Top Business Financing Options for Small Businesses

top financing options for small businesses

Owning a business is certainly fulfilling, but it’s also expensive. From start-up costs to day-to-day business operations, the list of the things you need to pay for may seem endless. Eventually, these expenses could put a strain on your finances and potentially lead to cash flow issues.

If you’re looking to give your company’s financial state a boost, there’s a plethora of small business financing available at your disposal. Here are the top five financing options you should check-out:

1. Traditional Term Loans

Term loans are typically the first financing option that comes to mind, most likely because it’s the simplest to understand. A business term loan provides businesses with a lump sum of up to $2,000,000 upfront which can then be put towards any type of business initiatives like business renovations, hiring staff, equipment acquisition, or business expansion. The company (borrower) can pay the loan back in increments over a fixed period of time (or term) and at a fixed interest rate (usually around 4% to 6%, depending on the company’s credit history and cash flow).

Term loans are usually best for mature businesses with a strong and established credit history. When applying for one, the lender may require you to present collateral to secure the loan, especially if you’re planning on using the money to purchase real estate or acquire another business.

2. SBA Loans

SBA loans are among the most common type of financing options small businesses apply for. The Small Business Administration (SBA) is a federal agency that supports small businesses by providing them with both short-term and long-term financing options at an affordable rate. Entrepreneurs can use this money to cover start-up costs, equipment purchases, working capital, or business expansion. According to the SBA, businesses with poor credit can qualify, but having a strong credit background always increases your chances of approval.

It’s important to note that the SBA doesn’t physically provide the loan to entrepreneurs. What the SBA does is pair entrepreneurs with lenders/financing companies so they can grant the funding to the entrepreneurs. To lessen the risk lenders face, the SBA guarantees up to 85% of the loan. This means that if the borrower defaults on payments, the SBA would have to pay for that portion of the borrower’s outstanding loan balance. This incentive makes lenders more willing to approve small businesses of the loan.

Since it’s backed up by the federal government, the SBA may require businesses to submit an extensive amount of paperwork. This may include the entrepreneur’s financial reports, business cash flow statements, as well as supporting documents like collateral, articles of organization, and business licenses. The entire approval process could take around 60 to 90 days because of the long verification process, so this may not be a viable financing option for businesses looking for immediate access to cash.

3. Small Business Line of Credit (LOC)

Business lines of credit are the most popular financing solution for businesses in need of quick access to cash and spending flexibility. Once approved, the lending company will open a credit line for you where you can withdraw money as needed, within the allotted credit limit. You only have to repay the amount you use, plus the interest. Once you’ve repaid the loan, your credit will be restored to its original amount and you can access the funds again as you see fit.

A business line of credit is perfect for businesses looking to address short-term financial needs like temporary cash flow gaps, payrolls, and equipment repairs. To qualify, businesses should be in operation for at least 6 months to one year, depending on the lender, and should have annual revenue of at least $25,000.

4. Equipment Financing

Most businesses rely on equipment to keep their operations running, but in many cases, the required machinery is too expensive to finance out of pocket. If your business is looking to obtain heavy equipment and machinery, equipment financing may be a suitable financing option for you.

Equipment loans provide businesses with access to funding that’s designated specifically for equipment and equipment-related purchases. The lender finances a majority of the equipment cost (up to 90%), and entrepreneurs have to cover the remainder. What makes equipment financing appealing is that the equipment itself serves as collateral for the loan. This lowers the risk for lenders as they will have something they can repossess in case the borrowers default on the payments.

5. Invoice Financing

Businesses that have to wait 30 to 90 days to get paid for goods and services rendered can benefit most from invoice financing. With this loan option, businesses can sell their customer’s outstanding invoices to a financing company to free up any cash tied-up to the invoices. This provides businesses with the cash they need for business initiatives, day-to-day expenses, or inventory needs.

When you’re approved for invoice financing, you’ll be able to advance up to 80% to 95% of the total amount of your customer’s invoices. The lenders will then take full control of your ledger, and depending on your agreement, may or may not handle the process of payment collection from your customers. Once all the invoices are paid in full, the lenders will deduct the amount you advanced, plus any transaction fees. The remaining balance is given back to the business owners.

Small Business Loans for Every Business Need

Access to capital is essential to the survival of any business. Small businesses may need to secure access to outside financing options to continue growing and maintaining a competitive advantage. Different business financing options are designed to address different business demands. Identify what your company needs to determine which option is best for you and your business.


Author Bio: Rumzz Bajwa is a writer and content marketer at SMB Compass. She enjoys spending time with her family. She also loves experiencing new moments and investigating new subjects that expand her points of view. You can frequently find her immersed in a good book or out searching for a new experience.

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