Small-Business Financing: Compare the Best Options of 2023
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You can get business financing by taking on debt, like small-business loans from traditional banks and online alternative lenders, or 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 six of the most common financing options for small businesses — and where to get them.
1. Bank loans
Best for: Established businesses with collateral and strong credit.
Traditional banks are a great starting point and can help you figure out where you stand in terms of qualifying for a loan. Types of small-business financing offered by banks include term loans, business lines of credit, equipment loans, commercial real estate loans and even business credit cards.
Bank 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 a bank loan, talking to someone at a traditional bank can help you figure out what application documents you need and what your best options may be.
2. SBA loans
Best for: Businesses that don't meet traditional banks' strict lending criteria.
The U.S. Small Business Administration offers 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 loans, you’ll still 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.
3. Online loans
Best for: Business owners with shaky personal credit, who want fast funding or ease of applying.
With traditional banks limiting access to capital, online lenders have seen an increase in popularity, especially among business owners who have bad credit: 60% of medium- or high-risk credit applicants apply to online lenders or nonbank finance companies, according to the 2022 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 7% to 99%.
Use NerdWallet’s business loan calculator to figure out your monthly payment on a loan.
4. Small-business grants
Best for: Free financing.
Small-business grants offer a way for business owners to get established or grow, 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.
» MORE: Best options for startup funding
5. Credit union financing
Best for: Members who like a personal touch.
Like banks, credit unions offer favorable rates and loans backed by the SBA. But unlike banks, credit unions have increased their small-business lending. Between 2004 and 2020, the number of credit unions offering business financing doubled, according to a report from the Consumer Financial Protection Bureau.
In addition to SBA loans, credit unions can offer a range of funding 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.
Best for: Businesses with products that can capture the public's interest.
Crowdfunding sites such as Kickstarter rely on investors to help get an idea or business off the ground, often rewarding them with perks or equity in exchange for cash.
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.
Crowdfunding can be a worthwhile option for businesses just starting out, but it’s not a great solution for long-term financing.