From covering startup or expansion costs to purchasing high-priced equipment, business financing has the potential to be a lifeline for your company. 

Unfortunately, it’s not always easy to qualify for a business loan, business credit card, or other types of business credit. According to the Federal Reserve, 30% of businesses were denied financing after March of 2020. 

Yet there are things you can do to stack the deck in your company’s favor. Read on for an in-depth business financing guide. You’ll learn about the many different business financing options, the costs of borrowing, and how to determine the best choice for your small business. 

Business Financing Basics: Debt vs. Equity

Most business financing options fall into one of two categories — debt financing and equity financing. You can use either option to access capital for your business, and each has its advantages and disadvantages. 

Here’s a deeper look at the differences between debt financing and equity financing.

Debt Financing 

Debt financing is something you’re probably already familiar with as a consumer. If you have ever taken out a mortgage or applied for a car loan to purchase a vehicle, you have used debt financing.

With debt financing, you borrow money and repay it according to the terms of your credit agreement — usually with interest.

There are several advantages to this type of financing. First, you retain full control of your business. Any interest fees you pay may be tax deductible as well. 

On the negative side, debt financing can be expensive. Interest rates on a small business loan can range from 2% all the way up to an exorbitant 99%. Monthly debt payments can also impact your business’s cash flow.

As a business owner, you might have to sign a personal guarantee for the money your company borrows. This means that if your company can’t repay its debt, you could be personally liable for the balance, and your personal credit might suffer too. 

Equity Financing

Equity financing is the process of selling a portion of your company in exchange for business capital from one or more investors. If you’ve ever watched the television show Shark Tank, you have seen equity financing negotiations in progress.

On a positive note, there’s no debt to repay when you use equity financing to secure funding for your business. High interest rates and other borrowing fees aren’t an issue either.
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The negative aspect of equity financing, of course, is that you no longer have full control over your company. In addition to sharing the profits your business earns, you also have a partner you must consult when you need to make future decisions. 

14 Types of Business Financing

Now that you understand the two main business financing categories, you can dig deeper into individual financing options. There are many different ways for your business to try to secure the funding it needs to launch, expand, or cover pressing expenses. 

Some financing options feature lengthy repayment terms. This might cause you to pay more interest in the long run, but it could lower the size of your monthly payment. 

Other financing methods might allow you to borrow money for your business, repay it, and borrow again by reapplying for a new account. 

Finally, some business credit choices may feature easy approval and fast funding while others might require a more in-depth application process. Of course, there are tradeoffs you’ll need to consider too. In general, easy and fast don’t equal competitive or affordable pricing. 

Below is an in-depth look at 14 types of business financing. You can use these details to determine which borrowing method is the best fit for your business. 

Traditional Bank Loans

Traditional bank loans are what many business owners think of first when it comes to business financing. You can find these types of loans at your local or online business bank or credit union.

Traditional bank loans include the following: 

• Installment loans or term loans that may require your business to repay the money it borrows over a fixed period of time.
  
• Your business receives the money it borrows up front in a single lump sum.
  
• Interest rates are typically fixed and don’t fluctuate up or down with the market.
  
• You may be able to secure an attractive interest rate, depending on your company’s creditworthiness and other factors. 

Business Lines of Credit

A business line of credit offers companies a more flexible way to borrow money over and over again. However, the interest rates with this financing option may not be as competitive as a traditional bank loan.

Business lines of credit: 

• Are like credit cards in the sense that you can borrow up to a set credit limit, make a payment, and borrow again as long as the account remains in good standing.
  
• Interest rates can vary based on the market.
  
• Your credit rating (business and personal) can play a role in the interest rate a lender offers your business.
  
• Your business might need to supply collateral to open an account. 

SBA Loans

Business loans backed by the Small Business Administration are some of the most attractive business loans available. But in return, they also feature strict approval criteria your business will need to satisfy. 

SBA loans are:

• Partially guaranteed by the federal government, lowering the risk involved for lenders.
  
• Available for a wide range of borrowing needs, from SBA 7(a) loans for working capital and more to SBA 504 Loans for fixed assets like equipment or property.
  
• Often one of the most affordable ways for eligible businesses to borrow or refinance existing commercial debt.
  
• Harder to qualify for and require a lengthy application and funding process (often spanning months). 

Commercial Real Estate Loans

Commercial real estate loans represent another traditional borrowing option available to business borrowers. If your business wants to build or purchase real estate property, this type of financing is worth considering. 

Commercial real estate loans:

• May be available for up to 80% of the value of the property you wish to purchase.
  
• You can use these loans to purchase or refinance business real estate, renovate existing commercial property, or build something new.
  
• Loan amounts may range from $50,000 to $5 million.
  
• Repayment terms can be as short as 12 months or as long as 30 years. 

Online Loan

An online lender may be more likely to approve your business loan request. However, this easy qualifying process can come at a cost. 

The Federal Reserve study mentioned above reveals that over half of the business borrowers that use online lenders report receiving high interest rates. Nearly a third were unhappy due to unfavorable repayment terms. 

Online loans:

• Are convenient and easy to apply for online.
  
• Are available from reputable lenders, but you have to watch out for bad actors.
  
• May give your business fast access to cash, especially compared with other funding choices.
  
• Often feature higher interest rates depending on the lender, your credit rating, and other factors.
  
• May come with steep origination fees, potentially as high as 8.9% of the loan amount.

Invoice Financing

Invoice financing, sometimes called accounts receivable financing, lets your business borrow against the value of unpaid client invoices. 

A key benefit of invoice financing is that it tends to feature easier approval criteria compared with other options. But lenders usually charge high rates and fees for this funding option. 

Invoice financing details:

• Your business may be able to borrow up to 100% of the value of outstanding invoices.
  
• The approval process is generally easy, without intense documentation requirements.
  
• May be an option even with less-than-perfect credit.
  
• Interest rates and fees can be extremely high. 

Equipment Financing

Equipment financing is another business funding option that typically features an easier approval process. Interest rates can vary widely depending on your creditworthiness and other factors the lender deems relevant. 

Equipment financing details:

• The equipment your business purchases serves as collateral for the loan.
  
• Interest rates could range from 8% to 30%.
  
• You may be able to secure financing with no down payment.
  
• You might be able to bundle the cost of sales tax and installation into the loan, if applicable. 

Merchant Cash Advance

Businesses that accept credit card payments may be eligible to take a merchant cash advance. 

The amount your business can borrow depends on your average daily credit card sales. Qualification tends to be much easier with this type of business credit, but once again the cost can be steep. 

Merchant cash advance details:

• You may have to pay high APRs between 15% to 80% (assessed in the form of “factor rates”).
  
• Lenders may approve your business with no collateral and bad credit.
  
• Funding is speedy, often arriving in your bank account within a couple of days.
  
• The lender may withdraw funds from your account to repay the advance on a daily or weekly basis. 

Note that a merchant cash advance should probably be a last resort due to the expense. 

Microloans

Microloans of $50,000 or less may be a worthwhile option to pursue for certain businesses. Veteran, minority, or female-owned businesses (among others) may be able to qualify for this type of business financing. 

Microloans details:

• Available through SBA lenders, nonprofit Community Development Financial Institutions, and some online lenders.
  
• Startups may be eligible for funding.
  
• Your business may qualify even with no credit or bad credit.  

Crowdfunding

With crowdfunding, you convince a large number of people to invest small amounts in your business. Collectively, the funds may add up to enough to help you reach your business goals. 

Depending on the type of campaign you design, you may offer investors equity in the company, rewards, or a debt to be repaid in the future. Meanwhile, some crowdfunding campaigns merely request donations. 

Crowdfunding points:

• Requires an excellent marketing strategy to succeed.
  
• Features popular online crowdfunding platforms that can be highly competitive.
  
• Involves fees that can vary based on the platform and type of crowdfunding campaign you select. 

Unfortunately, most crowdfunding campaigns don’t reach their financial goal.

Grants

Grants represent a desirable form of business capital that your company does not have to pay back. But your business project will need to stand out among a crowded and competitive field of applicants. 

Grant details:

• They are available from the federal government via the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs.
  
• Nonprofits, local community organizations, and private companies may offer small business grants as well.
  
• The research and application process can be tedious and time consuming.
  
• Beware of scams that charge fees.
  
• If your business operates in certain industries (i.e., scientific, technological, health advocacy, urban restoration, etc.), you may have a better shot.  

Family and Friends

The people who care about you may be willing to back your business goals with financial support. Often, this type of business funding falls into the equity financing category. However, some family members or friends might offer you a loan or a gift instead. 

Whatever the arrangement, make sure the terms are clear up front. Otherwise, you risk damaging an important relationship over money and business-related challenges. 

Angel Investors

Angel investing is a type of equity financing where you trade a portion of your company in exchange for business funding. While you don’t have to repay this cash infusion into your business, you do have to share both profits and decision-making capabilities. 

Angel investors:

• Tend to perform a detailed analysis before deciding to invest in a business.
  
• Are typically attracted to businesses with the potential for rapid growth.
  
• Can be difficult to locate, and may take a long time to negotiate with once you do.
  
• Often offer valuable advice and guidance that could help your business succeed.

Venture Capital

A venture capitalist is another type of investor that may provide equity financing in exchange for ownership shares in your business. 

However, unlike angel investors, when you work with a venture capital firm, you tend to receive business funding in rounds (i.e., Series A, Series B, etc.). 

Venture capital:

• Is typically only available to businesses deemed to be “disruptors” with the potential to grow fast and shake up their market.
  
• Often favors businesses in technology or finance industries or other companies poised for rapid growth.
  
• Will typically move your business through its seed rounds of investment with the goal of taking the company public.
  
• May offer the right company millions of dollars worth of funding. 

Factors Affecting Chances of Getting Approval

Anytime you borrow money from a business lender, your business needs to come across as a good risk. Lenders and banks only loan money to those they deem to be a sound investment. 

Below are some common factors that a lender may consider when you apply for business financing. These factors impact not only your ability to qualify for funding, but can also affect your interest rate, fees, loan amount, loan term, and more.  

Personal Credit Scores

As a small business owner, your business is an extension of you in the eyes of a lender. If you have good personal credit, it may reassure a lender that you’re likely to be responsible with your commercial credit obligations too. 

Good personal credit scores can make it easier to qualify for business financing, like loans or business credit cards. And, of course, the opposite is true as well. 

If you need help establishing good personal credit, a Credit Strong credit builder account is worth considering. There’s no minimum credit score requirement to qualify, and no upfront security deposit. 

Credit Strong accounts start with payments as low as $15 per month. With this option, you can open a $1,000 installment account and add up to 120 months worth of positive payment history to your credit reports with the three major credit bureaus. 

Business Credit Scores

Good business credit scores can be a tremendous asset for your company. When you work to establish and maintain good business credit, it tells potential lenders that your business is likely to repay its debts as promised. In other words, your company is a good credit risk. 

Most lenders rely on credit scores to evaluate loan applications. So, it’s wise to start building business credit as soon as possible. There’s just one problem. Finding companies willing to help you build business credit from scratch can be a challenge. 

Credit Strong Business is one solution that could help you establish business credit. This business credit builder account is a cash-secured installment loan that features easy approval criteria and has the potential to help you build your business credit profile. 

There is no upfront deposit required. And you have the option to select five or ten-year repayment terms. On top of the potential to establish good payment history (with on-time payments), account holders also enjoy free monthly access to their business credit score.

As you manage your business credit obligations well and the tradelines on your business credit reports age, you will put your company in a better position to qualify for funding.  

Cash Flow

Good credit can help you qualify for business financing, but it’s not the only factor lenders consider. A lender also needs to know that your company has sufficient cash flow to pay its monthly debt obligations. 

To assess your company’s cash flow and overall financial wellbeing, a lender may want to examine the following documents when you apply for financing:

• Business Bank Statements
  
• Business Tax Returns
  
• Other Financial Statements (Profit and Loss Report, Accounts Receivable and Payable Records, Etc.) 

Current Debt Levels (Balance Sheet)

A business lender may also want to review your current debts to make sure your business can afford to borrow more money. Your business balance sheet can help answer these questions. 

A balance sheet provides a potential lender with a bird’s eye view of your company’s financial health. It breaks down assets and liabilities in clear terms — aka how much your business earns versus how much it owes. 

Number of Years the Business Has Been Running

Your company’s time in business can also influence its ability to qualify for business financing. For certain types of business loans, your company may need a minimum of two years in operation underneath its belt. 

Yet even as a startup, your business may have some borrowing options. Just be prepared to provide more collateral, a bigger down payment, a personal guarantee, or to accept some other adjustment that brings the lender’s risk down to an acceptable level. 

Industry

In addition to all of the approval factors outlined above, the industry in which your business operates can also impact your ability to qualify for business financing. Businesses that operate in high risk industries may struggle to qualify for traditional business financing. 

With an SBA loan, for example, businesses that operate in any of the following industries are ineligible for financing: 

• Gambling
  
• Investment
  
• Lending
  
• Charities
  
• Religious Institutions
  
• Non-Profit Organizations
  
• Etc.

Determining How Much Financing You Need

You should also be prepared to tell a business lender how much money your company needs to borrow (and why). You may want to prepare a detailed report with cost estimates breaking down how your business will use the money it borrows when and if it’s approved. 

Try to answer questions like:

• What is the cost of the equipment or materials the company needs?
  
• How much additional payroll do you need to hire new team members for expansion?
  
• What amount does your business require to refinance existing high-interest debt? 

The amount of money you request will vary based on your borrowing needs. Over half of businesses that sought funding in 2020 requested more than $100,000 in financing, according to Federal Reserve data. Yet 15% of businesses asked for less than $25,000. 

Keep in mind that the maximum amount a lender is willing to loan your business may be more than you need. It’s generally not a wise move to borrow extra money just because you can. 

Understanding the Costs of Financing and Making a Choice

As you compare one small business financing option to the other, consider how much it will cost to borrow money. Pay attention to annual percentage rates, of course. But remember that fees, repayment terms, and monthly payments should all factor into your decision.

Take the time to rate shop and consider offers from multiple lenders as well. Interest rates and fees can vary widely. Spending a little extra research upfront to find the best deal could potentially save your business thousands of dollars or more in the long run. 

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