have lots of options. Whether you seek funding through a conventional bank or ask for support through a crowdfunding campaign, the most important aspect to keep in mind is what option aligns best with your business’ unique needs, finances, and goals.