How to finance your small business: Options and tips
Presented by Chase for Business.
Quick insights
- There are multiple financing methods for small businesses, including loans, grants, venture capital and lines of credit.
- Knowing the various loan and funding types may help business owners select a suitable option that aligns with their objectives.
- Key considerations such as loan terms, interest rates and repayment flexibility can help determine your preferred financing option.
Small business owners often need financing to launch, grow or sustain their operations. Whether that need results from acquiring new equipment, managing daily cash flow or investing in a major expansion, securing appropriate funding can play a vital role in your bottom line and future success.
This article outlines common financing options for small businesses and practical tips to help business owners determine which type of financing is right for them.
How to finance a small business
Financing your small business means obtaining capital and often taking on debt to cover operational expenses or growth initiatives. Many entrepreneurs seek external funding sources to help propel their business forward.
There are many ways to finance a small business including loans, grants and crowdfunding. Several loan types cater specifically to small businesses, each designed for different needs with their own application process. Below is an overview of common financing options and considerations for each.
Understanding the available funding types, along with their benefits and drawbacks, may be important when making an informed choice about how to finance your small business.
1. Business loans
Business loans are traditional financing options provided by commercial banks as well as other non-bank lenders. They typically often offer competitive interest rates and fixed payment terms, but they may require a strong credit history and thorough documentation.
A lending advisor can detail what you need when applying for a small business loan and help you gather the necessary paperwork. While the requirements vary, many lenders request the following:
- Your business credit score
- Your personal credit score
- Healthy cash flow
- A business plan
Having a positive history with the institution where you’re requesting the loan may help facilitate a smoother approval process.
2. Small Business Administration (SBA) loans
SBA loans carry partial guarantees from the Small Business Administration. Participating lenders originate and fund the loans, while the SBA provides a guarantee for a portion of the loan amount. The program is designed to expand access to affordable financing for businesses. They often feature lower down payment requirements and longer repayment terms, and the application process may require additional steps and documentation compared with some other loan options.
There are different types of SBA loans, including the SBA 7(a), SBA Express and SBA 504 loan programs. Each type has different loan limits, uses and approval timelines.
3. Small business grants
Grants provide non-repayable funds for small businesses usually distributed by government bodies, nonprofits or private companies to support designated industries or community growth. Because you do not have to repay a grant, they can offer a lower-risk option to fund your business.
However, grant eligibility criteria are often stringent, and competition may be high. Grant applications generally require detailed proposals and clear plans for effective use of the funds.
A grant’s terms and amount vary based upon the nonprofit, corporation or government agency issuing it. Some business grants are offered to select groups of people, such as veterans, for example. Eligibility varies by individual grant.
Chase for Business does not currently offer this lending solution.
4. Business line of credit
A business line of credit provides flexible access to a set amount of capital, empowering business owners to draw funds when needed and only pay interest on the money they use. Repayment is only necessary when the first draw begins.
If you need access to cash quickly for either short-term purchases or higher priced projects, a line of credit might be an alternative to a business loan. You will pay interest only on the amount of money you use, and you’ll have the flexibility to draw out money (up to your credit limit) as you need it. Repayment terms are usually monthly, but some lenders may allow you to choose your schedule based on your cash flow.
5. Venture capital (VC)
VC consists of investor funding exchanged for equity or ownership interest in your business. This option may be suitable for high-growth businesses. In addition to cash, VCs can also provide guidance and advice for starting and growing a business. Venture capitalists are often involved in several emerging companies and have industry connections that can help grow your business.
While VC offers substantial funding and strategic support, it entails sharing control and profits. Securing it typically requires a compelling business plan and scalable potential.
Chase for Business does not currently offer this lending solution.
6. Equipment financing
Equipment financing can help businesses acquire machinery or technology through loans or leases secured by the equipment itself. Equipment financing allows you to buy items necessary to run and grow your business without affecting your immediate cash flow.
Usually, equipment loans allow for 100% of the equipment cost to be financed. The loan may also include additional funds as a buffer for any “soft costs” associated with the purchase of equipment, like shipping or materials needed to run the equipment. Terms vary by lender and equipment type.
7. Crowdfunding
Crowdfunding raises small investments from many individuals via online platforms or social media. With crowdfunding, people interested in your product donate and help fund your business, sometimes in exchange for promotional rewards, equity or long-term benefits.
Like a grant, there is no need to repay these funds, but your brand’s use of the money could potentially be scrutinized by your donors. This type of funding may suit businesses with engaging products or stories that attract wide audience interest. Success often depends heavily on marketing effectiveness and community engagement.
Chase for Business does not currently offer this lending solution.
Determining which financing option may be right for your business
Selecting an appropriate financing option depends on your small business, its needs and its financial outlook. Here are a few things to consider:
- Funding amount: How much capital you need is often a deciding factor in your desired type of loan. Typically, loans that require a significant amount of capital will take longer to get and require more documentation than smaller funding requests.
- Rates and repayment terms: Interest rates and repayment terms can directly affect the total loan cost. Knowing your interest rate, monthly payment amount and loan duration can help you make an informed decision about the financial impact of a loan. Understanding what is considered "good" debt vs. "bad" debt may also be a helpful exercise for businesses contemplating funding.
- Credit score: Those building strong business and personal credit might more easily qualify for certain bank or SBA loans and may find more favorable terms than those with lower credit scores.
- Time in business: Newer business may not be able to apply to certain types of loans, so consider the documentation you may need to show to potential loan providers regarding the history and structure of your business.
- Urgency of funds: When you need funds immediately, some loans—like SBA loans or grants—keep in mind that it may take weeks or months before your loan is approved and the funds are available.
Frequently asked questions
What are common ways to finance a small business?
Typical options include business loans, SBA loans, grants, venture capital, equipment financing and crowdfunding.
What is the difference between bank loans and SBA loans?
Bank loans often have competitive rates but stricter qualification standards, while SBA loans feature government guarantees and usually more favorable terms. The borrower will need to complete SBA forms to help determine eligibility for an SBA program.
Can I get funding without repaying it?
Businesses may be able to apply for and qualify for grants, which offer non-repayable funds. Keep in mind that these are not guaranteed funds that are typically competitive and have strict eligibility conditions.
How do I know which loan is right for my business?
Consider the loan amount, interest rates, repayment terms, credit standing and how the funds will advance your business goals when evaluating loan options.
