Small-business funding is necessary to launch, maintain or grow a business. You can get financing by taking on debt, like small-business loans from traditional banks and online alternative lenders, or offering investors equity.
To help you find a good fit, here are six of the most common funding options for small businesses.
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 funding. 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 documents you need and what your best options may be.
Locally owned banks, in particular, are a great resource for small business financing because they often have a strong interest in economic development in the community. Community banks hold 36% of small business loans, according to a 2020 report from the Federal Deposit Insurance Corp.
Types of small-business funding offered by banks include term loans, SBA loans and business lines of credit.
For: Businesses who 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 funds you need to be successful. In guaranteeing the loans, the SBA also connects you with favorable rates offered by traditional lenders. And unlike most bank loans, you can use an SBA loan to start a business.
However, the application process isn’t easy, and you can find yourself trapped under a heap of documents while you work through the appropriate forms.
3. Online lenders
For: People 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 owners struggling with bad credit: 51% of medium- or high-risk credit applicants apply to online lenders, according to a 2020 report from the Federal Reserve.
Online lenders also offer fast cash, with several of them able to turn around funding within 24 hours.
Peer-to-peer business lenders are among the alternatives. These lenders cut out the traditional middleman, such as banks, to connect borrowers with individual and institutional investors. The cost of borrowing, however, is much higher; some charge annual percentage rates close to 100%. Still, alternative lenders are an option when a bank says no.
Online lenders offer a variety of small-business financing options, including term loans, lines of credit and invoice financing.
Use NerdWallet’s business loan calculator to figure out your monthly payment on a loan.
For: Businesses with products that can capture the public's interest.
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.
5. Credit unions
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 funding. Between 2004 and 2020, the number of credit unions offering small business financing doubled, according to the Consumer Finance Protection Bureau.
You’ll likely have to be a member. 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.
6. Small business grants
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.
The downside to free financing is that everybody wants it. It will take a lot of work to find and apply to grants, but time spent searching for free money opportunities could pay off in the long run.
Frequently asked questions