How to Obtain Financing for a Small Business

Small business financing can be a helpful a tool for stability and growth. Having the capital to fund your venture allows you to take advantage of opportunities to scale and expand your business.

Understanding the different financing options for small businesses can help you find the right fit for your goals. Let’s explore how to obtain financing as a small business and dive into the various financing options. 

Why small business financing matters

Small businesses need access to adequate capital to support business expansion and operations. Small businesses have a wide range of financing needs – from start-up costs, to real estate needs, to expansion, and more! Choosing the right financing type for a small business can be beneficial for long-term financial health. 

Let’s look at the most common financing options for small businesses and how each might meet your needs.

Common financing options for small businesses

There are several different categories of financing options that small business owners can consider, including traditional small business loans, SBA loans and business credit cards. 

Traditional small business loans

One financing option to consider is a traditional business loan from a bank or credit union. Business loans typically have lower interest rates and competitive terms when compared to credit cards. However, your business may need to meet credit requirements, like operating for at least two years and showing established revenue. You’ll also need strong business or personal credit to qualify.

SBA loans

The U.S. Small Business Administration (SBA) offers government-backed loans with several benefits for business owners. SBA loans are typically used for businesses that don’t meet conventional requirements, such as years in business requirements, or lower revenue thresholds.

The SBA partners with lenders to back the loan, making it easier for small businesses to access capital.  

The most common SBA programs include:

• 7(a) loans: This is the SBA’s primary loan program offering long-term financing for a variety of purposes, including acquiring real estate, refinancing business debt, accessing short- or long-term working capital and purchasing equipment or furniture. 7(a) loans offer amounts up to $5 million.
• 504 loans: 504 loans offer small businesses up to $10 million in aggregate exposure for major fixed assets promoting business growth and job creation. This long-term, fixed-rate financing is provided through Certified Development Companies (CDCs). 504 loans can be used for a number of purposes, like building new facilities, updating existing facilities or modernizing land, streets or parking lots.
  

In general, qualifying for SBA loans requires that small businesses:

• Be for-profit
• Are based within the U.S. 
• Be creditworthy (albeit at a potentially lesser degree than approved conventional loan applicants)

Business credit cards

Another common option for small business owners is business credit cards. Credit cards are an excellent choice for covering short-term or recurring business expenses. Many business credit card options offer benefits like rewards, purchase protection and credit building. 

It’s important to note that some business credit cards have higher interest rates, so managing your balances responsibly is the key to success. 

Additional lending options for small businesses

Here is another option to consider if you’re looking to finance your small business.

Business lines of credit

Business lines of credit offer revolving credit and ongoing access to funds. Businesses can apply for a business line of credit through a bank to gain access to working capital for purchases up to the available credit limit. Once you repay what you borrow, the line of credit is replenished, offering immediate use for future purchases.

Unlike a term loan where funds are given in a lump sum and repaid with interest, a business line of credit can be refreshed as the borrower makes repayments. 

How to finance a small business step-by-step

Financing a small business is just another part of being a business owner. Here are step-by-step instructions for accessing the funds you need to thrive.

Assess your funding needs and business goals

First, assess what your borrowing needs are and how financing can help you meet your business goals. Whether you’re expanding your business or need funding for daily operations, you should evaluate exactly what you need in financing and define what exactly you need it for.

Check your credit and financial documents

Prepare for applying to lenders by checking your personal or business credit history and gathering important financial documents like bank statements, tax returns and balance sheets. 

Research and compare lenders

It’s vital to do your due diligence by researching and comparing financing options. Look at what interest rates you may qualify for and different lenders’ repayment terms to find the best solution.

Understand terms before accepting an offer

Be sure to read the fine print and understand all the terms of the agreement before accepting a financing offer. 

Tips to improve your chances of obtaining financing

Here are a handful of tips to improve your chance of obtaining small business financing:

• Strengthen your credit profile: Build your credit history by applying for business credit, making on-time payments for both personal and business lines of credit and monitoring your credit regularly. 
• Maintain accurate financial records: Use accounting software to keep organized financial records for your business. This helps separate your personal and business finances.  
• Demonstrate cash flow and repayment ability: Your financial statements will highlight your business’ ability to cover its expenses and repay debt. Lenders can also use cash flow projections to see how a loan will impact your cash flow.
• Build relationships with lenders early: By building relationships with lenders from the start of your small business, you can establish rapport and creditworthiness over time.

Finding the right financing for your small business

There is no one-size-fits-all solution for small business financing. The best financing option for your small business depends on your needs, stage of growth and repayment ability. Research your financing options and potential lenders carefully to choose the right option for your business, keeping your long-term vision in mind.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.