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Business Financing Options: What’s Available & Why It Matters

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No matter the industry, all businesses need money to operate. Funds can be used toward business needs such as equipment, hiring additional employees, buying equipment, or paying for an office. However, when a business doesn’t have enough money on hand to handle expenses, it can use business financing to continue operating.

Growing a business is one of the most rewarding things you can do, but it’s not without its challenges. Truth be told, even with an airtight business plan and a dream team by your side, success largely depends on your ability to finance the venture. And, understandably, you’re now wondering about the different types of business finance.

That’s why having access to the right financing options and funding sources can often mean the difference between success and failure.

In this article, we explore everything you need to know about business loans and financing. We’ll discuss the different types of funding, their pros and cons, and the main sources of funding for a business.

What Is Business Financing?

Business financing is a funding option for business owners to be able to pay for things like expansion projects, inventory and equipment, and seasonal spikes in activity. There are several different types of business financing available, but each type of financing may be better for some purposes than others.

There are several ways your business can obtain financing. This includes taking out loans, selling stocks or bonds, using personal savings, and so on.

Financing for Business: Traditional Methods

Obtaining business loans for small business may involve turning to traditional bank loans. This type of loan can prove to be a slower and more difficult option for business owners. The application process usually requires a credit inspection, a business plan/industry risk, and collateral.

Additionally, approval can take up to 30 days or more, even if the business has good credit and provides collateral.

Who Should Apply for Business Finance?

Every business, at some point in its lifecycle, will need funding. Sometimes at multiple points. Consider the following examples:

  • An established company wants to expand into new markets, develop new products, or buy up a competitor.
  • A struggling company needs help to get back on track.
  • A small business wants to meet a sudden spurt in demand.

In any of these cases, business funding is the glue that binds the objective to the desired outcome. It’s what allows an established business to gain new market footholds, and a struggling one to keep from going belly-up.

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Types of business finance

Source: Pexels

The 19 Types of Business Financing

Now that you know what business financing is and its key benefits, let’s turn our attention to the various types of business funding. As we’ll see, debt and equity are the two most common types of funding for a small business, but there are other sources of funding for businesses too.

1. Debt finance

Debt financing is the most common type of financing available to small and mid-size businesses (SMBs). Debt is simply money borrowed from outside of the company that must be repaid with interest over time. It’s used to make investments, increase working capital, or purchase fixed assets like equipment or real estate.

Debt offers many advantages. For one, it lets companies raise large amounts of cash with little or no equity investment from their owners.

Debt financing interest rates are also typically lower than those for equity investments. That’s because banks are more willing to take on risk than individual investors.

For instance, a bank may be willing to lend money at an interest rate of 3%, while an angel investor might require 15% or more annually for an equity stake in your company. Most importantly, lenders want repayment rather than ownership in your business.

Sources

Debt can be in the form of bank loans, lines of credit, bonds issued by corporations and governments, or notes payable to shareholders. Other debt sources of financing for small businesses include suppliers, trade finance, supply chain finance, etc.

Pros

  • You retain full control of your business
  • Interest rates are typically lower than equity investments
  • Interest rates are tax-deductible
  • Flexible loan terms
  • Access to funds when you need them

Cons

  • Repayment terms are often fixed
  • Repayment starts immediately
  • Debt is often collateralized against your assets
  • Can lead to a revolving door of debt

2. Equity finance

Differing from traditional lenders, one way to receive financing for an existing business is by selling shares of it to investors. This is known as equity financing, which can come either from an angel investor (a wealthy individual who helps fund startups) or an investment firm.

When you choose equity financing, the people or firms that invest in your company become part owners.

Equity financing also refers to a type of business financing whereby a company raises money by selling ownership shares. Despite being a time- and labor-intensive process, equity financing is the best option for businesses that don’t want to take on debt.

For example, if a car dealership wishes to expand, they can receive capital from an investor in exchange for a certain amount of ownership in the business. This is known as an “equity investment” or “share capital investment”.

Note that investors use this type of financing as an opportunity to make money. They typically receive dividends at regular intervals—either quarterly or annually—based on the company’s profits.

This type of financing is best used for high-growth potential startups, businesses with innovative ideas, and expansion plans.

Sources

Equity financing is typically obtained through less traditional routes than debt financing. This includes venture capitalists, angel investors, crowdfunding—even your family and friends. An initial public offering (IPO) is another way to secure equity through the stock exchange.

Pros

  • Access to a large pool of capital
  • Does not require repayment
  • Flexible spending
  • Frees up cash flow
  • Lower risk than debt
  • Increased credibility when backed by reputed investors
  • Potential for industry connections and networking opportunities

Cons

  • Loss of control over your business or ownership dilution
  • Profits shared with investors
  • Raising equity can be time-consuming and resource-intensive
  • Investor ROI can cost more than debt repayment
  • Conflicts of interest can arise
  • Legal liabilities associated with selling company shares

3. Revenue-based financing

Revenue financing is another common type of business financing. It can be obtained through loans, a credit card, or invoice factoring. Revenue financing is also referred to as “working capital financing”.

Basically, it’s the process of obtaining money from a provider by using your business’s future revenue as collateral. You can think of it as a form of debt financing in which the provider agrees to give you a loan if your business proves it will have enough cash flow to pay it back with interest.

Revenue financing can be used for many purposes, like buying new equipment and supplies, or paying off existing debt.

Sources

Revenue-based sources of financing for business include specialized lenders, alternative lenders (such as trusted online lenders), private investors, and certain government programs.

Pros

  • Easy to obtain if your revenue stream is good
  • Solves cash flow problems until payments for goods/services are rendered
  • Flexible, since it can be paid off over time and is based on projected growth
  • You retain control of your company
  • Potentially lower cost of capital

Cons

  • Your cash flow needs to be high enough to cover repayments
  • Potentially higher cost of capital

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4. Lease financing

Lease financing allows you to acquire the use of an asset without having to purchase it. There are two types of lease financing agreements:

Operating/Purchase Lease

This allows a company to use a piece of equipment or other physical asset for an agreed-upon period at a fixed monthly payment. This is typically used for short-term projects and doesn’t require a large down payment or long-term commitment.

Typically, you’ll cover all maintenance and repair costs while the owner is responsible for depreciation, insurance, and taxes.

Capital/Finance Lease

This type of lease allows a company to use an asset without having to pay the upfront costs associated with purchasing it. Instead, it allows them to pay for the asset over time and then own it after completing the contractual payments.

Sources

Sources of financing a business lease include equipment leasing companies, manufacturers, private investors, banks, and other financial institutions.

Pros

  • No need for a down payment
  • Equipment lease may be tax-deductible as a business expense
  • Potentially flexible payment schedules, loan terms, and end-of-lease options
  • Access to state-of-the-art equipment without a big initial investment

Cons

  • Higher total cost due to interest charges over time
  • No asset equity
  • Potential to incur additional fees (early termination, excess use, etc.)
  • Limited customization options

5. Mezzanine financing

Mezzanine financing provides an alternative to bank loans. In fact, this source of business financing is commonly referred to as “middle-market” financing, since it falls somewhere between a traditional bank loan and private equity funding.

Mezzanine financing can be difficult to obtain. It’s typically given to businesses that (1) have demonstrated profitability, (2) have a high potential for growth, and (3) lack good credit or collateral.

Mezzanine lenders are willing to take on higher risk in exchange for higher interest rates. They want to earn more than they would from a typical commercial loan, but aren’t willing to fully back a project as an equity investor would do with an IPO.

Mezzanine loans typically range from $2 million to $100 million, depending on the size of your company and its capital needs. Terms can last from one year to five years, or even longer.

Sources

There are many ways to obtain this source of financing for business. This includes hedge funds, private equity firms, and even specialized mezzanine lenders.

Pros

  • Access to capital that may be harder to acquire otherwise
  • Flexible terms can be structured to meet the needs of both parties
  • Less ownership dilution than traditional equity financing
  • Interest paid may be tax-deductible

Cons

  • Higher interest rates associated with higher lender risk
  • Complex financing structure can lead to misunderstandings and difficulties negotiating

6. Traditional bank loans

When considering financing options, many business owners turn to traditional bank loans as their initial financing choice. This type of loan can prove to be a slower and more difficult option for business owners.

The application process requires a credit inspection, a business plan/industry risk and collateral. Additionally, approval can take as long as 30 days or more, even if the business has good credit and provides collateral.

Traditional bank loans are best used for established businesses with solid credit history, long-term financing needs, or larger investment projects.

Sources

Traditional banks can be found just about anywhere, and if you decide to go this route, we recommend working with a bank you already have a relationship with.

Pros

  • Lower interest rates
  • Longer repayment terms
  • Established relationships with banks

Cons

  • Strict eligibility requirements
  • Lengthy approval process
  • Collateral or personal guarantees may be required

different types of funding

Source: Pexels

7. Personal loans

A personal loan can also be a good option for business financing. It’s an unsecured loan that you get from a bank or other financial institution. It typically isn’t intended for general business operations, but is rather designed to meet specific business needs. The average personal loan amount ranges between $35,000 – $40,000.

Sources

This type of loan may also be available from banks or other financial institutions with whom you have an established relationship.

Pros

  • Quick access to funding; fewer obstacles than traditional loans
  • Potentially lower interest rates (compared to SBA loans, lines of credit, merchant cash advances, etc.)
  • More flexible repayment terms
  • No collateral required
  • Can help you build good personal credit

Cons

  • You already need good credit if the personal loan is unsecured
  • Has the potential to incur other fees (origination fees, late fees, etc.)
  • Average loan amounts aren’t suited to big investments
  • Higher personal risk that can potentially worsen your credit score

8. SBA loans

Although small businesses play a vital role in the economy, business owners tend to struggle to get approved for bank loans. To encourage the growth of small businesses, the Small Business Administration (SBA) partners with lenders to partially guarantee small business loans.

There are several different types of SBA loans, including 7(a) loans, which can be used for many different purposes, CDC/504 loans for major purchases like real estate, and disaster loans.

These loans are best used for small businesses lacking collateral, startups, real estate or equipment purchases.

Sources

Businesses can obtain SBA loans from a variety of sources. These include traditional banks, credit unions, and online lenders. The SBA partners with these institutions to provide government-backed loans, designed to support small businesses with more flexible terms and lower interest rates.

Pros

  • Lower down payments
  • Longer repayment terms
  • Flexible use of funds

Cons

  • Extensive paperwork
  • Longer approval process
  • Strict eligibility criteria

8. Short-term loans

Many businesses need a little extra money to handle a temporary, short-term need. In these types of situations, business owners often don’t want to be paying off a loan with high interest rates for years after the original need for the loan has been resolved.

Short-term loans offer small business owners the funding they need while avoiding lengthy loan applications and long repayment terms.

These types of loans are best used for businesses needing immediate working capital, bridging cash flow gaps, and covering unexpected expenses.

Sources

Businesses can secure short-term loans from online lenders, traditional banks, and credit unions. These loans are typically for a year or less and are designed to address immediate financial needs.

Pros

  • Quick access to funds
  • Flexible use of funds
  • Suitable for immediate financial needs

Cons

  • Higher interest rates
  • Frequent repayments
  • May require collateral

9. Unsecured Business Loans

Many lenders require a valuable asset to be used as collateral to secure a loan during the application process. But many businesses don’t have the types of assets lenders look for and the business owner might not be comfortable with using personal assets like their home or vehicle.

Unsecured loans are a type of business loan that does not require the borrower to put up an asset to be used as collateral.

You can use these types of loans for small businesses lacking collateral, short-term financing needs, and investment in marketing or inventory.

Sources

These loans, which don’t require collateral, can be obtained from online lenders, peer-to-peer lending platforms, and some traditional banks.

Pros

  • No collateral required
  • Quick approval process
  • Flexible use of funds

Cons

  • Higher interest rates
  • Strict eligibility criteria
  • Smaller loan amounts

10. Microloans

Not all business expenses require large loan amounts. Businesses seeking smaller loans are often turned down by banks because they aren’t seeking enough money.

To help fill the gap, many lenders have started offering microloans, which have loan amounts that are much smaller than traditional bank loans and come with shorter repayment terms. Microloans can be a good option for a new business or businesses that have low credit scores, no credit history, or have never received a loan from a bank before.

These loans are best used for startups, businesses with low credit scores, and purchasing equipment or inventory.

Sources

Microloans are often sourced from nonprofit organizations, community-based lenders, and online platforms. The SBA also offers a microloan program for small businesses and startups.

Pros

  • Small loan amounts
  • Suitable for startups or low-credit businesses
  • Mentorship and support

Cons

  • Higher interest rates
  • Limited loan amounts
  • Stricter repayment terms

11. Invoice factoring

When you have to wait for customers to pay their invoices, you have less working capital available in your bank account to cover day-to-day business expenses. While your customers may appreciate not having to pay immediately, this is the money used to take care of your business.

Invoice factoring allows business owners to turn their outstanding invoices into money they can use right away. This is done by selling those invoices to a third party, known as a factor, at a discounted rate. The factoring company then collects the full amounts of the invoices from your customers. Invoice financing is another small business financing option similar to invoice factoring.

The difference between the two is that while invoice factoring involves selling your outstanding invoices, invoice financing is a loan based on the value of your invoices.

You can use invoice factoring for businesses with outstanding invoices, seasonal businesses, and improving cash flow.

Sources

Businesses can get invoice factoring from specialized factoring companies or alternative online lenders that offer this service to improve cash flow.

Pros

  • Quick access to cash flow
  • Suitable for businesses with outstanding invoices
  • No collateral required

Cons

  • Lower advance rates
  • Possible impact on customer relationships
  • Fees involved

12. Equipment loans

Whether it’s desks and computers or specialized tools and machinery, all types of businesses need equipment.

Although many types of general business loans can be used for equipment, some loans are specifically intended to be used for purchasing equipment. Since equipment loans can be secured with the equipment itself, borrowers do not need to provide any extra collateral.

Businesses can use this type of loan if they need to purchase or upgrade equipment, and in industries reliant on specialized machinery.

Sources

Traditional banks, credit unions, and online lenders provide equipment loans specifically for the purchase or lease of business equipment.

Pros

  • Specific use for equipment purchase
  • Longer repayment terms
  • Equipment serves as collateral

Cons

  • Higher interest rates
  • Potential for equipment obsolescence
  • May require down payment

13. Merchant cash advance

If a business that typically has a high volume of credit card transactions needs some extra funding fast, one way to get it is through a merchant cash advance.

Technically, a merchant cash advance is not a loan, it is a purchase of future receivables from your credit card revenue. Since this is a transaction rather than a loan, they are an option for businesses that have a hard time getting traditional business loans because of a bad credit score.

These are best used for retailers, restaurants, businesses with high credit card sales, and short-term cash flow needs.

Sources

This type of financing is available from alternative lenders and specialized financial companies that provide advances based on future credit card sales.

Pros

  • Quick access to funds
  • Flexible remittance structure
  • Suitable for businesses with consistent credit card sales

Cons

  • Higher rates
  • Daily or weekly remittances
  • Potential impact on cash flow

14. Business line of credit

No matter how careful you are about managing your company’s finances, unexpected expenses can happen to anyone.

To make sure they’re ready to handle any unpredictable expenses that might come up, many business owners like to have a business line of credit available to them. Unlike a loan from a financial institution, which can only be borrowed against once, a line of credit can be borrowed against multiple times. The best part is, you only pay interest when you use it.

You can use a line of credit for businesses with fluctuating cash flow needs, covering operational expenses, and managing seasonal fluctuations.

Sources

Banks, credit unions, and online lenders offer business lines of credit, providing flexible access to funds as needed.

Pros

  • Flexibility to access funds as needed
  • Interest only on the amount used
  • Suitable for ongoing cash needs

Cons

  • Variable interest rates
  • Possible annual fees
  • Potential credit limit restrictions

15. Franchise financing

Just like starting any other kind of business, becoming a franchisee takes money. You’ll need to pay for things like equipment, a location, marketing expenses, and inventory, not to mention your franchise fees. A franchise loan can help you get the money you’ll need to get started.

You can use franchise financing for startups or expansions, and businesses with established franchise partnerships.

Sources

Franchise financing can be obtained from traditional banks, online lenders, and sometimes directly from the franchisor.

Pros

  • Specialized financing for franchise businesses
  • Support from franchisors

Cons

  • Strict eligibility requirements
  • Potential limitations on franchise options
  • Franchise fees involved.

16. Real estate financing

The right location can make a big difference in the success of your business, but most businesses aren’t able to pay for a real estate purchase all at once.

Instead of taking out a mortgage the way a person would to buy a house, businesses have many different real estate financing options available to them. These options include term loans, commercial real estate loans, and SBA loans.

This kind of financing is best used for businesses seeking to acquire or expand their property holdings, generate rental income, or utilize real estate assets as collateral for additional financing.

Sources

Commercial real estate loans are available from traditional banks, commercial mortgage lenders, and online lenders specializing in business property financing.

Pros

  • Long-term investment: Real estate provides potential for appreciation and rental income over time
  • Asset-backed financing: properties serve as collateral, making it easier to secure financing

Cons

  • High upfront costs: real estate purchases typically require substantial down payments and closing costs
  • Market volatility: real estate values can fluctuate, impacting potential returns on investment

17. Inventory financing

Do you have a warehouse or storeroom full of inventory? Inventory financing is an option that allows you to use your unsold inventory to get the capital you need to help your business handle temporary, short-term cash flow shortages.

Inventory financing is best used for businesses that rely heavily on inventory, such as retailers, wholesalers, and manufacturers, to ensure consistent supply, manage cash flow, and support sales growth.

Sources

Businesses can secure inventory financing from traditional banks, online lenders, and specialized financial institutions that provide loans for the purchase of inventory.

Pros

  • Enables businesses to purchase necessary inventory and manage supply chain efficiently
  • Provides funds to cover inventory costs while waiting for sales and receivables

Cons

  • Financing inventory incurs interest expenses that can impact profitability
  • If inventory does not sell as anticipated, businesses may be left with excess or obsolete stock

18. Crowdfunding

Though far less traditional than other forms of financing, crowdfunding is a popular low-cost option for small businesses. Instead of taking out a loan or line of credit, businesses are funded by interested individual investors across the globe.

Business owners can exchange their own goods and products for investments, and can start the process right on the internet. This method is a good choice for those who are starting a new business because it can bring in money without interest rates, deliver market validation and widen the scope of customers.

Crowdfunding is best used for businesses with innovative ideas, creative projects, or social causes that resonate with a wide audience.

Sources

Crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe provide a way for businesses to raise funds from a large number of people, typically in exchange for rewards or equity.

Pros

  • Crowdfunding provides an alternative funding source, especially for startups or businesses with limited options
  • Campaigns create buzz, attract attention, and help build a customer base

Cons

  • Planning, creating, and promoting a crowdfunding campaign requires significant time and effort
  • Not all crowdfunding campaigns succeed, and there is no guarantee of reaching the funding goal

19. Working capital loan

If your business requires funds that are flexible and terms that are shorter, a working capital loan may be the best option. This type of loan allows businesses to grow without the stress of spreading funds too thin.

A working capital loan requires businesses to have a 500+ credit score, 6+ months in business and $15,000+ average monthly bank deposits to be considered for approval with Credibly.

These are best used for businesses experiencing temporary cash flow shortages, seasonal fluctuations, or unexpected expenses.

Sources

Working capital loans can be obtained from traditional banks, credit unions, and online lenders. These loans are designed to finance the everyday operations of a company.

Pros

  • Working capital loans help businesses maintain liquidity and cover immediate financial needs
  • Funds can be used for various operational expenses
  • Giving businesses freedom to allocate resources as needed

Cons

  • Borrowing funds incurs interest expenses, which can impact profitability
  • Taking on additional debt increases the financial obligations and repayment responsibilities

How to Choose the Best Sources of Business Financing

Now that we’ve covered the different types of business funding and the sources of small business financing, let’s explore the six-step process of deciding which option is best for you.

Determine your business funding needs

Before you even begin to consider the various types of funding for small businesses, determine your funding needs. Start by creating a solid business plan outlining your objectives, competitors, customer demographic, and financial projections over the coming years.

Doing so will give you a bird’s eye view of your business, allowing you to assess the type of financing you’ll need. For example, bank loans are a great way to get money fast, but a line of credit may be a more efficient and flexible long-term solution.

Consider your business funding source

As we’ve seen, there are many available sources of business funding. Traditional sources include banks and the Small Business Administration (SBA). Alternate lenders also exist, which we discuss at length below.

Weigh the pros and cons

No funding option is perfect. Take the time to seriously consider the pros and cons of all types of business funding models.

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For instance, self-funding may be easy to obtain, but could put your personal assets at risk. Likewise, friends and family may be a good source of funding for a business, but it could strain relationships if you’re not able to repay the loan.

Consider the cost

All business funding types are subject to their own cost structure. Some options, such as grants or self-funding, may not involve any costs at all, while others (like venture capital or small business loans) may involve high fees or interest rates.

Figure out the terms

Once you’ve settled on the optimal types of business funding sources, you’ll have to find the right lender. Each lender will have their own loan terms and conditions.

For instance, some venture capitalists may ask for a substantial stake in your business, while others might want a seat on your board of directors. Remember, the devil is in the details here.

Seek expert advice

Whether you’re opening your first business or you’re an experienced owner, choosing the best funding source for your business can be complicated.

That’s why it’s worth consulting a trusted professional such as an accountant, attorney, or financial advisor. They can help you navigate your options and make the right choice.

Choosing Between Fixed and Variable Rates

Deciding between fixed and variable rates for your small business funding source can be tricky. Each option comes with its own unique advantages and disadvantages. To put things into perspective, let’s touch on some key points to consider.

  • Interest rate trends
    Arguably the most important thing to consider are the current and expected interest rate trends.For instance, if interest rates are low and are predicted to remain low for the foreseeable future, then a variable rate is better. Conversely, if interest rates are high and predicted to rise, then a fixed rate is preferred.Be aware, some financing sources may express the cost of borrowing as a factor rate. A factor rate is a fixed amount, usually expressed as a decimal rather than a percentage, attached to your original loan total, whereas your interest rate is typically a variable percentage that applies to the remaining balance.
  • Risk tolerance
    Risk tolerance is another factor to consider. A fixed rate offers certainty and stability in your monthly payments—ideal for those who require a predictable budget. A variable rate, on the other hand, provides short-term savings but entails the risk of rising interest rates, resulting in higher payments.
  • Finance term
    The duration of financing is another important factor in your decision. If you have a short-term loan, a variable rate may be more attractive as interest rate changes won’t have much impact on your overall loan costs. In contrast, a long-term loan may benefit from the stability of a fixed rate.
  • Flexibility
    If you value financial flexibility, a variable rate may be a more attractive option. Compared to fixed rates, they often come with flexible terms. This includes the ability to make supplementary payments or pay off the entire amount early without incurring penalties.
  • Industry standards
    The last thing to consider are industry standards and the prevailing market conditions. Some industries may have a preference for fixed rates, while others may favor variable rates. Researching industry standards can give you a better idea of which rate is more prevalent and suited to your type of business.

9 Benefits of Business Financing

Now that we know what business funding is and who should consider it, let’s look at nine benefits.

Improved cash flow

Your daily operations benefit enormously from access to funding. Not only does it help you stay on track with your day-to-day expenses, but financing also allows you to take advantage of new opportunities without disrupting cash flow.

Growth and expansion

One of the most substantial benefits of business financing is that it gives you the capital you need to grow and expand. Whether you’re looking to open new locations, develop new products, or enter new markets, financing can help to achieve your long-term objectives.

Increased competitiveness

With access to financing, your company can invest in new technologies, equipment, or other resources that make you more competitive. This also helps boost sales and secure a larger piece of market share.

Reduced risk

Risk management doesn’t sound fun, but it represents an important facet of your business. By spreading the costs of starting or expanding a business over time, financing lets you manage the risk associated with these types of investments.

Increased credibility

Demonstrating that your business has access to financing can help improve its credibility with customers, suppliers, and other key stakeholders. This makes it easier to secure future financing, attract new investors, and convert potential buyers.

Better decision-making

A steady stream of available capital is one of the best ways to improve decision-making. It gives your business the opportunity to collect and analyze financial data, allowing you to make better choices regarding the future allocation of resources.

Access to expertise

Many types of financing come with the added benefit of access to expert advice and guidance. This is invaluable for companies looking to grow and flourish in their industry.

Increased employee satisfaction

By providing a company with the resources it needs to grow and succeed, financing can boost employee motivation and job satisfaction.

Tax benefits

Believe it or not, business financing can provide tax benefits, such as deductions for interest paid on loans or investment tax credits. In the next section, we discuss the types of business finance that offer tax benefits.

sources of funding for a businessSource: Pexels

Documentation You’ll Need When Applying for Financing

When it comes to business funding, the biggest hurdle most owners face is the application process. Not only is it painstaking, but you open up your business to financial scrutiny. Many lenders are, first and foremost, looking to partner with you, and approach your financial assessment from this standpoint.

Organizing and submitting the proper documentation is essential to secure a source of funding in business. Doing so will streamline your application and improve your odds of approval. Note that the type of financing you apply for will dictate the documentation needed. With this in mind, let’s look at a general list of documents you’ll need.

  • KYC documents
    “Know Your Customer” or “Know Your Client” documents refer to a collection of identification demonstrating the legitimacy of you and your business. Potential lenders and investors rely on this to verify that your business is what it claims to be. In other words, that it isn’t a front for financial crimes like fraud or money laundering.KYC documentation includes things like passport, driver’s license, proof of address, and sometimes financial statements.
  • Business plan
    A business plan is what enables lenders and investors to gauge the viability and potential of your business. It should formally outline your goals and how to achieve them. Include info about your offerings, target market, financial projections, marketing strategy, and anything else relevant to your business.

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  • Financial statements
    Your financial statements comprise a collection of reports that objectively demonstrate the historic performance of your business. Think balance sheet, income statements, business bank statements, and cash flow statements.Lenders and investors use these to assess the financial health of your business and assess your ability to repay the loan or investment.
  • Tax returns
    Your business’ tax returns can provide a wealth of information about your financial history. Lenders and investors may request several years’ worth of tax returns to evaluate your financial stability and income history.
  • Legal documents
    Legal documents include business registration certificates, licenses, and permits, as well as contracts with suppliers and customers. These documents provide evidence of your legal compliance and can demonstrate the stability of your business.
  • Collateral documentation
    If you’re taking out a secured loan, you’ll need to supply collateral documents to the lender. This ensures that their money is protected in the event of a failure to repay the loan. Documents include anything from property deeds and titles to other assets with a value roughly equivalent to the loan amount.
  • Personal financial statements
    If you’re a small business owner, lenders and investors may request personal financial statements. This includes things like your tax returns, bank statements, and credit reports. By reviewing your personal financial situation, they can better assess your ability to repay the loan/investment.
  • References
    Some lenders and investors may request references from customers, suppliers, or business partners. These references provide additional evidence in support of your business’ stability and reputation.

types of funding for a small business

Source: Pexels

What Are the Alternative Sources of Funding for a Business?

Just like there are many different types of funding a business can obtain, so too are there many sources of financing for a small business. Let’s look at some popular alternative options.

Bootstrapping

As the name implies, this requires you to figuratively pull yourself up by the bootstraps—meaning the funding will come from your personal savings or assets.

Family and friends

Friends and family members can be a reliable, low-interest source of funding. Of course, you’ll need to be especially considerate in devising terms both parties are happy with.

Crowdfunding sites

Sites like Kickstarter and Indiegogo are a great way to raise money from people interested in your product or service.

Angel investors

These are independently wealthy people who invest their own capital into your business, usually in exchange for a stake in it.

Venture capitalists

This refers to companies that invest venture capital into high-growth businesses in exchange for shares.

Government grants

These are provided by governments for specific purposes. That said, there are many other types of organizations that offer grants.

Small Business Administration (SBA)

The SBA is a government-backed organization that helps SMBs secure financing. This source of financing a business is designed for those that may not qualify for traditional loans.

Microloans

These are small loans, typically in the range of $50,000 or less. They’re offered by microlenders to small businesses.

Factoring

This is when a business sells its accounts receivable to a third party, known as a factoring company. The catch is that you have to sell at a discount in exchange for immediate cash.

Online lenders

Online lenders and peer-to-peer platforms offer business loans at competitive rates, without needing collateral.

Many online lenders are renowned for their extremely fast turnaround times. For example, Credibly helps businesses secure funding in mere days—saving you weeks of anxious waiting associated with transitional lenders.

sources of funding for businesses

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12 Questions to Ask about Business Financing Sources and Options

There are 12 key questions to ask when preparing to apply for business financing.

  1. How much money does my business require?
  2. What types of business funding best reflect my own needs?
  3. What kind of interest rates and terms are associated with the types of funding for a business?
  4. How will the funds be used to drive business innovation and growth?
  5. What kind of return on investment (ROI) can lenders and investors expect?
  6. What kind of loan term do I want and how much time will I need to repay it?
  7. What are the risks and advantages associated with the different types of business funding?
  8. What are sources of long-term funding for a business?
  9. What are sources of short-term funding for a business?
  10. How will my personal financial history and credit score impact my ability to secure financing?
  11. Can I provide a solid business plan to help secure financing?
  12. Have I explored and compared all possible sources of funding a business?

Asking these questions—and taking the time to consider the answers—will guide you in making the right choice for your business.

How to Get Business Financing

The more prepared you are to apply for business financing, the smoother the application process will be. In order to increase your chances of approval for any of the financing options mentioned above, consider preparing the following:

  • Tax returns
  • Credit history
  • Recent invoices and business transactions
  • Pay off any outstanding debt, if possible
  • Business plans
  • Valuable asset collateral

Get the funding your business needs, with Credibly

Are you a small business owner looking for a hassle-free way to secure a loan?

With Credibly, you’ll enjoy a straightforward application process, unparalleled turnaround times, and access to a 100% U.S.-based customer service team.

Ready to get started? Contact us today to prequalify for different types of funding for your business.

Speak to a financing expert

Frequently Asked Questions About Business Financing

Traditional banks, credit unions, or online lenders can provide loans. You could also consider alternative routes like crowdfunding or even dipping into personal savings. 

If you’re a small business, the Small Business Administration (SBA) offers loans with more flexible terms. Remember, the best choice depends on your unique business needs and financial situation.

Many secure loans from banks, credit unions, or online lenders. Others might tap into government-backed SBA loans.

Some businesses even use crowdfunding or venture capital. It’s all about finding what works best for your business.

There’s no one-size-fits-all answer here. The best financial option for your business depends on your specific needs.

Need to buy equipment? An equipment loan might be your best bet.

Short on cash flow? Consider invoice factoring or a merchant cash advance.

It’s all about understanding your needs and exploring your options. Don’t be afraid to ask for advice!

You can use personal savings, tap into retirement accounts, or leverage personal assets.

Some folks even use credit cards, but be careful with those interest rates. Remember, self-financing means taking on all the risk yourself. It’s a big decision, so make sure you’ve considered all the pros and cons.