Financing options for businesses

Whether you run an established business or are just starting out, you may need financing to pursue new opportunities or current ones. The type of financing most appropriate for your business will depend on how much is needed and whether that need is short- or long-term. Creditworthiness — your business’s ability to qualify for financing — will also play a role. Most major banks offer an array of financing options for businesses. In some cases, depending on factors like the business’s stage of development, businesses may consider alternatives to traditional lenders.

Business credit cards

Business credit cards are generally used to manage transactions for everyday purchases. Some business credit cards offer business-centric rewards programs, such as cash back for common purchases like office supplies. Unlike a personal credit card, a business credit card may contribute to a business’s credit history.

Compared to other financing options, business credit cards typically have higher interest rates and lower credit limits. The business owner may also have to give a personal guarantee — a promise to pay back the balance personally if the business cannot.

Another option is a secured credit card, which requires a deposit that serves as collateral against purchases made on the card. If you fail to pay, you’ll forfeit the deposit to the card provider.

Read more: How to get a business credit card

Lines of credit

Like business credit cards, lines of credit provide ongoing access to funds up to the account’s limit, with a fixed or variable interest rate and monthly payments based on the amount borrowed. But unlike a business credit card, lines of credit are commonly used for short-term cash needs and access to cash to manage business cash flow. Depending on the financing product and lender requirements, lines of credit may offer different credit limits, interest rates and repayment features than business credit cards. However, while credit cards may offer a grace period for payments, in which you can make charges without paying interest, lines of credit typically do not.

There are also secured lines of credit, which require collateral, and unsecured lines of credit, which don’t. Depending on the lender, financing product and borrower circumstances, a business or personal guarantee may be required.

This type of financing is often helpful for businesses with seasonal sales. “A business owner may use the credit line to invest in inventory part of the year but may not need the extra cash during busier sales months,” explains Roderick Wilson, Small Business Lending product executive with Bank of America.

Read more: What is a business line of credit and how does it work?

Term loans

Because of their generally lower interest rates and predictable monthly payments, term loans are often used to finance the purchase of business assets or to finance business expansion. This type of loan gives you access to borrowed funds up front, in one lump sum. You then make fixed monthly payments according to a predetermined payment schedule. The term — or length — of the loan is based on its purpose. Some term loans are as short as one year, while others, such as SBA loans, can be as long as 25 years. The interest rate may be fixed or variable, and they can be secured or unsecured loans. Secured term loans may have different terms and requirements than unsecured term loans. Some term loans may require a personal guarantee by the business owner.

Commercial real estate loans

To finance the purchase of commercial property for your business, there are a variety of commercial real estate loan options available, including conventional and SBA-guaranteed loan programs. Conventional commercial real estate loans generally require a 20% down payment, and terms may or may not feature a balloon payment.

Non-real estate loans

Many businesses apply for a non-real estate loan to support capital needs, such as equipment, asset acquisition or other purposes. These loans may have shorter repayment terms, in some cases five to seven years, that vary by lender and financing structure. Adding an SBA guarantee may extend the term, often up to 10 years, fully amortized. Many banks manage business auto loans through a separate business auto loan program with rates and terms determined by the lender, borrower qualifications and financing product.

Small Business Administration loans

Small Business Administration (SBA) loans are available through SBA-approved lenders, which include many major banks. Because these loans are partially guaranteed by the SBA, they may have different eligibility requirements, down payment requirements and loan terms compared with other types of small business loans.

SBA lenders may offer three core loan programs featuring the SBA guarantee:

• SBA 7(a) loans are the SBA’s primary small business loan program. There are several subtypes of SBA 7(a) loans, for which the terms and conditions vary. The Standard SBA 7(a) is a general purpose loan and can provide financing for a variety of business needs, including commercial real estate, equipment, working capital, tenant improvements, business acquisition, partner buyouts and debt refinancing. These types of loans are capped at $5 million.
• Another subtype is the SBA Express loan, which is capped at $500,000. SBA Express loans are often used for equipment and working capital.
• SBA 504 loans are generally used for commercial real estate and large equipment or machinery, as well as larger loan transactions.

Rates and terms depend on loan use, and SBA loans can be secured or unsecured, depending on the loan program, use of funds and term. Bank of America offers Standard SBA 7(a), SBA Express and SBA 504 loans.

Read more: What is an SBA loan and how do I qualify?

Practice loans

Many lenders offer loans to healthcare professionals who want to establish or acquire a medical, dental or veterinary practice. Maximum loan amounts vary by lender and purpose, such as practice acquisition, expansion or remodeling, or equipment purchase. Some practice loans offer interest-only and graduated-payment structures with up to 100% financing on startup loans. Startup and practice acquisition loans may include working capital.

Franchise loans

Given the unique needs and financial requirements of franchise businesses, there are lenders that specialize in working with franchises. Franchise lenders can offer financing products designed to meet specific franchising needs. Whether you want to acquire additional locations, refresh your current location or refinance existing debt, many franchise lenders offer both conventional and SBA loan options. Depending on the lender, financing program and borrower qualifications, financing may be available for up to $5 million or up to 90% of your project, and repayment terms may range from 5 to 10 years. Startup financing options for new franchisees may vary by lender.

Asset-based loans

Midsize and large businesses seeking financing of $5 million or more may consider an asset-based loan for financing needs. Asset-based loans are revolving lines of credit or term loans secured by the borrower’s assets. How much credit a borrower can access is primarily determined by the quality and value of the collateral, which can range from accounts receivables and inventory to equipment and real estate.

If traditional or specialized bank lending is not the right fit, a business can consider exploring alternative financing options.

Community development financial institutions

Community development financial institutions (CDFIs) provide financing and other financial resources to historically underrepresented communities and organizations to foster entrepreneurship. CDFIs receive certification and funding through the U.S. Treasury’s CDFI Fund, which maintains a list of certified CDFIs. 

Local funding

Funding opportunities may be available from regionally based organizations. This includes opportunities provided by your local or state governments. The grants that states and local organizations offer may include ones for minority business owners. Information about available funding programs may be available through state and local organizations.

Grants

Grants are awards given by the government, foundations, corporations or individuals that, under most conditions, do not require repayment. While state-based grants and loans largely depend on what’s happening locally, a good source for federal grants is Grants.gov.

Crowdfunding

Websites such as Kickstarter and GoFundMe have introduced many entrepreneurs to crowdfunding, a funding model that allows businesses to raise relatively small amounts of money from a large number of contributors. Depending on the platform, funding may be provided in exchange for rewards, products, services or other benefits. Crowdfunding platforms may have different funding models, eligibility requirements, fees and terms, including conditions related to when funds are distributed to the business.

For all types of financing, terms such as the interest rate and credit limit can vary based on factors, such as your business credit profile. A banking specialist can provide information regarding available financing products and discuss factors that may be relevant when evaluating financing options.