How to Access Capital for Your Business

Funding comes in many forms. Get familiar with your capital options and find the right fit for your business.

Do you need funding to start or grow your small business? It can be overwhelming to determine where to go, what to ask, and which loan is right for you. At DreamSpring, we’ve been lending for more than 30 years, and we’ve seen firsthand how access to the right capital at the right time can transform businesses and communities. Here’s an overview of the different types of capital available to your small business, plus helpful guidelines to follow and important questions to ask yourself before applying.

Before committing to any form of debt for your small business, it is crucial to thoroughly evaluate your financial situation and the potential implications of borrowing.

Small Business Loan

A small business loan is usually a type of “term loan”: You borrow a lump sum, then repay it with interest to a lender over time. Loans can help you cover expenses like startup costs, working capital, equipment or inventory purchases, or expansion. Business loans can come from banks, credit unions, community lenders like DreamSpring, online lenders, or government-backed program intermediaries (like those originating with the U.S. Small Business Administration). Small business loans can vary in size and include microloans under $50,000. Sometimes lenders will offer specialized products for invoice financing, equipment or vehicle purchase, and commercial real estate. Small business loans can have fixed or variable interest rates, and the terms — such as length of time for repayment — are dependent on the lender and product.

Line of Credit

A line of credit is a flexible loan that grants access to funds when needed. Unlike a term loan where you borrow a lump sum all at once, a line of credit allows you to borrow incrementally as needed. You only pay interest on the amount you draw, not the total credit limit, and once you repay what you’ve borrowed, the funds are available to borrow again. Many business owners use a line of credit to cover unexpected expenses or to manage changes in cash flow. This can also be a great option for inventory-dependent businesses or businesses that experience seasonality.

Business Credit Card

A business credit card works just like a personal credit card but is specifically designed for business expenses. It can help you separate personal and business expenses, especially if you travel or have frequent supply purchases. Business credit cards often offer rewards, such as cash back or travel perks, but they can carry high interest rates. If you’re not able to pay the balance down every month, this could be an expensive way to access capital.

Other Financing Options

You may have other financing options to consider depending on your unique business, including crowdfunding, angel investing, circle lending, “bootstrapping” (using your own assets) or asking friends and family for money, or equity investments. 

Debt vs. Equity 

For most businesses, traditional debt is the most straightforward path. Debt applies to all borrowed money, which is paid back with interest. Debt enables you to keep full ownership of your business and have predictable repayment terms. The downside of traditional debt is that you must repay the loan regardless of business performance. On the other hand, business equity involves selling partial ownership of your business in exchange for capital. The benefit of equity is that there isn’t any immediate debt to repay, and investors may bring valuable experience and community connections — but you’re surrendering complete control of your business. Many investors also expect a return on investment, so make sure you understand all the terms and expectations of an equity deal.

Ready for Debt? Where Do You go?

• Banks – Banks are traditional brick-and-mortar financial institutions. Banks include large national institutions and smaller community banks. Products and services vary, so you may want to shop around to secure the best deal.
  
  
• Credit Unions – Credit unions are nonprofit financial institutions that provide banking services like traditional banks, but they’re owned by their members. Members pool money together to provide loans and other financial services, and interest rates are typically better than traditional banks. Profits are returned to members through better rates, lower fees, and community programs. Membership is usually based on factors like where you live or work, or a shared affiliation such as branches of military service or industry.
  
  
• Online Lenders – Many online lenders offer flashy websites, but make sure you understand their loan products and terms before you sign on the dotted line. Online lenders can carry high interest rates in exchange for an easy application and quick decisioning. If you have questions about the terms offered by an online lender, reach out to a small business development center for guidance.
  
  
• Local Government – Many municipal government agencies offer in-house loan funds or special programming to encourage small business growth in your community. If your local government has an economic development or small business agency, it may be worth checking in with them to see if there are opportunities for you and your small business.
  
  
• CDFIs (Community Development Financial Institutions) – CDFIs are lenders with special services and programs for underserved communities and small businesses that may not qualify for traditional bank loans. CDFIs can be loan funds like DreamSpring, as well as banks and credit unions. CDFIs are mission-driven, usually nonprofit, and less regulated than banks, so we can have more flexibility in our loans. DreamSpring works with startup entrepreneurs and small businesses with limited credit history. Many CDFIs also offer wraparound services like business education, technical assistance, and support.

Questions to Ask Yourself Before You Apply

Taking on debt to grow your small business is a big step, and it can have long-term impacts on your financial future. Ask yourself the following questions about your business and needs to help you succeed:

Finding the right funding option for your small business is a significant step toward achieving your goals. Do your research and speak with a lender to help you make the best decisions for your business.

Ready to take the next step?

Explore DreamSpring’s funding options today.