1. Online Loans

Gone are the days of having to visit a brick-and-mortar financial institution to take out a business loan. Today, it’s easy to find online nonbank lenders that offer business loans that you can apply for in the comfort of your home or office.

Loan limits, repayment terms, interest rates and fees can vary widely depending on the online lender you work with and the loan type. And you can use this type of financing to cover a wide range of expenses, such as working capital, expansion costs, debt consolidation, and purchasing inventory or equipment.

Online business loans may offer more lenient approval criteria than traditional bank loans. According to Federal Reserve data, 81% of business loan applicants were approved for at least some funding with online lenders prior to March 1, 2020. That figure dropped to 55% after March 1, 2020 (but so did the approval percentages with other financing sources at that time).

With online loans, your business may be able to access funding faster, assuming it’s approved. But, of course, lending speed and flexibility often come at a price.

Pros and Cons of Online Loans

2. Traditional Bank Loans

Business loans from traditional financial institutions, like banks and credit unions, remain a popular way to borrow money. For well-qualified borrowers, the interest rates with traditional business bank loans tend to be a more affordable option.

However, it can be tough for some businesses to qualify for bank loans—especially for new startups or those without established business credit. Even bad personal credit scores could present an obstacle when applying for this type of business funding.

Pros and Cons of Bank Loans

3. SBA Loans

Loans backed by the U.S. Small Business Administration (SBA) tend to be one of the more affordable ways to access business financing. With SBA loans, the federal government guarantees a portion of the loan. That makes lenders more comfortable approving borrowers who might appear to be a risky investment otherwise.

The SBA itself doesn’t issue loans. Instead, you’ll need to contact an SBA-approved lender to apply. But like traditional bank loans, you may need to jump through numerous hoops to qualify for this form of business funding.

If you can qualify, however, your business might be able to borrow up to $5 million. Repayment terms can stretch out as long as 30 years with some SBA loans, and you might get financing with a down payment as small as 10% of the loan amount.

Pros and Cons of SBA Loans

4. Business Lines of Credit

A business line of credit offers a flexible way to borrow money on an as-needed basis. If you don’t know the exact amount of money your business needs for a project upfront, or if you’re looking for a standing source of capital, a business line of credit might be worth considering.

Like a credit card, you can use a business line of credit to borrow funds up to the credit limit on your account. As your business repays the funds it borrows, it can access the credit line again—up to the limit. When the draw period expires, however, you’ll no longer have access to the credit line.

Business lines of credit are available through both traditional financial institutions and online lenders. So, the specific approval criteria you encounter, along with the interest rates and fees to borrow, can vary a great deal from one lender to the next.

Pros and Cons of Business Lines of Credit

5. Business Credit Cards

Business credit cards represent another flexible way to access financing and establish business credit. This type of funding may be easier to qualify for as well, especially if you have good personal credit scores (at least 670). For this reason, business credit cards can be a great tool if you’re looking for a way to establish business credit.

Of course, the interest rates on credit cards can be high, even for well-qualified applicants. The average credit card interest rate for Nov. 2021 was 14.51% (based on Federal Reserve data for accounts that assessed interest). That figure represents consumer credit cards. Business credit card interest rates may be somewhat higher, but they also depend on your personal credit rating and other factors.

Pros and Cons of Business Lines of Credit

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6. Small Business Grants

Small business grants represent a funding option that can be attractive to any business owner. The main appeal of grants is the fact that you don’t have to repay them, nor do you have to give up a portion of your business equity to secure the funds. They are, in essence, free money.

On the negative side, you’re likely to face steep competition when you apply for small business grants. So, you may need to fill out many applications (some of which may be detailed and tedious) if you hope for your business to get selected for a cash award. Grants tend to be a long shot when it comes to business funding, but they’re hard to beat if your business can qualify.

Pros and Cons of Grants

7. Invoice Factoring

For businesses that provide services or products to other companies, invoice factoring represents another way to access funding. With invoice factoring, your business sells its outstanding invoices to a third party. That third party—a factoring company—gives you a portion of the money upfront in exchange for those invoices. Then, it collects payments from your customers and gives you the remaining balance minus a percentage called a factor fee.

The creditworthiness of your customers matters more than your own business’ credit scores when it comes to this type of financing. So, even with bad credit or no established credit, you might be able to qualify. Yet as you may encounter with other nontraditional business funding sources, the cost of borrowing can be high with invoice factoring.

Pros and Cons of Invoice Factoring

8. Crowdfunding

Crowdfunding is an out-of-the-box way to raise cash for your business goals. Several crowdfunding options include: debt crowdfunding that you repay; equity crowdfunding where you seek investors; reward crowdfunding that offers benefits to donors; and donation-based crowdfunding.

Depending on the type of crowdfunding you’re interested in for your business, you’ll want to find an appropriate platform to manage your campaign. Some options:

Each type of crowdfunding has its benefits and drawbacks to consider. With donation crowdfunding, for example, you don’t have to repay the funds your business receives nor share equity in your company in exchange for investments. But getting the word out and getting others excited about donating to your business goals can be challenging.

Pros and Cons of Crowdfunding

Bottom Line

Researching the different types of business loans and other funding options puts you in a better position when you need to access business capital. From there, you can take the time to review the steps you need to take to qualify for a business loan before you start filling out applications.

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