The Best Small Business Loans & Financing Ideas to Help Your Business Grow
Many entrepreneurs often need financial help to get their business going, but it can be hard to find that help until it's no longer needed.
Over the years, the number of funding options in the US has grown, but these options are often tailored to businesses with great credit scores and a fair amount of annual revenue or assets.
So where does that leave small business owners with low funds, no business credit score, limited business credit history, or poor credit? —You know your business has potential, but how do you get it to where it should be?
We've put together a list of the best small business loans and financing options in 2021 to help you on your way.
Startup loans and business financing options
Finding the best business loan comes down to a few key factors. First, it's a good idea to make a detailed startup budget and settle on a loan amount you can justify.
Once you have a startup budget, we recommend finding an option with realistic repayment terms, paying close attention to the loan’s interest rates.
You can then assess your odds of approval for each option. The following is an overview of financing options that may be right for your business, though you should always getting personalized and professional advice before making any decisions for your particular company.
Small Business Administration (SBA) loans
With competitive rates and loan terms, the SBA offers some of the best business loans to small companies. The administration doesn’t provide loans directly but instead disburses funds to banks and credit unions. Online lenders, nonprofits, and alternative small business lenders also receive SBA loans.
The SBA 7(a) loan program is the most well-known SBA loan, allowing business owners to apply for up to $5 million in capital. The loan can be used for working capital, inventory, equipment, and more. If you need $50,000 or less, you may want to consider the Microloan program. This loan covers most business expenses, but you can't 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 something called an 'origination fee' or 'prepayment penalty,' which is a fee for paying off a debt before the loan term ends, preventing the lender from collecting the full extent of interest payments on the loan.
Comparing lenders based on these additional costs can help you weed out less favorable options.
The SBA also stepped up its lending because of COVID-19, so it's a good idea to see if any coronavirus relief programs apply to you.
Small business credit cards
A business credit card is really a short-term loan that can earn rewards points on all of your purchases. Many entrepreneurs rely on business credit cards for covering daily expenses, but they can also help you get started if used responsibly.
It's a good rule of thumb to look for cards with a 0% introductory annual percentage rate (APR) and no personal guarantee. A 0% introductory annual percentage rate means the credit card has no annual interest fees for the first year, while 'no personal guarantee' means your house, car, or personal funds won't be at risk if you can't pay your credit card bill.
A bonus for new owners is that paying your balance on time boosts your business credit score. There's many different business credit cards to choose from, but the Brex Card is a good example. The Brex Card reports your on-time payments to two major business credit bureaus, Dun & Bradstreet and Experian, with the option to report to all three. With Brex, your payments are always on-time, because the credit card is paid automatically.
However, it's important to note that the Brex Card differs from a traditional credit card in that it comes with a cash account (similar to a checking account) that has built-in spend management tools. The credit card is automatically paid off daily from the funds in your cash account, where it earns rewards on everything you spend, including services like Apple, Zoom, Slack, restaurants, ridesharing and more.
From there, you can apply to switch the Brex Card to monthly payments instead of daily payments, though there's certain criteria for qualifying.
Equipment financing is often considered a good small business loan option 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. If you can’t pay for your essential tools out of pocket, it may be good to consider equipment financing.
But keep in mind that, if you default on an equipment loan, the lender may seize that equipment to cover the loan amount, depending on the lending terms. So it's important to decide what's realistic for your specific business.
Friends and family
Consider this option if you aren't afraid to make business personal. 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.
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.
Angel investors are in high demand, so it's a good idea to have a well-defined business plan for the best chance of success.
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.
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 provide millions of dollars in grants each year. There are broad programs, like Grants.gov, while others provide grants to minority business owners. (See if you’re eligible for these 10 minority grants.)
Applying for grants can be time-consuming and very competitive, but it may be worth the effort. In a way, grants are as close to “free money” as most entrepreneurs get.
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.
Increasing your odds of approval
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. A lot of 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:
- Your annual revenue: If you don’t have any demonstrable business sales, do you have reliable personal income?
- Your cash flow: Do you have steady income that can offset any cash flow issues?
- Your current debt load: Can you keep up with current debt commitments if you take on an additional loan?
- Your business plan: Do you have realistic financial projections and a sound business model? What experience does your management team have?
- 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.
Thoughts on Personal Loans
A personal loan can be a good way to fund your company in its early stages. Personal loans are similar to business loans in that you can technically use either loan for anything you want, but they differ in terms of their approval process.
When you apply for a personal loan, the lender looks at your personal credit history and assets rather than your business credit history or business assets. That's why a personal loan can be a good option if you don't have a business credit score.
That said, if you default on your personal loan, the lender can seek repayment from your personal funds or assets, and with a business loan, it's likely only your business funds and assets would be at risk as long as your business is incorporated.
It can be hard to get a business off the ground and make it successful, but that's partly what makes it so rewarding. There's more than one funding option available, so never get discouraged. Where there's a will, there's a way, and if you push hard enough, there's a good chance you'll get there. Keep trying, keep going, and make your business what you want it to be.