Module 08 of 09
Small business funding options
Most small businesses are started and grown with personal savings, customer revenue, and selective borrowing. But knowing what funding options exist — and when each one is right — helps you avoid expensive money when you don't need it and access affordable money when you do.
Start with the right question
The question isn't "how do I get funding?" — it's "do I actually need outside money, and if so, what kind?" Borrowing money costs money, requires repayment, and introduces risk. It's the right tool for specific situations and a trap in others.
Good reasons to borrow: Purchasing equipment that will generate more revenue than the loan costs. Bridging a temporary cash flow gap when you have firm receivables. Acquiring a lease or inventory for a proven concept. Financing growth that you can see the revenue to support.
Poor reasons to borrow: Covering ongoing operating losses. Financing a business concept that hasn't been validated. Avoiding the discipline of starting lean. Funding lifestyle expenses while a business ramps up.
THE BOOTSTRAPPING ADVANTAGE
A business started without debt has more flexibility, lower fixed costs, and no creditor pressure during hard times. Many successful small businesses are built entirely from customer revenue — growing slowly but keeping every dollar of profit. This isn't always the right choice, but it's almost always undervalued by people who assume they need outside money.
In this Module
When to borrow
Funding options
How lenders evaluate
Related Modules
Cash flow
Financial statements
Legal structures
Funding options — select to explore
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Self-funded from savings or revenue
No approval | No debt
Using personal savings, reinvesting early revenue, or starting the business as side income while keeping a day job. The default starting point for most small businesses — and often the best one.
Amount: Any
Cost: $0
Time to access: ImmediateAdvantages
No debt or repayment
Full ownership retained
Forces lean startup thinking
Limitations
Limited by personal savings
Slower to scale
Personal financial risk
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Government-backed bank loans
Harder to get | Low rates
SBA loans are issued by banks but partially guaranteed by the Small Business Administration — which lets banks offer better terms to businesses that might not qualify for conventional loans. The most common: SBA 7(a) loans (up to $5M, general purpose) and SBA Microloans (up to $50,000 for very small businesses).
Typical amount: $25K–$5M
Rate: Prime + 2.75%
Time to fund: 30–90 daysAdvantages
Lower rates than alternatives
Longer repayment terms
Large loan amounts available
Limitations
Requires strong credit (650+)
May require collateral
Slow process with paperwork
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Small loans from nonprofits & CDFIs
Moderate | Accessible
Microloans are small loans (typically $500–$50,000) from nonprofit lenders, Community Development Financial Institutions (CDFIs), or the SBA's Microloan program. They're designed for businesses that don't yet qualify for bank loans — often including new businesses, lower credit scores, or businesses without collateral.
Typical amount: $500–$50K
Rate: 6–14%
Time to fund: 2–6 weeksAdvantages
Accessible with limited credit history
Often includes mentorship
Flexible underwriting
Limitations
Small amounts
Higher rates than SBA
Must find local CDFI lender
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Loans or leases for equipment
Moderate | Self-collateralizing
Equipment financing lets you purchase business equipment — trucks, trailers, mowers, commercial kitchen equipment, tools — with the equipment itself serving as collateral. This makes it easier to qualify than unsecured loans. Equipment leasing is an alternative that lowers monthly payments but doesn't build ownership.
Typical amount: $5K–$500K
Rate: 5–20%
Time to fund: 1–5 daysAdvantages
Easier to qualify than unsecured
Fast funding
Equipment as collateral — not personal assets
Limitations
Equipment-only purpose
Rates vary widely
Equipment depreciation risk on lease
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Revolving credit for expenses
Easy to get | High rate
A business credit card is useful for managing day-to-day expenses, building business credit history, and capturing cash-back or rewards on regular purchases. It's not a good source of long-term financing — interest rates of 20–29% APR make carrying a balance expensive quickly.
Credit limit: $2K–$50K+
Rate: 20–29% APR
Time to get: 1–2 weeksAdvantages
Builds business credit
Easy to qualify
Rewards and cash back
Limitations
High interest if balance carried
Easy to overspend
Low limits early on
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Draw funds as needed, repay over time
Moderate | Flexible
A business line of credit gives you access to a pool of funds you can draw from as needed and repay on a revolving basis. You only pay interest on what you use. It's ideal for managing cash flow gaps — seasonal slow periods, a slow-paying client, an unexpected expense — rather than long-term capital needs.
Typical amount: $10K–$250K
Rate: 8–25%
Time to fund: 1–4 weeksAdvantages
Only pay interest on what you use
Flexible — draw when needed
Reusable as you repay
Limitations
Requires established credit
May have annual fees
Can become a crutch for weak cash flow
How lenders evaluate your application
Every lender, from a bank to a CDFI, evaluates some version of the same factors:
Credit score: Your personal credit score matters significantly for small business lending. 700+ gives you access to most options at good rates. 650–700 may require SBA backing or a CDFI. Below 650 is challenging but not impossible through microlenders.
Time in business: Most bank lenders want 1–2 years in business with documented revenue. Startups are harder to fund through traditional channels — microloans and bootstrapping are more realistic options.
Revenue and cash flow: Lenders want to see that the business generates enough cash flow to service the debt. A common threshold: monthly revenue should be at least 1.25× the monthly loan payment.
Collateral: Assets you can pledge as security if you can't repay — business equipment, real estate, inventory. Collateral reduces lender risk and often improves terms.
BUILD YOUR CREDIT BEFORE YOU NEED IT
Open a business credit card early, use it for regular business expenses, and pay it in full every month. This builds business credit history before you need a larger loan. It's one of the most underused preparation steps for growing businesses.