Five Essential Financing Options for Growing Small Businesses

Published by BradyRenner CPAs | March 20, 2018

In business, the competitive marketplace requires smart business owners to pursue growth and continue to innovate, both to stay competitive and to increase operational efficiency as the company scales. That’s why financing is one of the most important factors in the ability of a small business to expand and attain new levels of size and impact, both in terms of market presence and in terms of revenue and profitability.

With that in mind, small business owners need to know about the various financing options that can be pursued when the time requires new equipment, new locations, new working capital and new growth:

Option 1: Commercial Banks

The first option is to approach a commercial bank and apply for a term loan or a line of credit. The advantages of this approach are many, beginning with the fact that you probably have an existing business relationship with the bank and, depending upon the bank itself, you might be able to work directly with a loan officer or commercial banker who can guide you through the process.

However, this process comes with two potential obstacles. First, most banks tend to have conservative lending criteria and very restrictive lending requirements. And second, your bank might be quick, agile and personalized in working with you through the approval process – or they might take your application and send it behind an impenetrable wall of banking bureaucracy that leaves you hanging for weeks (or longer).

It’s also important to consider the kind of bank you partner with. For some businesses, a large national bank may offer the best resources such as locations, services and lending options. For other businesses, the right solution may be to work with a small community bank or a bank that specializes in certain sectors (such as banks that work heavily with industrial and manufacturing businesses or those that specialize in supporting startups and technology companies). In addition, some banks may be chartered to support specific communities, populations or other objectives (such as banks that are chartered by unions or those originally established to serve minority communities). Even though all banks today will serve all customers, mission-founded banks may still be more flexible or attuned to specific customer needs when applicable.

Option 2: Credit Unions

In the past, credit unions were legally restricted from offering commercial loans or in growing these portfolios aggressively. This was, in part, because they are (or were) nonprofit institutions whose legal charters limited them to serving a very narrow band of customers. Narrow customer groups make a poor foundation for building a diversified commercial lending portfolio, even when legal restrictions are removed. But what many business owners don’t know is that this has changed in the last ten to twenty years, and in fact many credit unions have successfully petitioned to transition from a closed charter to a community charter. This, in turn, freed some credit unions to bring a range of new commercial loan products to the marketplace.

For some communities, the result is that credit unions may be able to offer highly attractive lending terms, coupled with the personalized service that many small business owners greatly appreciate. Of course, credit unions are by their nature limited in their market footprint, which limits their effectiveness for companies intending to grow geographically or in other ways, but nonetheless they are worth examining in depth.

Option 3: Economic Development Agencies

Many small business owners are at least somewhat familiar with the U.S. Small Business Administration (SBA) and they may likely know that some banks offer SBA-backed small business loans. But other than that, most small business owners are not aware of just how many attractive financing products can be obtained or made available specifically through federal, state and local governments and their partners. Some of these products include:

  • SBA Small Business 7(a) Loan
  • SBA CDC/504 Loan
  • USDA Business & Industry (B&I) Loan Guarantee
  • EDA Revolving Loan Fund Program
  • Community Development Financial Institution (CDFI) Loan

In addition, each state and many counties and cities also manage loan programs that target incumbent or expanding businesses in their jurisdictions. For example, the community of Bowie, Maryland (where BradyRenner CPAs is headquartered) is served by the following economic development agencies:

  • Maryland Department of Commerce (
  • Prince George’s County Economic Development Corporation (
  • FSC First (
  • City of Bowie, Economic Development Office (
  • Bowie Business Innovation Center at Bowie State University (

Each of these agencies and organizations is chartered or authorized to offer access to different programs and options, or to help small business owners locate, select and secure economic development financing that would otherwise not be obtainable.

Option 4: Factoring Services

Another option for generating cash you can use to drive growth is invoice factoring, especially if you run a small, fast-growth company doing business with larger enterprises that tend to pay slowly. Invoice factoring is the formal term for a transaction in which you sell your accounts receivable to another business, investor or financial institution, who then takes responsibility for collecting the money owed to your business. You gain the advantage of cash up-front, which you can apply immediately to pay bills or finance growth. And, in many cases, factoring does not require a business credit check or assets backing the arrangement, since the factoring company’s primary concern is not your ability to pay but rather, your customer’s ability to pay instead.

The disadvantages with factoring can be considerable, of course. These begin with a high cost (often 20% of the face value of the outstanding invoices, plus a service fee) and continuing with potentially onerous terms and details. This is why you should read the fine print carefully when considering factoring companies, and feel free to negotiate any details necessary to meet your needs.

Option 5: Alternative, Online and Crowdfunding Services

The market for online and alternative small business loans has exploded in the past few years, creating a new opportunity for businesses seeking financing – and new challenges for business owners trying to select the best options.

The advantage to these services is usually a combination of simplicity and speed. Fill out the right information through an online form, and you can secure an approval in as little as thirty minutes with some services. Many of these services are online balance sheet lenders, which means in essence that they provide primarily short-term, working capital funding with terms of nine months or less. They often work in a manner similar to a merchant cash advance, wherein they deduct a percentage of revenue from your bank account directly over time.

Others are built instead around a peer-to-peer model, backed by individual investors. Terms can often go much longer (up to three or five years, for example) and for larger amounts. And still others create marketplaces between lenders and borrowers, which opens up a variety of options but can also complicate the decision process for the business owner. Either way, the greatest disadvantage to these options is usually the cost of funds, which can be very high depending primarily upon your business credit and the nature of your balance sheet.

Then, there is crowdfunding. Crowdfunding is a rapidly changing field and it comes with great pros and serious concerns at the same time. Some crowdfunding services allow companies to focus on crowdfunding efforts targeting their existing customers (i.e. those most loyal to the company), while other services connect in a more traditional peer-to-peer model. In addition, some crowdfunding programs operate on a debt model whereas others are focused on equity-based crowdfunding. One important thing to consider is the tax implications of crowdfunding, since both states and the IRS may apply complicated and expensive rules when treating crowdfunding income.

Considering Your Options and Packaging Your Deal

Finding the right financing solution for your business is no easy task, and today’s cautious lending environment can make it seem impossible to secure the money you need to grow your company to the next level.

Nonetheless, today small business owners have access to more options than ever before, and a creative approach that examines multiple avenues (or combines more than one together) can help you achieve your business goals in the timeframe you desire and with the right terms to help you build toward success.

Consult with your CPA to discuss these options both individually, and in concert with one another, to prepare, select, obtain and package the right financing solutions for your business.

Image Credit: Ken Teegardin (Flickr @ Creative Commons)