What Small Business Financing Options Are Available?

Sometimes, businesses need extra capital to cover a shortfall in cash flow caused by an unexpected bill or a drop in revenue. Other times, they seek long-term funding to pay for an expansion or renovate a commercial property. Regardless of your financial needs, you have a number of small business financing options available.

In this article, you’ll learn more about the types of business funding available to you and the pros and cons of each.

7 Small Business Financing Options

Below are seven small business financing options for you to consider. Each one comes with its own advantages and drawbacks, which should be considered alongside your specific funding needs.

1. Bank Loans

Many traditional banks and credit unions offer term loans to small businesses. With a term loan, you get a lump-sum payment upfront, which you agree to pay back with interest over a specific timeframe. You’ll usually make monthly payments.

If you take out a fixed-rate loan, your repayments will stay the same each month. However, repayment amounts with a variable interest rate loan fluctuate, so they can be harder to budget for.

Bank loans provide entrepreneurs with access to larger amounts of capital, particularly for established customers that offer collateral. This makes it a good option for large purchases such as real estate. 

A downside of this small business financing option is the strict eligibility requirements. If a business owner or entrepreneur has a less-than-perfect business or personal credit history, they may struggle to receive an approval.

Also, the application process often takes a long time and requires you to submit extensive documentation and financial information, such as cash flow and annual revenue statements. That means a traditional bank loan might not be the right option for a business that needs quick access to capital.

2. Business Credit Cards

Business credit cards allow you to purchase goods and services for your company now and repay them later.

Your issuer will give you a limit. That limit is the maximum amount you can spend on the card at any one time. The balance is the amount you’ve spent. If your balance is less than your limit, you can spend more on the card up to the limit.

When you make a repayment, the money becomes available again for you to use, as it brings down your balance. This is known as revolving credit.

You can use the money interest-free with most credit cards if you repay the entire balance by the due date each month. If you don’t, you’ll be charged interest on the outstanding balance.

Business credit cards offer quick and convenient access to funds, and many offer rewards programs. However, the two major disadvantages of credit cards are their high-interest charges and restricted spending limits. For these reasons, business credit cards are best used for budgeted expenses that you know you can cover the cost of right away.

3. Business Lines of Credit

Business lines of credit are another type of revolving credit. They allow you to spend on goods and services and defer the payment until later.

Repayment terms for a business line of credit are often more flexible and shorter term. The maximum loan term often ranges from six months to a few years, depending on the lender and the agreement.

Backd’s business line of credit provides up to $750,000 in funding that you can borrow on flexible terms over a period of six or 12 months. Repayments are weekly. Approval time for Backd’s Business Line of Credit is 24 hours from application.

When choosing between a business credit card and a business line of credit, think about your business needs and spending habits.

A business line of credit may be the better option for larger short-term purchases, such as equipment or payroll. It also gives you ongoing access to funds at favorable interest rates. However, if your financing needs are smaller, the convenience and rewards of a credit card may be a better fit for you.

4. SBA Loans

The SBA loan program is a joint venture between the U.S. Small Business Administration and private lenders. SBA loans are designed for companies who are unable to get funding through traditional lenders.

There are several types of SBA loans available:

• SBA 7(a) loans: With this option, you can borrow up to $5 million to use for working capital, machinery and equipment purchases, debt refinancing, commercial real estate, and more.

• SBA Express loans: These are similar to the SBA 7(a) loans but offer a maximum loan amount of $500,000 and a 36-hour application turnaround time.

• SBA 504 loans: With a 504 loan, you can receive up to $5.5 million to consolidate or refinance debt, buy land and build a new property, or purchase and renovate commercial real estate. SBA 504 borrowers can not use loans for working capital purposes.

• SBA Microloans: A microloan gives you up to $50,000 for working capital or to buy equipment, inventory, or other assets. SBA Microloans are available to startups, new businesses, and some non-profit organizations. The funds can’t be used to buy real estate or pay existing debts.

On the plus side, you can access large funding amounts with more favorable approval terms under the SBA program. On the negative side, you may have to front a sizable downpayment, and the application process is often lengthy and complex. You’ll almost certainly need an in-depth business plan and financial forecasts.

If your application is turned down by an SBA lender, it may be worth investigating small business grants as an option for funding. Other alternatives include crowdfunding platforms, angel investors for startup businesses, and venture capital for more established businesses. Each of these three choices will often mean you have to sacrifice some of your shareholding.

5. Working Capital Advances

Working capital advances are a fast-turnaround form of financing companies use to ease cash flow problems during slower periods, handle unexpected bills, and stock up on inventory before the holiday rush.

Backd offers a working capital advance product with daily, weekly, or semi-monthly payments over a maximum term of 16 months. Application turnaround time can be as little as 24 hours.

Working capital advances deliver swift access to funds, which can be crucial for managing short-term cash flow challenges. The trade-off is that the shorter repayment periods may place additional pressure on your finances if revenue takes more time than expected to recover.

6. Equipment Financing

Companies use equipment financing to purchase machinery, equipment, vehicles, and other assets vital to their businesses' operation. Equipment loans can be easier to access because the equipment you are financing will serve as the collateral.

While equipment financing can be very useful for small business owners, you risk the equipment or machinery being repossessed by the lender if you can’t keep up with repayments. This may make running your business very difficult if, for example, you’re a T-shirt manufacturer whose production equipment has been taken from you.

7. Merchant Cash Advances and Revenue-Based Financing

Merchant cash advances are short-term loans made against your future debit or credit card sales. You’ll need to have an account with a payment processor to apply for one.

Revenue-based merchant funding is a variation on merchant cash advance loan options where you borrow against your future sales, regardless of how customers make their payment.

You’ll owe no interest on either type of financing. Instead, you pay a factor rate ranging from 1.1 to 1.5, which means you’ll repay 10% to 50% more than the loan amount. You repay a percentage of your daily or weekly sales to your lender, which is automatically deducted. With revenue-based financing, you may also have the option of fixed, regular installments regardless of your revenue.

Merchant cash advances and revenue-based financing can provide quick funding when traditional credit is not available. However, their repayment models — often tied directly to sales — can result in higher overall costs and place significant strain on cash flow if revenue is inconsistent.

Choose the Right Funding Option for Your Company

In the past, banks and credit unions were the gatekeepers, and they locked many businesses out of the funding they needed because eligibility requirements were so hard to pass. However, alternative and online lenders like Backd have changed the industry. That means you have a number of small business financing options available to you.

To choose the right one for you, first consider your business needs. For example, do you need a long-term loan for an expansion project or a business credit card for planned everyday expenses? Also, think about how quickly you need access to the funds. If you need them swiftly, alternatives such as business lines of credit or working capital advances might be more suitable than traditional loans.

Apply for one of Backd’s two funding options that can provide you with the capital you need:

• Working capital advance: Access between $25,000 and $2 million (minimum one year in business required).

• Business line of credit: Borrow between $50,000 and $750,000 (minimum two years in business required).

To be eligible for our lending solutions, you must be based in the U.S., have established business credit, have a brick-and-mortar address, a minimum credit score of 625, and a minimum monthly revenue of $100,000.

Apply now and be funded within as little as 24 hours.