Types of Business Financing – Finding Your Capital

When starting a business, finding financing can be the most stressful part. You may have a great startup idea but feel like your financial situation makes it impossible. Don’t give up! Although starting a business is expensive, you have options. The hardest part is setting yourself apart rather than the financing. So, you have your great idea – what types of business financing is available to you? If you’re in this situation, read on to learn about your financing options.

A graphic showing a businesswoman sitting at a laptop. She has a coin in one hand, and a light bulb in the other.

Best Financing Options for Brand New Businesses

It’s difficult for a brand new business to receive certain loans, due to the obvious risks of new businesses. However, this is still one of the common types of business financing. According to Forbes, roughly half of all small businesses survive the five-year mark. Obviously, these statistics would make any bank or lender nervous.

If you have an idea for a startup or brand new business, you still have options. Read on to learn about the types of financing available for your new business.

Personal Bank Loans

Don’t let the risk associated with new businesses deter you. You may have to get a tad creative or rely on yourself. Meaning, you may have to apply for a personal bank loan.

You can still use this money for your business although it’s considered “personal.” It’s personal because it’s based solely on your personal credit. So, you will need good credit to qualify. This is an option, however, you still need to weigh out the pros and cons.

Keep in mind that starting a new business is expensive. Aside from that, it’s very likely you won’t be making much money for your first few years of operation. All this to say, your personal credit score may take a hit. If this is a time in your life you need that high credit score, take this into account. For example, if you’re looking to buy a new home, car, or other big purchase you may need to hold off. However, if you truly believe in your startup and have the passion, this is likely a risk you’re willing to take.

Key Takeaways

  • Great option if you have a good credit score
  • Pros: ideal for new businesses/startups, receive funding quickly
  • Cons: risk to your credit, smaller borrowing amounts

Business Credit Cards

Among the common types of business financing, the business credit card. While typically used by established businesses, they are an option for those just starting out. Along the same lines as the option above, you’ll need to have good credit to use this type of funding. This is also another way you can receive your funds quickly.

There are a plethora of business credit cards available. Like many credit cards, you can find a business credit card that offers rewards for purchases. To get the most bang for your buck, this is a great perk to look for. You’ll also want to shop around considering interest rates, terms, and fees. Nerdwallet created this easy-to-understand comparison chart for popular business credit card options.

Closeup examples of three credit cards, a mastercard, visa, and american express.

Although it’s boring, read the fine print! A credit card is a commitment, and when it’s for your business, even more so. Don’t risk digging your business into debt because you didn’t want to spend the time comparing.

Key Takeaways

  • Fast funding, great for re-occurring business costs
  • Pros: Easy to get, can find an option with rewards
  • Cons: High interest rates, fees can apply

Crowdfunding

If you’re on social media, you’ve likely seen this type of business financing option in action. Products specifically, share information about their product idea on Platforms like Kick Starter. Kick Starter allows people to request funding for their ideas, projects, or businesses. Likewise, it also lets people donate to projects they’d like to support. In short, crowdfunding is essentially requesting support from the community.

Many Kick Starters give special perks to those that have supported their project. For example, supporters may receive first access, special pricing, or gifts. Usually, the “reward” depends on the monetary amount. Meaning, you don’t have to pay back these loans – rather you can give project-related rewards.

Platforms typically show your goal amount, the amount you’ve reached, and info on your product. The key to this type of business financing is presentation. You want to pique people’s interest in your product or idea. People need to see your passion and understand why you believe your business deserves funding! Read this article by Entrepreneur for tips on how to make your crowdfunding venture more successful.

Key Takeaways

  • An ideal option if you have a product to show off
  • Pros: Don’t have to pay back the loans in the traditional sense, build up a community/following for your product early on
  • Cons: Funding isn’t guaranteed

Microloans

One of the lesser-used types of business funding is the microloan. Depending on the startup amount you need and your type of business, you may qualify for microloans. As you probably guessed from the name, microloans are typically smaller. The loan amount is less than $50,000, with the average being $13,000. Again, these are for the small startups.

Typically, these funds are provided by non-profit organizations. Due to the mission of these loaning programs, they’re focused on new businesses and startups in disadvantaged communities. If your business is community-centered, or something you believe can really benefit your community, consider the microloan. Like the crowdfunding option, you’ll need a good presentation.

Key Takeaways

  • Provided by non-profits, so depends on what your business does
  • Pros: May provide additional training or resources
  • Cons: Need some type of collateral, has a lengthy application process, smaller loan amounts

Best Types of Business Financing for Established Small Businesses

If you have an established business, you are more likely to qualify for additional types of business financing. Since you have some progress to show or collateral, you can also qualify for larger loans. Let’s go over the best types of loans available for more established small businesses.

The small business administration seal, with the est. year of 1953. The types of business financing include the small business administration loan.

Small Business Administration Loans

The Small Business Administration (SBA) Loan is another type of business financing facilitated through a bank. However, the SBA guarantees these loans, making it safer. It can also make loans more attainable for small business owners. The SBA also provides additional resources, training, and assistance. Like the microloan, they’re focused on building the community and helping small businesses succeed.

Although you may be able to obtain a higher loan amount, the application process is harder. Along these same lines, the application process and funding process will take longer. So, this is best if you have a long-term plan rather than a need for an emergency loan or fast funding.

This type of business financing is ideal for growth or expansion. If the business you have is taking off and you need more equipment or additional space, start an SBA loan application. Depending on what you’re using the loan for, you’ll have varying times to pay it off. If you’re using the loan for additional space for business growth, you can have up to 25 years to pay off your loan.

Key Takeaways

  • Ideal for expansion or a long-term plan
  • Pros: Higher loan amounts, additional support and training available
  • Cons: Longer application and wait time for funding

Term Loans

A term loan is a relatively simple and straightforward type of business financing. If you qualify for a term loan, you’d receive a lump sum, and a specified repayment schedule. The “term” refers to the timeframe of repayment. The lending amount is also significantly higher than the previously mentioned options – with amounts up to 1 million dollars. The amount will also come through faster than say a small business loan would.

Although all of this may sound great so far, it does come at a bit of a cost. These higher loans do require some collateral. Meaning, you’ll have to provide an asset. Essentially, you’re ensuring you’re “good” to pay back your loan. Because if you don’t, they’ll still have your asset!

Another important aspect of the term loan is to pick the right one. This is another type of loan that needs a very detailed plan. Look at every factor of the loan and your ability to repay it. Although you could use these for an emergency, it’s probably not a wise choice. There are a few different types of term loans. The main differences involve the risk, collateral, and the repayment length.

Key Takeaways

  • Ideal for strong, established businesses that need quick financing or a higher loan amount.
  • Pros: Higher loan amounts available, get your amount upfront, much faster
  • Cons: Riskier depending on the type of term, need collateral to put up for your loan

Choose Wisely and Thrive!

No matter which option you choose, remember to do your research. While these types of business financing can greatly help your business, they can only do so if you choose the correct one for your situation. Also, create a very detailed plan for what you need the loan for, the return of the investment, and your repayment plan.

These funding options are all designed to help your business grow. So, after making your decision, keep your passion to succeed alive and keep growing your small business!