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Your Guide to Small Business Financing: What Options Are Available to You?

By Dock Treece Reviewed By Mike Lucas
By Dock Treece
By Dock Treece Reviewed By Mike Lucas

Various small business funding options are available these days. The variety of funding available may leave self-employed people wondering which type of financing for small businesses is ideal for them.

We’ll review small business financing options, along with information on how to find and compare financing options for entrepreneurs.

Debt vs. Equity Financing

When you’re trying to secure financing, there are 2 different types of small business funding options available:

  • Debt financing – Funding that’s borrowed from a bank or another lender and repaid later
  • Equity financing – Capital that’s contributed by investors in exchange for partial ownership in your company

While there are many variations on types of debt and equity small business financing options, the most significant difference is that equity financing requires you to give up some ownership in your company, and debt financing doesn’t.

Many entrepreneurs prefer to avoid equity financing because they want to maintain control of their company. However, some small businesses are too risky to finance with debt, or the owner’s credit is too poor to obtain financing.

However, most small business owners can access at least some form of debt if they have a new business they want to finance — and typically can do so more easily than they can raise equity.

Financing a Small Business With Debt

When you’re looking for small business loans, keep in mind that there are many different types of loans that can be used in many different ways. 

Operating capital, for instance, is typically handled differently than a mortgage. Indeed, the 2 are often distinct loan products with different application processes, requirements and stipulations on how funds are used. If your company needs funding, it usually pays to shop around.

Every loan is unique. Never agree to borrow without reviewing all the information provided along with the terms. Here are a few matters to consider:

  • Interest rates: These rates show how much you will pay for borrowed money over a specific loan term. The higher the rate, the more you end up paying on your loan. Compare rates of loan offer to find out how much you’d owe.
  • Factor rates: These reflect the total cost of borrowing. Be careful: Factor rates may be expressed on a per-month or per-week basis, which can make a loan seem cheaper than it is.
  • Term: How long a loan takes to reach maturity and when it needs to be repaid. You may have ongoing, regular payments to make on your loan throughout the life of the financing. Short-term loans typically are designed to reach maturity in 18 months or less. Long-term loans may last for several years.

Gather a few quotes and consider applying. If you’re ready to weigh your options, here are several types of business loans you’ll probably see.

Do you need a loan for your small business?

6 Types of Funding for Small Businesses

Business loans don’t have to be opaque and confusing. Learn more about each of these options so you’ll be in a better position to make the right financial decisions for your company.

1. Term Loan Small Business Financing

If you need a lump sum of capital to use for specific investments in your business, a term loan may fit the bill. Term loans offered by Fast Capital 360’s lending partners have several unique features:

  • Designed to last between 1 year and 5 years
  • Generally available up to $250,000
  • Provide a fixed interest rate starting at 7%
  • Low monthly payments
  • Are repaid in-full over time (fully amortized)
  • May have prepayment penalties

Keep in mind that these loans can be used for a variety of different purposes. Some cases where a term loan makes sense include:

  • Building a new facility or adding on to an existing plant
  • Acquiring another company or expensive new technology
  • Paying for a partner’s buyout

2. Financing a Small Business With Short-Term Loans

If you’re looking for an easy source of working capital, you may prefer a short-term loan. Fast Capital 360 short-term loan programs:

  • Are designed to last for a few months to more than 1 year
  • Provide up to $500,000, depending on your qualifications
  • Are repaid daily, weekly or monthly
  • Have higher payments because the loan term is shorter than other loans

Businesses experiencing limited cash flow may benefit the most from a short-term loan.

3. Business Line of Credit

With a line of credit, your business gets flexible access to capital that you can use as needed once you’re approved. Applicants receive approval for a loan up to a certain amount, such as $250,000, and can then charge up to that amount whenever needed. Some things to note:

  • As long as you make on-time payments and don’t exceed your credit limit, you can keep borrowing over and over again
  • Generally, lines of credit have lower limits than term loans
  • Repayment includes interest and other borrowing costs
  • Business lines of credit are typically structured with monthly payments
  • Unsecured loan amounts available, but higher amounts may require collateral.
  • You may need to secure larger loan amounts with collateral—this means you pledge an asset you have, such as real estate, as a potential payment for the loan if you default. Smaller loans, however, generally don’t need to be securitized.

securing a line of credit can be your first step to taking your business to the next level

4. Merchant Cash Advance for Small Businesses

Merchant cash advances are costly financing options for small businesses but can serve as another source of operating capital. How much you qualify for may vary. Advances are repaid on a daily or weekly interval.

Factors to keep in mind:

  • Designed for terms that are 3-24 months
  • Small amounts, typically up to 250% of your past 6 months of revenue
  • Repaid based on a fixed rate held from your future income
  • More expensive than some other loan options, but very flexible

With a cash advance, your business is free to do whatever is needed to keep operations going. Merchant cash advances are a flexible funding option you can use for just about anything.

5. Invoice Financing Business Loans

If unpaid invoices are holding your business back, invoice financing may be the right option. Invoice financing, also called accounts receivable financing, gives you access to your funds sooner so you can start using that cash for your business. 

Some characteristics include:

  • Immediate access to funds
  • Amounts of up to what you’ve invoiced for
  • Your invoice serves as collateral, and the invoice payment may go directly to your lender
  • Your cost may include a fee or fixed percentage taken from the invoice payment
  • Generally available only for businesses that provide goods or services to other businesses (business-to-business companies)

Invoice financing is just a way of getting paid early from money you’re already due, so you can pretty much use the funds for anything you choose. Keep in mind that invoice financing isn’t necessarily available for all business models, such as those that are consumer-focused.

6. Conventional Bank Lending and Small Businesses

Small businesses also can obtain the loans they need from a conventional bank lender. These loans may have special requirements, and some business owners will need to provide personal credit history information to qualify.

Some characteristics include: 

  • Loans designed for a variety of terms, uses and rates to fit nearly any need are available
  • Amounts vary depending on applicant qualifications
  • Repayment terms may vary
  • May have significantly tighter loan requirements and limitations than alternative loan options
  • May be more difficult to qualify for if you don’t have an established banking relationship

Banks offer a wide variety of loan types, but typically have high expectations and standards for qualification compared with other kinds of small business loans.

conventional bank loans can require a relationship with a personal banker

Applying for Business Financing

Depending on the loan you’re applying for and the type of lender, your application for a small business loan may require the following:

  • Personal credit check: You, the owner and borrower, may need to provide your credit information, and lenders may run background checks when you apply for a loan.
  • Bank statements: You should consider preparing copies of your business bank account statements and information.
  • Credit-card receipts: Receipts for credit-card payments you’ve received are another part of many business loan applications. Your lender may ask to see 6 months of receipts from payments you’ve received via credit card.
  • Business expenses: You may need to show what your typical business expenses are for a specified period, such as office rental agreements and vendor contracts.
  • Invoices: Some loan applications require you to show invoices for customer and client payments you expect to receive in the future.

Once you’ve started shopping around for quotes, you can generally determine what types of evidence a lender expects to see.

Ready to Explore Business Financing Options?

If you’re ready to consider the best financing options for a business, jot down a few lenders you’re considering and gather quotes. Remember to compare the terms and be sure to read the fine print carefully.

Dock Treece
Dock David Treece is a finance analyst and contributing editor at Fast Capital 360 focusing on personal and small business finance. Dock is a former securities broker and investment advisor and brings more than 10 years of experience in investments and finance to Fast Capital 360. Dock has been featured by CNBC, Forbes and Bloomberg. He lives with his wife in North Carolina.
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