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Best small business loans and financing options for new businesses

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Money is always on the mind of any entrepreneur starting a small business. There’s the upfront investment in new equipment, inventory, and furniture. Then there are ongoing costs, like rent, utilities, and other basic startup expenses.

The number of funding options has grown. But many of them are still tailored to companies with great credit scores, annual revenue, and collateral. Business owners with bad credit or limited credit history will face other obstacles.

So, we’ve put together a list of the best small business loans and financing options for new small business owners. Discover a variety of loans, investors, and grants that help you turn your plans into profits.

Startup loans and business financing options

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Finding the best business loan comes down to a few key factors. First, it’s vital that you make a detailed startup budget and settle on a loan amount you can justify. 

Second, find an option with realistic repayment terms, paying special attention to the loan’s interest rates. Third, assess your odds of approval for each option. (We’ll go over how creditworthiness is determined later.) Here’s a snapshot of your business financing possibilities. 

Small Business Administration (SBA) loans 

With competitive rates and loan terms, the SBA offers some of the best small business loans to fledgling companies. The administration doesn’t provide loans directly. Rather, it disburses funds to banks and credit unions. Online lenders, nonprofits, and alternative small business lenders also receive SBA loans.

The 7(a) loan program is the most well-known SBA loan, allowing business owners to apply for up to $5 million in capital. The funds can be used for working capital, inventory, equipment, and more. If you need $50,000 or less, consider the Microloan program. This loan covers most business purchases. You can’t, however, use it to refinance debt or buy commercial real estate. 

In some cases, financial institutions can add their own fees and penalties to your SBA loan. This might include an origination fee or prepayment penalty. Comparing lenders based on these additional costs can help you weed out less favorable options. 

The SBA also stepped up its lending due to the COVID-19 outbreak. They expanded eligibility and streamlined application processes across the board. Some businesses hear back in a few business days. See whether any coronavirus relief programs apply to you.

Small business credit cards

A business credit card is just a short-term loan without the spending restrictions. For most entrepreneurs, it’s essential for daily purchases, but it can also help you get started. 

At the very least, look for cards with a 0% introductory annual percentage rate (APR) or no personal guarantee. That gives you up to 15 months to cover costs without paying interest or putting personal assets at risk. 

A big bonus for new owners is that paying your balance on time boosts your business credit score. The Brex card reports your on-time payments to two major business credit bureaus, Dun & Bradstreet and Experian. This improves your odds of getting loans in the future, and it makes a credit card one of the best loans available.

Speaking of credit card transactions, you can also use a merchant cash advance (MCA) to get a lump sum quickly. With MCAs, you pay a portion of your daily or monthly credit sales to the lender to repay the loan. They’re best for businesses with a high volume of credit transactions.

Equipment financing

Equipment financing is one of the best small business loan options for founders planning to buy machinery. 

In most cases, the equipment itself is the collateral for the loan. As a result, lenders generally offer better interest rates and longer monthly payment terms. Keep in mind that, if you default on an equipment loan, the lender may seize that equipment to cover the loan amount. If you can’t pay for your essential tools out of pocket, consider equipment financing. 

Friends and family 

If you aren’t afraid to make business personal, consider this option. Your friends and family may be willing to fund you in the critical early stages. 

Friends and family funding is a double-sided coin. It works well if there are factors that would rule you out with most loan applications. There are two main ways to approach it. You can hammer out loan amounts and repayment schedules or offer an equity stake in your company.

There are inherent disadvantages. If you lack good credit, you’ll have to make a strong case for how you’ll pay each person back. And if your business struggles, you’re risking the funds of close friends and family and may be risking the relationships as well. Think carefully about who you bring in, and make sure they understand those risks.

Angel investors

Another way to get funding is to work with accredited angel investors. These are wealthy individuals who invest in early-stage businesses in exchange for a company stake. The stake can be anywhere from 5% to 50% of your startup’s equity.

Angel investors generally have a special focus on helping young businesses succeed. That’s in contrast to venture capitalists, who are typically more focused on making a profit. Besides providing funds, angel investors sometimes act as advisors. 

This kind of investment is in high demand. Make sure you have a well-defined business plan for the best chance of success.

Crowdfunding

With a crowdfunding campaign, you take your business needs directly to the people. It’s a small business financing option that’s growing in popularity for many reasons. 

Websites like Kickstarter and Indiegogo are popular for building online campaigns. It's simple to pitch your idea, build awareness, and communicate with donors worldwide. 

Companies usually offer tiered rewards like merchandise and early access to products. There’s also equity crowdfunding where a group of individuals invests in your business in exchange for an ownership stake.

Early-stage businesses also benefit from crowdfunding in other ways. Each campaign is a powerful way to validate your concept and learn about your market.

Small business grants

We can’t talk about business funding options without mentioning grants. Even the best small business loans come with strings attached. But grants provide much-needed funds minus the repayments, interest rates, and additional fees.

Government agencies, private foundations, and nonprofits dole out millions of dollars each year. There are broad programs, like Grants.gov, while others specifically target minority business owners. (See if you’re eligible for these 10 minority grants.) 

Applying for grants can be time-consuming and highly competitive, but it may be worth the effort. It’s as close to “free money” as most entrepreneurs get. 

Honorable mentions

If you don’t qualify for any of the options we’ve mentioned, there are a couple more ways you can access essential funding. 

  • Business line of credit: Business lines of credit work similarly to credit cards, but with added flexibility. Credit limits go as high as $1 million, and you only pay interest on the funds you draw. Funds are in your bank account the moment you need them.
  • Invoice financing (or invoice factoring): This loan type is best suited for businesses with outstanding invoices and reliable paying customers. Technically, you’re borrowing against the money you’ll receive from paid invoices later on. You can collect customer payments yourself or hand off that responsibility to a third party.
  • Personal loans: These loans don't often rank among the best small business loans due to their higher costs and inherent risks. If your business fails, you could do serious harm to your personal credit score. If this is your best option, personal loans with banks tend to have the strictest qualifications, but the lowest APRs. 

Raising your odds of approval

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Approval rates vary widely by the type of loan and lender. Traditional banks and credit unions tend to look at credit scores, business age, tax returns, and financial reports. Modern online lenders, on the other hand, hone in on your business revenue. 

Before you apply, it’s a good idea to assess where you stand based on these five factors: 

  1. Your annual revenue: If you don’t have any demonstrable business sales, do you have reliable personal income?
  2. Your cash flow: Do you have steady income that can offset any cash flow issues? 
  3. Your current debt load: Can you keep up with current debt commitments if you take on an additional loan? 
  4. Your business plan: Do you have realistic financial projections and a sound business model? What experience does your management team have? 
  5. Your reasons for borrowing: What will this capital allow you to accomplish?  

If you're ready to apply, learn what you can expect during the loan application process

Taking your small business funds to the next level

After you've done the hard work of securing a loan, store your new funds with a financial institution that doesn't eat away at them with so-called service fees. 

Brex Cash is an all-in-one cash account. It gives you industry-leading yields on your capital while you focus on your business. There are no transaction fees, account fees, or minimum balance requirements. That means you earn interest and keep more of your money from day one. 

Small business lending can be stressful, but using Brex Cash to manage your funds isn’t. Learn more about easier finance management.

Brex Cash is offered by Brex Treasury LLC, a registered broker-dealer and member FINRA and SIPC. Brex Cash is a program that allows you to elect to automatically place your cash balances into certain money market mutual funds. Brex Treasury LLC is not a bank, your Brex Cash account is not a bank account, and it may not offer all of the services and protections that banks may offer. The cash you deposit into your Brex Cash account will not be stored at a bank.

You could lose money by investing in a money market mutual fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund and you should not expect that the sponsor will provide financial support to the fund at any time.

Brex Treasury LLC is not an investment adviser, and therefore investors should consider the investment objectives, risks, and charges and expenses carefully before investing. See program disclosures and the applicable fund prospectus for details and other information. Contact us for a copy of the fund prospectus and recent performance data. You should read the prospectus carefully before investing.

Brex Treasury LLC does not charge transaction or account fees. However, money market funds bear expenses and fees. Fees are subject to change. Yield is variable and may fluctuate as market conditions change.

Brex Treasury is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org. Securities in your account are protected up to $500,000. For details, please see www.sipc.org.

This is not an offer, solicitation of an offer, or advice to buy or sell securities, or to open a brokerage account in any jurisdiction where Brex Treasury LLC is not registered.

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