Financing options for small businesses

Whether you run an established small business or are just starting out, you may need outside funding to pursue new opportunities or endure a period of uncertainty. The type of financing that best suits your company will depend on how much you need 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 small businesses. In some cases, depending on factors like your stage of development, it may make sense to consider alternatives to traditional lenders.

The most common financing options available to small businesses

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 will allow you to build a credit history for your business.

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

A secured credit card may be a good option if you’re looking to establish or rebuild your credit. Secured credit cards require 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.

Lines of credit

Like business credit cards, lines of credit provide ongoing access to funds up to the account’s limit, with a variable interest rate and monthly payments based on the amount borrowed. But unlike a business credit card, lines of credit are designed to help manage short-term cash needs of up to one year and provide access to cash to manage business cash flow. Lines of credit typically offer larger credit limits at lower interest rates than 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 secured lines of credit (requiring collateral) and unsecured lines of credit (without collateral). Most lenders will require both a business and personal guarantee on the line of credit.

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 Strategy and Product executive with Bank of America.

Term loans

Because of their low interest rates and predictable monthly payments, term loans are often used to finance the purchase of business assets or to finance business expansion over a period of time. This type of loan gives you access to borrowed funds upfront, in one lump sum. You then make fixed monthly payments according to a predetermined payment schedule. The term of the loan is based on the loan’s purpose — some term loans are as short as one year, while others can be as long as 25 years or more (Bank of America offers term loans for up to seven years). The interest rate for these loans may be fixed or variable, and they can be secured loans or unsecured loans. To get the best interest rate, many business owners opt for a secured term loan. Some term loans also require a personal guarantee by the small business owner.

Small Business Administration (SBA) loans

Small Business Administration (SBA) loans are available through SBA-approved lenders, which include many major banks. Because the SBA guarantees them — meaning the agency promises to pay a certain percentage if the borrower defaults — these loans typically require lower down payments and feature easier qualifying conditions and longer terms than other types of small business loans.

There are three core loan programs that SBA lenders offer, 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 just about any business need 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.
• The SBA 504 loan is used only for commercial real estate and large equipment or machinery and is ideal for transactions up to $5.5 million.
• SBA microloans are designed for small loan requests — generally up to $50,000 — and can be used for working capital, equipment and supplies.

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 can I apply?

Specialized financing

Commercial real estate loans

If you are looking to purchase 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.

SBA-guaranteed commercial real estate loans feature longer, fully amortized loan terms (up to 25 years) with no balloon payment and up to 90% financing (with a 10% down payment). There are two SBA loan programs that can be used for commercial real estate: SBA 7(a) and SBA 504. The SBA 7(a) loan is capped at $5 million and is provided by the SBA lender, while the SBA 504 can accommodate larger loan requests and includes a Certified Development Company (CDC) participating in the financing. Consult with your banker to compare all three loans side by side to determine which solution is best for your business and needs.

Equipment loans

Many businesses use equipment loans to finance industrial or general-purpose equipment as well as specialized machinery and commercial-purpose vehicles. These often come with shorter terms, such as five to seven years. Adding an SBA guarantee can help 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 similar to personal auto loans.

Practice loans

Many lenders offer loans to healthcare professionals who want to buy 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 be a great option because they can tailor loans 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 your qualifications, you may be able to borrow up to $5 million, finance up to 90% of your project and select a term from five to 10 years. Startup financing options for new franchisees may vary by lender.

Alternative financing

Community Development Financial Institutions

The Community Development Financial Institutions (CDFI) Fund awards money to historically underrepresented communities and organizations in order to foster entrepreneurship.

The biggest contributor to CDFIs in the U.S. is Bank of America, with over $2 billion in loans and investments to more than 250 CDFIs. Bank of America supports local economies by partnering with community development financial institutions across the U.S., including all 50 states and the District of Columbia as well as Puerto Rico.

Minority Business Development Agency

The Minority Business Development Agency (MBDA) is a part of the U.S. Department of Commerce, and it seeks to provide aid to minority-owned businesses to help them grow. The agency provides a variety of financing options for minorities, such as grants and access to venture capital specifically geared toward minority-owned businesses.

The agency also has MBDA Business Centers across the country, which provide financial advice for businesses: how to secure loans, get contracts and more. Look for a MBDA Business Center in your area.

Local funding

One of the best resources may actually be in your own backyard. Funding is often available from regionally based organizations, specifically geared toward minority business owners. This includes opportunities provided by your local or state governments and local credit unions and banks.

Many states and local organizations have set aside grants specifically for minority business owners. Do some research on your state and local organizations; many will be able to provide you with financial help.

Grants.gov

While looking for state-based grants and loans largely depends on what’s happening locally, the best place to look for federal grants is through Grants.gov. This site has thousands of grants that may be beneficial to your business. Grants are provided to businesses that can aid the government in “projects to provide public services and stimulate the economy.”

Crowdfunding

Websites such as Kickstarter and GoFundMe have demonstrated to entrepreneurs that small amounts from multiple funders can add up quickly. The crowdfunding model hinges on two methods to attract investors: The service or product must lend itself to a good story that contributors want to support, and the business seeking capital typically offers tiered rewards (such as free products and participation in product design) for each contribution level. Keep in mind that some crowdfunding sites void the funding offer if you don’t meet 100% of your goal, which means you won't receive any money, so make sure you understand all the terms and set a realistic fundraising target.

Borrow from friends or family

Without an established business history, many startup business owners look to friends and family for initial funding. If possible, choose a friend or relative who can offer business guidance as well as cash. Prepare a business plan just as you would for any other business loan. Ask for just enough money to take the business to the next stage — and if you prove to your lender that you can repay on time, it will be easier to ask for more money later if you need it.

For all types of financing, terms such as the interest rate and credit limit can vary based on your business credit profile. A small business specialist can help you compare financing options, evaluate approval odds and find the right fit for your business.