Getting capital for a business typically comes down to four paths: borrowing it, selling equity to investors, winning grants, or using alternative financing tied to your revenue or invoices. The right choice depends on how much you need, how established your business is, and how much control you want to keep. Here’s how each option works and what you’ll need to qualify.
SBA Loans
The U.S. Small Business Administration doesn’t lend money directly, but it guarantees loans issued by participating banks and credit unions, which makes lenders more willing to approve small businesses that might not qualify on their own. The most popular option is the SBA 7(a) loan, which caps at $5 million and can be used for working capital, equipment, real estate, or refinancing existing debt.
To qualify for a 7(a) loan, your business must be operating, for-profit, located in the U.S., and classified as small under SBA size standards (which vary by industry). You also need to show that you couldn’t get comparable financing from a non-government source on reasonable terms, and you must demonstrate a reasonable ability to repay.
The SBA also runs a 7(a) Working Capital Pilot program designed for businesses in manufacturing, wholesale, or professional services that need cash to fulfill large contracts or borrow against accounts receivable or inventory. This program also caps at $5 million but requires at least one year of operating history and the ability to produce accurate financial statements and aging reports for receivables and payables.
SBA loans tend to offer lower interest rates and longer repayment terms than conventional business loans, but the application process is slower and documentation-heavy. Expect to spend several weeks gathering paperwork and waiting for approval.
Conventional Bank and Online Loans
If you don’t want to go through the SBA process, traditional banks and online lenders offer term loans, lines of credit, and equipment financing directly. Banks typically want to see a solid credit history, at least two years in business, and strong revenue. Online lenders often have lower thresholds for approval but charge higher interest rates to compensate for the added risk.
A bank term loan might carry a rate in the single digits for well-qualified borrowers, while online lenders frequently charge rates well into the double digits. The tradeoff is speed: online lenders can fund in days, while a bank loan might take weeks. For a newer business with limited credit history, an online lender or a microlender (many nonprofits offer microloans under $50,000) may be the most realistic starting point.
Documents You’ll Need for Any Loan
Regardless of the lender, you should have these ready before you apply:
- Financial statements: Up to one year of business bank statements, personal and business tax returns from the most recent three years, current and projected balance sheets, an income statement, a cash flow statement, a list of current accounts receivable, and a schedule of business debts.
- Legal documents: Articles of incorporation, your Employer Identification Number (EIN), an operating agreement if you’re structured as an LLC, business licenses and permits, your commercial lease agreement, and any contracts between your company and third parties. Franchise agreements apply if relevant.
- Personal financial information: Up to one year of personal bank statements, plus your personal credit report. Lenders use your personal credit score to gauge approval odds and set your interest rate, especially for newer businesses without an established business credit profile.
Having these organized before you apply speeds up the process considerably and signals to lenders that you run a tight operation.
Angel Investors
Angel investors are wealthy individuals who invest their own money in early-stage companies, typically during the seed or concept phase when traditional financing options are limited. They write checks ranging from tens of thousands to a few hundred thousand dollars, and in return they take an equity stake in your company, meaning they own a percentage of the business.
Because angels invest so early, when your company’s valuation is low and risk is high, the equity they receive can be significant relative to the amount invested. An angel putting in $100,000 might expect 10% to 25% ownership depending on your stage and traction. They’re looking for ambitious but realistic revenue growth plans and a path to high returns.
Finding angels typically means networking through local startup communities, attending pitch events, or joining platforms like AngelList that connect founders with investors. You’ll need a polished pitch deck, clear financials, and a compelling explanation of your market opportunity.
Venture Capital
Venture capital firms pool money from institutional investors and deploy it into high-growth companies, usually starting at the Series A stage and beyond. VC investments are larger than angel rounds, often ranging from a few million to tens of millions of dollars. In exchange, VCs take a substantial equity stake and typically want a board seat or significant influence over company decisions.
Because VCs invest at a later stage when your company’s valuation is higher, the dilution per dollar invested can be lower than what you’d give an angel. But the expectations are steeper: VCs require a scalable business model, strong growth potential, and a solid management team. They’re looking for investments that can return several times their initial capital, which means they favor businesses with the potential to reach very large scale.
VC funding works well for technology companies, biotech, and other sectors where rapid scaling is possible. If your business is a local restaurant or a steady-growth services firm, venture capital probably isn’t a fit, and most VCs won’t be interested.
Business Grants
Grants are the most attractive form of capital because you don’t repay them or give up equity. They’re also the hardest to get. The SBA does not provide grants for starting or expanding a typical business. Its grant programs go to nonprofits, educational organizations, and resource partners that support entrepreneurship through counseling and training.
The main exception is research and development. If your small business engages in scientific R&D, you may qualify for federal grants through the Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) programs. These fund projects that meet federal research objectives and have high potential for commercialization. The SBA also offers grants to help small manufacturers through the Made in America Manufacturing Initiative, focused on training and workforce development.
Beyond the federal level, many state and local governments, private foundations, and corporate programs offer grants targeting specific demographics (women-owned businesses, veteran-owned businesses, minority entrepreneurs) or specific industries. These tend to be competitive, with hundreds of applicants for each award. Search your state’s economic development agency website and sites like Grants.gov to find current opportunities. Be wary of any “grant” program that asks you to pay a fee upfront to apply.
Revenue-Based Financing
Revenue-based financing lets you borrow a lump sum and repay it as a fixed percentage of your monthly revenue. When sales are strong, you pay more and retire the debt faster. When sales dip, your payments shrink. This structure works well for businesses with predictable recurring revenue, like subscription services or e-commerce companies, because repayment flexes with your cash flow rather than locking you into a fixed monthly payment.
The cost is typically expressed as a multiple of the amount borrowed (for example, you receive $100,000 and repay $130,000 over time). Translated into annual percentage rates, these deals often land in the double digits, so they’re more expensive than a traditional bank loan but faster to secure and don’t require you to give up equity.
Invoice Factoring and Invoice Financing
If your business invoices other companies and waits 30, 60, or 90 days to get paid, you can unlock that cash sooner through invoice factoring or invoice financing. Both options let you borrow against outstanding receivables, but they work differently.
With invoice financing, you take out a loan or line of credit backed by your outstanding invoices. You still collect payments from your customers yourself, and you repay the lender as those invoices are paid. With invoice factoring, a factoring company purchases your invoices at a discount, advances you a portion of their value upfront (often 80% to 90%), and then takes over collecting payment directly from your customers. When the customer pays, the factoring company sends you the remaining balance minus their fee.
Both options commonly carry double-digit APRs when fees are annualized, so they’re best used as a short-term cash flow tool rather than a long-term financing strategy. Factoring can be particularly useful if you don’t have the resources to chase down slow-paying clients, since the factoring company handles collections.
Bootstrapping and Personal Capital
Many businesses start with the founder’s own savings, credit cards, or a home equity line of credit. This approach keeps you in full control with no investors to answer to and no loan payments from day one. The obvious risk is personal financial exposure: if the business fails, you absorb the loss directly.
If you go this route, keep personal and business finances strictly separated from the start. Open a dedicated business bank account, get a business credit card, and track every expense. Commingling funds creates accounting headaches, weakens any liability protection from your business structure, and makes it much harder to bring in outside capital later when a lender or investor asks to see clean financials.
Choosing the Right Capital Source
Your stage, industry, and growth plans narrow the options quickly. A pre-revenue startup with a tech product might pursue angel investors or SBIR grants. A two-year-old service business with steady revenue is a strong candidate for an SBA 7(a) loan. A company with $500,000 in unpaid invoices sitting in accounts receivable could unlock immediate cash through factoring.
Many businesses use a combination: bootstrapping to get started, a small loan or grant to hit a milestone, and equity investment or a larger credit facility to scale. The key is matching each funding source to what you need right now, what you’re willing to give up, and what you can realistically qualify for.