Securing funding for a small business can be challenging, but understanding the different financing options available can help owners make informed decisions. There are several types of loans and funding sources that entrepreneurs may consider.
SBA loans are government-backed and generally offer more favorable terms, such as lower interest rates and smaller down payments. Eligibility is determined by factors like income generation, repayment ability, credit history, business plan quality, business location, and whether the company meets SBA size standards.
Commercial loans differ in that they are not backed by the government but instead provided directly by banks or credit unions. These loans usually have stricter requirements, including a strong credit record and proven cash flow. Commercial loans often feature shorter repayment periods, larger down payments, and variable interest rates. Business owners are encouraged to contact their current bank or lender to determine if this option fits their needs.
Another option is through Small Business Investment Companies (SBICs), which are licensed and regulated by the SBA. SBICs combine SBA-guaranteed funds with private investment to support small businesses across various industries. However, they cannot invest in companies involved in real estate, gambling, or banking. SBICs offer loans between $250,000 and $10 million at interest rates from 9% to 16%. They may also provide equity investments ranging from $100,000 to $5 million in exchange for ownership stakes.
Debt financing involves borrowing money that must be repaid with interest. This category includes traditional loans and lines of credit. While debt financing requires repayment—often secured by collateral—it allows owners to retain full control over their business profits. In cases of nonpayment, lenders may seize collateral or pursue legal action. Established businesses typically find it easier to access debt financing due to stronger financial histories.
Equity financing provides capital in return for partial ownership of the company and a share of future profits. Sources include family members, friends, business contacts, or venture capitalists—though venture capital is harder to obtain. Equity financing does not require repayment but reduces the owner’s stake in future earnings and could result in disagreements among partners regarding business direction.
Grants and scholarships represent another form of funding that does not need to be repaid nor affect ownership structure. These funds are usually offered by government bodies, nonprofits, or foundations but tend to be highly competitive and tailored to specific industries. Owners should exercise caution about “free money” offers as these can often be scams.
Business owners seeking further information on small business financing options can contact NFIB’s Legal Center at info@nfib.org.
