If you’re thinking of starting a small business or franchise, you may be unsure about where to start when it comes to small business funding. From traditional business loans to portfolio loans, grants, and 401(k) business financing — there are plenty of avenues to fund your small business. Each has its own set of pros and cons. And some are easier to secure than others. 

Some funding methods can offer favorable loan terms with low monthly payments and lower interest rates but can be more challenging to secure. More traditional business loans, like Small Business Administration (SBA) loans, are typically a popular and competitive choice. 

More innovative strategies — like 401(k) business financing, also known as Rollovers for Business Startups — can offer quick, reliable business funding without overhanging debt or risking valuable assets, such as your home. This method is rising in popularity as interest rates among business loans, including SBA loans, continue to rise. 

Lenders range from traditional lenders like SBA-backed banks to online and alternative lenders. As you know, your business and financial situation are unique. You need a solution that fits both your business and your bank account. That’s why we’ve cut through the clutter for you. This way, you can sit back, relax — and learn about some of the best small business financing options for aspiring or current business owners like yourself. Access to capital for small business loans is out there and ready for you.

Thinking of opening your own business? Here are the 10 Steps to Starting a Business.

Are You Ready for Business Funding?

Before we get too far into the ins and outs of the different types of loan programs and financing, let’s look at what steps you should have taken before you start your search. At this point, you likely already have an exciting small business idea or franchise in mind — and maybe even written a stellar business plan. But have you taken time to organize your finances? That means taking inventory of all your finances from home equity and 401(k) amounts to your annual income and annual revenue, credit score, and debt. You’ll encounter fewer surprises if you go armed with all your information.

Speaking of surprises, remember to be realistic about your financial situation. If you’ve struggled with your credit following some tough financial times, you may not be qualified for certain types of funding that rely on your credit score. That’s why getting input from a business attorney or Certified Public Accountant is also a wise idea. That way, you have a second opinion on whether the financing is right for you — and you also have a trusted advisor at tax time.

Need a balance sheet? Get a FREE template — or learn how to make your own in How to Make a Balance Sheet in 5 Steps. 

Top 7 Best Options for Small Business Financing 

Now that you have your finances in check, let’s look at the several types of small business financing that can help you fund your dream. Most fall under four categories: self-funding, equity financing, secured business loans and collateral-based options, and unsecured and collateral-free loans. We’ll start with self-funding options and continue to review a few of the most popular financing methods: 

1. Self-Funding: Ideal, but Not Always Realistic

Self-funding isn’t the most popular method, as many people don’t have accounts with large sums of extra money. But if this is you, congratulations! The great news is that you don’t have to take on any debt to start your business. And if you don’t personally have the funds but have a relative or business partner who does, you can feel thankful to your friends or family. You could even offer them a share or stock in your business. See How to Ask Friends and Family to Invest in Your Business. 

Even if you don’t have half of a million dollars ready to go, you may have 20 percent — and that amount could be a down payment on another type of loan, such as an SBA loan. 

Not sure whether self-funding your business is right for you? Explore our Guide to Self-Financing Your Business: Is Bootstrapping Right For You?

2. 401(k) Business Financing or Rollovers for Business Startups (ROBS): Debt-Free

Even if you don’t have a great-grandmother who was an heiress, you can still start your business debt-free with Rollovers for Business Startups (ROBS), also known as 401(k) business financing. With this type of funding, you use your eligible retirement funds to invest in your own business. ROBS isn’t a novel concept, as it started in 1974 — but it is less common.

With ROBS, you “rollover” your retirement funds into a new retirement account, then use that new account to fund your venture. There are no withdrawal penalties, and you don’t take on any monthly payments. This option can be more complicated to set up, so it’s best to work with a ROBS provider (we can help with that). The pros? You can start your business cash-rich and debt-free. Plus, you can pair ROBS with any other financing option, including using your 401(k) funds as a down payment on an SBA loan. 

Ready to learn more about 401(k) business financing? Get started with the Top 10+ Resources and Guide for Getting Started with ROBS. 

3. Small Business Administration Loans: Hard to Secure, Reliable Financing for Small Businesses

The Small Business Administration (SBA) has been around for a while —1953, to be exact. There are a couple of types of Small Business Administration (SBA) loans, but all can be challenging to secure. Not only are these loans highly competitive, but banks use the “Five Cs” to determine your eligibility. These are as follows (in no particular order):

• Credit: You’ll need a personal credit score of at least 680 and a small business credit score of 160.
• Capacity: Here the bank will look at your income or the business tax returns for the last three years (if you’re purchasing a business).
• Character: Lenders look at your personal and business character when evaluating your strength as a borrower. Your business experience is a factor for lenders. While you don’t need experience in the industry of the business you’re funding, it helps. You’ll provide information about events in your personal history, like child support payments, criminal convictions, and recent arrests.
• Capital: Banks want to see that you have between 20 to 30 percent of the loan as a down payment, depending on many factors — including whether you’re financing an existing business or starting a small business from scratch. Lenders will also want post lending liquidity usually amounting to 10 percent of the loan amount.
• Collateral: The bank may want to use your home, boat, car, or other real estate assets as collateral — depending on the size of a loan.

Learn more about the Five C’s of SBA Loans in depth, including a two-minute video explanation.

As you can see, you’ll need quite a few of these to fall into place to be granted an SBA loan. That’s why about 70-80 percent of SBA loan applicants are denied. But if you have your Five Cs all lined up, then an SBA loan is a great option for you. SBA loans can often come with reasonable repayment terms such as lower interest rates, small monthly payments, and flexible down payments. And, if you work with a lender like Guidant Financial, you may have a competitive advantage in getting your loan approved. However, it should be noted that SBA loan interest rates have increased since previous years. 

Thinking of applying for an SBA loan? Find everything you need to know in our Complete Guide to SBA Loans. 

4. Portfolio Loans: Lines of Credit with Low Interest Rates

How does your investment portfolio look? If the answer is “strong,” portfolio loans are another loan type that could work for you. Also called Securities Backed Lines of Credit (SBLOCs), these loans let you access the money in your portfolio without selling your stocks. You set up a line of credit — and you can borrow a percentage of that, such as 50-90 percent, depending on other factors such as your assets and total portfolio value.

Interest rates for these loans are low, and you only make interest payments on your repayment. There are no upfront costs, and you can get financing in a couple of weeks. The risk? You’re playing with the market, which fluctuates often and could leave you on the hook if it takes a big dip.

Interested in using portfolio loans to fund your business venture? See our Complete Guide to Everything You Need to Know About Portfolio Loans. 

5. Unsecured or “Term” Loans

These funding sources are as they sound: unsecured. What does that mean for you? In the simplest terms, unsecured loans are debt-free financing that you don’t need to “secure” with collateral such as a home. This strategy allows you to finance your business at 100 percent with no money down. Your credit score will come into play here, helping determine how much funding you qualify for. With unsecured loans, the idea is to pay them off quickly before the interest rates go up — and quickly, too. And with unsecured loans, you can get your money faster than an SBA loan, which often takes months to secure. 

Discover the Best 5+ Alternative Start Up Business Loans to learn more about unsecured loan options. 

6. Grants for Small Businesses: Private, Nonprofit, or Government Grants

Many people think of grants as only for nonprofits seeking funding — but you can also get a grant from a private company, bank, or government. Remember that by securing a grant for your business, you won’t need to pay the money back. However, you must closely follow the application process set by the organization.

You’ll also need a strong business idea or passion that really stands out from the crowd of other applications to get chosen. And you’ll want to make sure you fully understand any terms that come with accepting the grant money. If small business grants sound familiar these last few years, it’s because one type is COVID-19-related small business grants offered by the federal government. Other types of grants may be for minority-owned businesses or women-owned businesses. See a list of government agencies that may offer grants here.

7. Online Business Loans: An Alternative with Flexibility

For an alternative-type loan, you can look at options such as online business loans. You can apply for these through online lenders such as Fundera, OnDec, and Nav. With these types of loans, you won’t need collateral, but you will need a personal guarantee document. Interest rates vary, so you want to keep a close eye on that when you apply. Often, these loans are easier to get if you’re new to the world of business. Learn more and see the Best Online Business Loans according to Forbes. 

Financing Your Small Business 

Don’t forget: From SBA loans to ROBS to unsecured business loans and small business grant opportunities, you have many options to fund your small business. You may even use multiple strategies to finance your venture, depending on your situation. Now that you know the pros and cons of these top business financing methods, you’re better equipped to gauge which aligns with your financial situation, credit, business tenure, and personal assets. But if you’d like expert help in strategizing, Guidant Financial can help. 

At Guidant, we specialize in financing and supporting small businesses — and we’ve helped over 30,000 American small businesses since 2003. Unlike other business financing partners, our team of experts takes an education-first approach, considering all your unique needs and goals. Whether you’re interested in securing an SBA loan or exploring 401(k) business financing, we can help you get the funding you need to make your dream come true.  Explore our Funding Solutions and Business Services offerings now.

Call us today at 425-289-3200 for a free, no-pressure business consultation to get started — or pre-qualify in minutes for business financing now!

“When Falling Sky Brewing presented itself as a great opportunity for me, I needed the capital. Traditional lenders weren’t going to do it. I took a chance on myself that I could grow my business and my 401(k)… And I thought, ‘You know what? I could do this without overhanging debt.‘”

— Stephen Such, Falling Sky Brewing

Read the stories of REAL small business owners who work with Guidant.