Small-Business Funding: Find Financing Options in 2021

The top sources of small-business funding include loans from banks and online lenders, as well as small-business grants.
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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’s an overview of six of the most common funding 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 financing. Types of small-business funding offered by banks include term loans, business lines of credit, equipment 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 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 application documents you need and what your best options may be.

Start by contacting a bank with which you have an existing relationship. If you don’t have an existing relationship with a bank that offers small-business funding, you can search for local banks in your community.

These institutions, 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.

Big-name banks, like Chase, Bank of America and Wells Fargo, also offer a variety of business funding options.

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 funds 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 funding 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.

Most SBA loans are issued by banks, credit unions and other financial institutions. Similar to bank loans, you can start your search for an SBA loan with a lender you’ve previously worked with, or a local bank in your community. National banks like Chase, Wells Fargo and Bank of America issue SBA loans as well.

The SBA website also offers a lender match tool to help connect you with financial institutions in your area.

3. Online loans

Best 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.

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; some annual percentage rates reach close to 100%.

There are a variety of small-business lenders out there that offer online loans — and the best option for your business will depend on the type of financing you need and what you can qualify for.

For example, if your business has strong qualifications but prefers an expedited process, Credibility Capital and Funding Circle are great options for traditional term loans. For businesses that want a flexible line of credit, BlueVine, OnDeck and Fundbox each offer competitive products.

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 funding 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.

Federal and state agencies, as well as private corporations, all offer small-business grants.

Grants.gov is one of the most well-known online databases for grants distributed by government agencies. Your local Economic Development Administration branch or Small Business Development Center may also help you find grant programs and similar funding opportunities.

For grant options focused on different types of business owners, check out the following lists:

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 funding. Between 2004 and 2020, the number of credit unions offering small-business financing doubled, according to 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.

Since credit unions are often community-based, you’ll want to find a local option. You can use MyCreditUnion.gov to browse credit unions in your area.

Some credit unions also offer membership based on your employer or organizations you may be affiliated with.

For example, Navy Federal Credit Union is a national credit union that offers membership to members of the U.S. armed forces, Department of Defense and National Guard as well as their families. Navy Federal members can apply for a variety of business loan types.

6. Crowdfunding

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.

Platforms like Kickstarter, GoFundMe and Indiegogo are good choices for rewards-based crowdfunding. For equity crowdfunding, platforms like Republic, CircleUp and Fundable are all viable options.

Frequently asked questions

It can depend on the stage of your business. If you're just starting out, consider self-funding your business or explore startup business loans. If you have at least a year in business and solid personal and business finances, you have more options, such as SBA funding and other types of business loans.

The U.S. government doesn't actually provide small-business financing. However, it does offer a guarantee on business loans issued by traditional banks and other lenders to qualified businesses through the SBA loan program.

Because SBA loans are backed by the U.S. Small Business Administration, they have lower interest rates and more flexible qualifications than traditional bank loans. The SBA and other federal agencies also provide free assistance and, in some cases, small-business grants through various programs to help small-business owners.

If you need money to get your business off the ground, you’ll likely have difficulty qualifying for traditional financing, like a term loan or line of credit. Instead, you might turn to alternative sources, such as friends and family, crowdfunding, small-business grants or angel investors for the startup funding you need.