Understanding Business Funding
Business funding is not one-size-fits-all. The right funding depends on your stage of business, what you need the money for, how quickly you need it, and your ability to qualify. Understanding the landscape before you need capital puts you in a position of strength rather than desperation.
This guide covers funding from two perspectives: getting capital when you need it, and building the credit profile that makes future funding easier and cheaper.
What This Guide Covers
- -Building business credit: Establishing and growing your business credit profile
- -Startup funding: Options for new businesses without established track records
- -Expansion capital: Funding for growth, equipment, hiring, and scaling
- -Loan types: SBA loans, term loans, lines of credit, and alternatives
- -Getting approved: What lenders look for and how to prepare
Assessing Your Funding Needs
Before exploring funding options, get clear on what you actually need. Different purposes require different funding types - and requesting the wrong type can hurt your approval chances.
Common Funding Purposes
Startup Costs
- - Initial inventory or supplies
- - Equipment and technology
- - Lease deposits and buildout
- - Licenses and permits
- - Initial marketing
- - Working capital runway
Working Capital
- - Payroll coverage
- - Inventory replenishment
- - Seasonal fluctuations
- - Accounts receivable gaps
- - Operating expenses
- - Emergency reserves
Growth & Expansion
- - New location opening
- - Hiring and training
- - Marketing campaigns
- - Product development
- - Market expansion
- - Acquisition opportunities
Equipment & Assets
- - Machinery and equipment
- - Vehicles
- - Technology upgrades
- - Real estate
- - Renovations
- - Furniture and fixtures
Calculate Before You Borrow
Know exactly how much you need and what the money will accomplish. Vague requests like "as much as I can get" raise red flags. Specific requests with clear ROI projections get funded. Calculate your actual need, add 10-20% buffer, and be prepared to explain exactly how the funds will be used.
Building Business Credit
Business credit is separate from personal credit - and building it takes intentional effort. Strong business credit unlocks better rates, higher limits, and funding that does not require personal guarantees.
Why Business Credit Matters
- - Separate personal and business liability
- - Access higher credit limits
- - Get better interest rates
- - Qualify without personal guarantees
- - Build business value/sellability
- - Establish vendor relationships
Steps to Build Business Credit
Establish Your Business Entity
- - Form an LLC or Corporation (sole proprietorships struggle to build business credit)
- - Get your EIN (Employer Identification Number) from the IRS
- - Open a business bank account in the company name
- - Get a dedicated business phone number (listed under business name)
- - Establish a business address (not a PO Box if possible)
Register with Business Credit Bureaus
- - Dun & Bradstreet: Get your free D-U-N-S number (required for many B2B relationships)
- - Experian Business: Register your business profile
- - Equifax Business: Ensure your business is in their system
- - Verify your information is accurate across all bureaus
Start with Trade Credit (Net-30 Accounts)
These vendors extend credit and report to business credit bureaus:
- - Uline: Shipping and packaging supplies
- - Quill: Office supplies
- - Grainger: Industrial supplies
- - Crown Office Supplies: Office products
- - Strategic Network Solutions: IT supplies
Tip: Open 3-5 accounts, use them monthly, pay early or on time. This builds your payment history.
Get a Business Credit Card
- - Start with secured business cards if needed
- - Graduate to unsecured cards as credit builds
- - Keep utilization below 30%
- - Pay in full or early each month
- - Cards that report to business bureaus: Capital One Spark, Chase Ink, American Express Business
Monitor and Maintain
- - Check your business credit reports regularly
- - Dispute any errors promptly
- - Continue adding positive trade references
- - Never miss payments - one late payment can tank your score
Business Credit Score Ranges
| Bureau | Score Range | Good Score |
|---|---|---|
| D&B PAYDEX | 0-100 | 80+ |
| Experian Intelliscore | 1-100 | 76+ |
| Equifax Business | 101-992 | 700+ |
| FICO SBSS | 0-300 | 160+ |
Personal Credit Impact
For most small business loans - especially for newer businesses - your personal credit matters significantly. Most lenders will pull your personal credit and many require personal guarantees.
Personal Credit Score Thresholds
Improving Personal Credit Before Applying
- - Pay down credit card balances below 30% utilization
- - Dispute any errors on your credit reports
- - Do not open new personal credit accounts right before applying
- - Bring any past-due accounts current
- - If possible, wait until negative items age (2+ years helps)
Startup Funding Options
Startups face unique challenges - no track record, no revenue history, and often limited collateral. Here are the realistic options for new businesses:
Personal Savings (Bootstrapping)
Pros
- - No debt or equity given up
- - Full control retained
- - No approval process
Cons
- - Personal financial risk
- - Limited capital available
- - Slower growth potential
Friends & Family
Pros
- - Flexible terms
- - People who believe in you
- - Often lower/no interest
Cons
- - Relationship risk if business fails
- - Limited capital pool
- - Can create awkward dynamics
Tip: Always document loans in writing with clear terms, even with family.
Business Credit Cards
Pros
- - Quick access to capital
- - 0% intro APR offers available
- - Builds business credit
- - Rewards and cashback
Cons
- - High rates after intro period
- - Personal guarantee usually required
- - Lower limits for new businesses
SBA Microloans
Pros
- - Up to $50,000
- - Reasonable rates (8-13%)
- - Designed for startups
- - Often include mentoring
Cons
- - Longer approval process
- - Still requires decent credit
- - Limited availability by region
Crowdfunding
Pros
- - No debt or equity (reward-based)
- - Validates market demand
- - Marketing exposure
Cons
- - Significant effort to run campaign
- - Platform fees (5-10%)
- - All-or-nothing platforms
Platforms: Kickstarter, Indiegogo (product-based), Wefunder, Republic (equity)
Angel Investors & Venture Capital
Pros
- - Large capital available
- - Strategic guidance/connections
- - No repayment obligation
Cons
- - Give up equity (10-40%+)
- - Loss of full control
- - High expectations for growth
- - Only for scalable businesses
Expansion & Growth Capital
Established businesses with revenue and track record have more options. The key is matching the funding type to your specific growth need.
Term Loans
Traditional loans with fixed amount, fixed term, and fixed payments.
- Best for: Major one-time investments (equipment, expansion, acquisition)
- Amounts: $25,000 - $5M+
- Terms: 1-10 years
- Rates: 6-30% depending on qualifications
Business Lines of Credit
Flexible credit you can draw from as needed - only pay interest on what you use.
- Best for: Working capital, seasonal needs, managing cash flow
- Amounts: $10,000 - $500K+
- Terms: Revolving, typically renewed annually
- Rates: 7-25%
Equipment Financing
Loans or leases specifically for equipment - the equipment serves as collateral.
- Best for: Machinery, vehicles, technology, fixtures
- Amounts: Up to 100% of equipment value
- Terms: Matched to equipment useful life (2-7 years)
- Rates: 4-20%
Invoice Financing / Factoring
Get immediate cash for your outstanding invoices instead of waiting 30-90 days.
- Best for: B2B businesses with slow-paying clients
- Amounts: 80-95% of invoice value
- Speed: Often same-day funding
- Cost: 1-5% per invoice
Commercial Real Estate Loans
Loans for purchasing, refinancing, or renovating commercial property.
- Best for: Buying your building, major renovations
- Amounts: $100K - $10M+
- Terms: 5-25 years
- Rates: 5-12%
SBA Loans Explained
SBA loans are partially guaranteed by the Small Business Administration, making lenders more willing to approve them. They offer some of the best rates and terms available to small businesses.
SBA 7(a) Loan
The most common SBA loan - flexible use of funds.
- - Amount: Up to $5 million
- - Terms: Up to 25 years (real estate)
- - Rates: Prime + 2.25-4.75%
- - Uses: Working capital, equipment, real estate, refinancing
- - Down payment: 10-20% typical
SBA 504 Loan
For major fixed assets like real estate and equipment.
- - Amount: Up to $5.5 million
- - Terms: 10, 20, or 25 years
- - Rates: Below market (fixed)
- - Uses: Real estate, heavy equipment, renovations
- - Structure: 50% bank, 40% CDC, 10% down
SBA Express
Faster approval for smaller amounts.
- - Amount: Up to $500,000
- - Approval: 36 hours typical
- - Rates: Prime + 4.5-6.5%
- - Uses: Working capital, equipment
- - Less documentation required
SBA Loan Requirements
- -For-profit U.S. business
- -Owner-operated
- -Good personal credit (680+ preferred)
- -No recent bankruptcies
- -2+ years in business (for most programs)
- -Demonstrated ability to repay
- -Collateral for larger loans
- -Personal guarantee from owners 20%+
Alternative & Online Lending
Online lenders offer faster approval and more flexible requirements than traditional banks - but often at higher rates. They fill gaps for businesses that cannot qualify elsewhere.
When Alternative Lending Makes Sense
- ✓Need funding quickly (days, not weeks)
- ✓Cannot qualify for bank/SBA loans
- ✓Short-term need where higher rate is acceptable
- ✓Building credit/track record for future bank loans
- ✓Opportunity cost exceeds loan cost (clear ROI)
Types of Alternative Lenders
| Type | Speed | Typical Rates | Min Requirements |
|---|---|---|---|
| Online Term Loans | 1-3 days | 10-50% | 600+ credit, 1yr, $100K rev |
| Online Lines of Credit | 1-2 days | 10-80% | 600+ credit, 6mo, $50K rev |
| Merchant Cash Advance | Same day | 20-150%+ (factor rate) | Card sales history |
| Revenue-Based Financing | 1-5 days | 15-40% | Consistent monthly revenue |
Warning: Merchant Cash Advances
MCAs can seem attractive for quick cash but often carry effective APRs of 50-350%. Daily repayments from your revenue can create a cycle of dependency. Only use MCAs as a last resort with a clear, short-term ROI that exceeds the cost. Always calculate the true cost before signing.
Preparing Your Application
A well-prepared application dramatically increases approval odds and can result in better terms. Lenders want to see you have your act together.
Documents to Prepare
Business Documents
- - Business tax returns (2-3 years)
- - Business bank statements (3-12 months)
- - Profit & loss statement (YTD + prior years)
- - Balance sheet
- - Business licenses and permits
- - Articles of incorporation/organization
- - Business plan (for larger loans)
- - Accounts receivable/payable aging
Personal Documents
- - Personal tax returns (2-3 years)
- - Personal financial statement
- - Government-issued ID
- - Resume/background (for startups)
- - Personal bank statements (if requested)
- - List of personal assets
The Loan Package
For larger loans, prepare a loan package that tells your story:
- -Executive summary: Who you are, what you need, how you will use it
- -Business description: What you do, your market, competitive advantage
- -Use of funds: Exactly how the money will be deployed
- -Financial projections: How the investment will generate returns
- -Repayment plan: Clear path to repaying the loan
What Lenders Look For
Understanding the lender's perspective helps you present your best case. They are evaluating risk - the likelihood you will repay as agreed.
The 5 C's of Credit
Character
Your credit history, background, reputation. Do you pay your obligations?
Capacity
Your ability to repay. Cash flow, debt service coverage ratio, revenue trends.
Capital
Your skin in the game. Equity, down payment, reserves. Are you invested?
Collateral
Assets to secure the loan. Real estate, equipment, inventory, receivables.
Conditions
Industry outlook, economic conditions, loan purpose. External factors.
Key Ratios Lenders Calculate
Debt Service Coverage Ratio (DSCR)
Net Operating Income / Total Debt Payments. Lenders want 1.25x or higher.
Debt-to-Equity Ratio
Total Liabilities / Owner's Equity. Lower is better - shows you are not over-leveraged.
Current Ratio
Current Assets / Current Liabilities. Shows short-term liquidity. 1.5x+ is healthy.
Common Mistakes to Avoid
Waiting until you desperately need money
Desperation shows. Lenders give better terms to businesses that plan ahead. Apply when your business is strong, not when you are struggling.
Not separating personal and business finances
Mixing finances makes it impossible to show business profitability clearly. It also prevents building business credit.
Applying to too many lenders at once
Multiple credit inquiries can hurt your score. Research first, then apply strategically to your best-fit options.
Not understanding the true cost
Factor rates, origination fees, and daily payments can obscure the true APR. Always calculate the total cost of capital before signing.
Borrowing more than you can service
Just because you are approved does not mean you should take the maximum. Calculate your debt service capacity realistically.
Ignoring business credit building
Many business owners never establish business credit until they need it - then it is too late. Start building now, even if you do not need funding yet.
Getting Started
Whether you need funding now or want to position yourself for future opportunities, here is your action plan:
Separate Your Finances
- - Open a dedicated business bank account
- - Get a business credit card
- - Stop using personal accounts for business expenses
Get Your D-U-N-S Number
- - Register at dnb.com (free)
- - Verify your business information is accurate
- - This is required for many B2B relationships and lenders
Open Trade Credit Accounts
- - Start with 3-5 net-30 vendor accounts
- - Use them monthly and pay early
- - This builds your payment history
Get Your Finances in Order
- - Organize tax returns and financial statements
- - Know your numbers (revenue, profit, cash flow)
- - Clean up any credit issues if possible
Need Funding Guidance?
Navigating business funding can be overwhelming. With 32 years of experience helping businesses secure capital - from startups to established companies seeking expansion - we can help you identify the right options, prepare your application, and improve your approval odds. Get a free consultation to discuss your funding needs and strategy.
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