Finding the best business grants and loans for your business can be daunting.
It’s a safe bet to say that every small business owner would like to have access to funding that will help them grow. But there is a snag…
Securing an approval is more difficult than most people may believe. You have grants, loans, banks, and alternative lenders. Not to mention the numerous ways of funding that will make your head spin.
Here is some good news. With proper planning and execution, every small business owner can secure financing for their business. In this complete guide, we will cover everything you need to know about the business grants and loans industry. And help you secure the right small business funding.
What Will Be Covered:
- The Basics of Grants vs. Loans
- The Trouble with Small Business Financing
- The Best Options Available
- The Approval Rates and How to Improve Them
The Basics of Grants vs. Loans
Before we dive into all the business loan and grants options, let us get the basics out of the way.
Grants are what we call free money. The money you do not have to repay. However, grant requirements are usually more strict, and the application process highly competitive.
Loans, on the other hand, do require you to pay the funds back along with the interest. But they are easier to apply for and generally more flexible in the use of the money.
So…
The thing is grants sound amazing. But are quite frankly, nearly impossible to win. Most federal grants are limited to nonprofits or research-based entities. For the regular Joe’s small business looking to fund working capital or expansion, a small business loan is the more realistic option.
Granted, we do not mean to discourage you from applying for grants. But if you are going into the process with your eyes wide open and are having realistic expectations of what each one has to offer, the decision is yours to make.
The Trouble with Small Business Financing
Funding a small business is not a simple case of filling out an application and waiting to get approval.
According to the Federal Reserve’s 2024 survey, 37% of small businesses applied for financing in the previous year. Which leaves a large number of business owners who did not even apply because they were under the impression they would be rejected.
And unfortunately, their fears are somewhat justified.
Approval rates for small businesses from major banks are abysmally low. Alternative lenders have a higher flexibility range, but their interests are steeper. The whole process is often overwhelming.
And before you throw your hands up in despair. There is hope. Understanding the landscape is the first half of the battle.
The Obstacles Business Owners Encounter
There are several reasons why small business financing is a task in the first place:
- Credit requirements. Most lenders require good personal and business credit scores.
- Time in business. Newer small businesses are usually turned down by traditional lenders.
- Revenue thresholds. Lenders require proof of healthy cash flow.
- Existing debt. If you have outstanding debt, you may be rejected.
The obstacles are real. But not insurmountable. The right plan of attack can do a lot of the way towards making the process much easier.
The Best Options Available
Enough beating around the bush. Let us dive into some of the good stuff. Here are the leading options available for small business financing.
SBA Loans
The Small Business Administration is a government agency that has partnered with lenders to offer small business loans. These loans are considered the holy grail of small business financing. They offer low-interest rates and long repayment periods.
The three major SBA loan types are:
- 7(a) loans, the most common one suitable for general business purposes
- 504 loans meant for large fixed assets like equipment or property
- Microloans, a relatively small loan up to $50k for startup costs and small expenses
SBA loans are quite difficult to obtain due to the eligibility requirements and take longer to get approval. But for those that make it, they are the gold standard.
Traditional Bank Loans
As old as it may sound, banks remain the default option for small business funding. The smaller community banks are often more flexible with small business than the bigger national ones.
The process for bank loans are straightforward. Submit financials, tax returns, and a business plan to the bank, and they will make a decision. Approval times vary but most of these loans can be approved within a couple of business days if there are no issues.
Alternative Lenders
Online and fintech lenders have revolutionized small business funding.
Alternative lenders approve applications quicker and have more flexible requirements. They approved over 28% of loan applications in the first quarter of 2024.
These include:
- Term loans, a fixed amount of money to be repaid over a specific time frame
- Lines of credit, flexible loans that can be drawn upon as needed
- Invoice financing, loaning money based on outstanding invoices
- Merchant cash advances, a lump sum amount based on future sales
The trade-off is higher interest rates. But when businesses are in need of a quick cash infusion, these alternative lenders are there to provide it.
Government Grants
Federal and state government grants can be a good source of funding but they are very competitive and usually require a specific purpose.
SBIR and STTR provide over $4 billion in annual grants to support R&D. Grants are also available for areas of agriculture, export, or supporting underserved populations.
Federal grants can be found at Grants.gov and their portal. State and local grants are usually on the respective economic development websites.
The honest truth is…
Grants are awesome and they should definitely be a part of your overall strategy. But again, it is best to have expectations and not to rely solely on one source of funding. The grant application process can be arduous and time-consuming with no sure promise of receiving the funding.
The Approval Rates and How to Improve Them
Approval for financing is not something you can take for granted. But you can certainly increase your chances with the right preparation.
Good Credit
This is one of the most important things you can do. Make sure that your personal and business credit scores are in good shape. Pay all your bills on time and keep the outstanding debt low. Keep an eye on your credit reports and rectify any errors or mistakes.
Documentation
Organized financial documentation is key to getting approved. Make sure that you have the following handy:
- Personal and business tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
- Business plan
The Right Lender
One of the biggest mistake business owners make is not starting with the right lender. Different lenders serve different industries and sizes of business. It is best to research your options and narrow down to lenders who will be most amenable to your business type. Community banks and credit unions often have better approval rates for small business financing than national banks.
Apply to Multiple Lenders
Do not be shy to apply to multiple lenders and shop around for the best terms. Multiple credit inquiries can ding your credit score. But applying to several lenders will allow you to compare offers.
Wrapping Things Up
Navigating the small business grants and loans can be simple if you know where to look.
The trick is to know what options are out there and what will be most suitable for the business at hand. Grants are free money. But it is usually hard to win and comes with very strict competition. Loans require repayment but are generally more flexible, accessible, and available.
To quickly recap:
- Know the difference between grants and loans before proceeding
- Be aware of the obstacles and know how to deal with them
- Research every funding option including SBA, banks, and alternative lenders
- Gather proper documentation and start off with a lender with the best chances of success
Seeking proper business financing can take a lot of time and hard work. But the right financing is available to every business owner who goes about it the right way.
Assess your current needs and research what options best suits the situation. Then, prepare a solid application and apply. The funding you are looking for is out there.
