The Breakdown: Types of Small Business Funding

When looking for funding for your small business or startup there are a variety of different options each with different pros and cons. If one of your concerns is giving up equity, there are options for non-dilutive growth capital. The sheer number of financing options can be difficult to navigate so we’ve broken down the most common ones here. 

SBA Loan

For an SBA Loan, the Small Business Association guarantees part of the loan reducing the risk for the lender. These types of loans are very affordable, but the requirements are strict and receiving funding can take longer than a traditional loan.

  • Pros: 
    • SBA Loans are lower cost
    • Favorable repayment terms
    • Low monthly payments
    • Available for many uses
    • Less collateral required
  • Cons:
    • The low cost of an SBA loan comes with strict requirements and due to the increased scrutiny, the approval process can be longer than traditional loans.
    • Good credit is often required
    • Numerous SBA programs exist which can can be confusing
    • Personal guarantee often required

Business Line of Credit

A business line of credit is very similar to a business credit card. You can use it whenever it’s needed as long as you don’t exceed the predetermined limit. However, with a business line of credit, you can also withdraw cash. There are two kinds of business lines of credit; revolving and non-revolving. With revolving credit, you can use the funds, pay them back and your credit limit doesn’t expire or close - allowing you to leverage that same line of credit again in the future. With non-revolving credit, you can also borrow the funds up to the limit of the credit line, however once you’ve returned the capital to the lender, the credit line will close.

  • Pros: 
    • Build business credit
    • Smooth cash flow during leaner months
    • Interest is only charged for capital you use
    • Flexible loan product
  • Cons:
    • Difficult to qualify
    • Can be expensive
    • Limits can be low
    • Application is time-consuming
    • Difficult to choose the best lender

Equipment Financing

Equipment financing helps you buy equipment for your business. You can use it to purchase new and used machinery, cars, or any other equipment your business may need.

  • Pros: 
    • Low APR
    • Predictable monthly payments
    • Builds business credit
    • Equipment serves as collateral
  • Cons:
    • Can require a high down payment
    • Good credit is needed to obtain reasonable terms
    • Only available for equipment purchases

Invoice Financing

Invoice financing allows businesses to borrow money against outstanding invoices, or to sell those invoices at a discount. It works by providing a cash advance based on a percentage of the unpaid or outstanding invoices. Generally, you can receive between 50-90% of the value of outstanding invoices depending on the risk that those invoices will ultimately be paid. 

  • Pros: 
    • Fast approval without much paperwork
    • Can mitigate cash flow emergencies
    • Transparent and easy to understand pricing
    • Personal credit is not a major factor
  • Cons:
    • Relatively high rates/fees
    • Need invoices as proof/collateral
    • Mostly unavailable for business to consumer businesses

Personal Loan for Business

A personal loan is money borrowed from a bank, credit union or online lender that can be used for any number of purposes. As long as the lender doesn’t restrict it, you can use a personal loan for your business. Most personal loans are unsecured so they don’t require any collateral.

  • Pros: 
    • If your business is just starting out, it may be easier to get a personal loan than a small business loan
    • Personal loans tend to have lower APR’s than credit cards
    • A personal loan is flexible and can be spent on anything from office supplies to credit card bills 
  • Cons:
    • No tax credits, as you might otherwise receive if you were to take out a business loan
    • If the loan is secured, assets like your house may be used as collateral
    • Personal loans are usually smaller than business loans
    • Generally higher rates than a business loan

Merchant Cash Advance

Merchant cash advances (MCAs) can be a riskier form of financing. Some carry APRs in the triple digits and their daily repayment schedule can lead to a debt trap where it is nearly impossible to repay without refinancing. A merchant cash advance provider gives you an upfront sum of cash and takes fixed debits from your bank account on a daily or weekly basis. Some merchant cash advances are structured similarly to a royalty payment except they are paid back by the lender receiving a portion of credit card transactions instead of overall revenue.

  • Pros: 
    • Merchant Cash Advances are quick with no heavy paperwork
    • MCAs are unsecured so you don’t need any personal or business collateral
  • Cons:
    • Much higher fees and interest rates than a revenue-based financing deal 
    • No benefit to repaying early

Business Credit Card

Business credit cards can be a useful tool for small business owners. They’re a convenient way to increase your company’s purchasing power. Business credit cards essentially have two categories. Cards with low APRs and cards that earn business owners rewards. If you plan to carry a balance, a card with a low APR is probably better. If not you might want to maximize your rewards. 

  • Pros: 
    • Some cards have lucrative bonuses
    • Flexible 
    • Convenient
    • Separate your business and personal expenses
    • Build business credit
  • Cons:
    • Business cards tend to offer fewer protections and come with higher rates and fees
    • Higher rates and fees than an SBA loan
    • Business credit cards provide less protection than personal cards

Purchase Order Financing

Purchase order financing is very similar to invoice factoring except that instead of selling receivables invoices, the small business will sell their purchase orders for inventory or a specific service. This means the business doesn’t need to have delivered their service yet. This works best for companies that deliver a tangible product since the business can sell the purchase order to receive the capital needed to deliver the product or service. 

  • Pros: 
    • Don’t have to turn down business due to working capital constraints
    • May be able to qualify with poor credit score
    • New or small companies that don’t qualify for a traditional loan may still be able to access purchase order financing
    • Not a loan so no monthly payments
    • No equity is lost
  • Cons:
    • Not usually fast
    • Financing costs can be on the high side
    • If the client who placed the order has poor credit your business may have a hard time qualifying
    • Your customer will typically have to pay the financing company directly

Venture Debt

Venture debt refers to a variety of debt financing products that are offered to early and growth-stage VC backed companies. It’s typically structured as a term loan that is a percentage of what was raised during the last seed round. Taking on debt allows founders to save dilution for a future round of financing. Typically, the loan is around 30% of the last round. If your startup raised $10M in a Series A round, you would probably be able to borrow around $3M.

  • Pros: 
    • Preserves equity
    • Useful as an additional cushion on top of equity financing
    • Provides runway in between financing rounds 
  • Cons:
    • Debt needs to be repaid
    • If the company defaults on payments the venture debt managers could force the company to be sold or be liquidated
    • Without backing from a VC firm venture debt is near impossible to find


Some businesses may qualify for grants from a variety of different organizations. Federal grants are only offered to nonprofits, educational institutions, and state and local governments but sometimes nonprofits or state and local governments offer grants directly to small businesses.

  • Pros: 
    • No debt
    • No loss of equity
    • Veterans, young entrepreneurs, women and minority business owners may be able to qualify for financing and other resources
  • Cons:
    • Not available for most businesses
    • Application process can be long
    • Often a competitive process


Crowdfunding for small businesses is a fairly new option. It wasn’t legalized until 2016 and companies are allowed to raise $1.07M every year through regulation crowdfunding. There is also Regulation A+ funding which allows companies to raise up to $50M each year but launching is significantly more expensive and time-consuming.

  • Pros: 
    • Available for startups
    • No need for collateral
    • Investors can advise your company
    • Can receive a large sum of money
    • Ability to test if there is a market for your business
  • Cons:
    • Unlike VC funding, investors from crowdfunding are unlikely to add anything besides money so you might be missing out on connections or experience
    • Takes a lot of preparation and effort to pitch investors
    • Most crowdfunding platforms charge fees
    • Can take some time to get the cash
    • Giving up equity

Equity Financing

Equity financing is the process in which companies sell equity in their company to investors to raise capital. Usually, these investments come from angel investors and venture capital firms.

  • Pros: 
    • Available for startups
    • Investors can advise your company
    • Can receive a large sum of money
    • No repayment necessary
  • Cons:
    • Loss of equity
    • Not many small businesses will be considered
    • Difficult to receive funding

Revenue Based Financing/Royalty Financing/Shared Earnings Agreement

Revenue-based financing is an alternative financing option for small businesses in which they receive funding in exchange for a percentage of future revenue. Lenders charge a fixed amount and payments are typically capped between 1.35x to 3x the amount borrowed. The biggest benefit is how flexible these loans are since during slow months the business will pay back less. 

  • Pros: 
    • No loss of equity
    • Pay less during months with lower revenue
    • No personal guarantees
  • Cons:
    • You’ll pay more long term
    • You need revenue to qualify
    • Payments can place strain on your operating capital

Peer to Peer Lending

Peer-to-peer lending enables individuals to get loans from other individuals and cuts out the middleman. For qualified applicants, the rates are often lower than a bank loan but for less qualified applicants the rates can be higher.  

  • Pros: 
    • More accessible than a business loan 
    • Fast and easy process
  • Cons:
    • Low credit applicants may end up with a higher rate 
    • Not well regulated 

Working Capital Loan

Working capital loans are a specialized type of loan designed to help businesses meet their day to day operating costs. These loans are typically short term and designed to cover urgent cash flow issues.

  • Pros: 
    • Cash on hand to deal with any problems
    • Non-dilutive
    • May not need collateral
    • Borrow and repay quickly
  • Cons:
    • Short term
    • Needs to be repaid and might have a high-interest rate due to the short repayment period

Defining “Value Preserved” - A New, But Core Concept in Growth and Debt Financing

The technical explanation: 
At Bootstrapp, we view the “value preserved “”the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.” This is typically measured as the amount of equity value, in dollars, that a company’s leadership is able to retain for themselves, employees, and other shareholders instead of needing to sell the equivalent amount of equity-value to equity investors. This value typically grows as one projects into the future, with a strong correlation to the growth in overall enterprise value. 

The Plain English Explanation
Think of value preserved as the of opportunity cost. Instead of missing out on something because you didn’t pursue an opportunity, you actually retain, gain, or preserve value within your company because you did not pursue an opportunity. Furthermore, opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” Value Preserved, as we define it, is a type of opportunity benefit - i.e., “the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.”

Let’s use an example: 
What if you sold 10% of your company today for $1M. That would mean that your company is currently worth $10M. Not bad. Now what if in five years, it’s worth $50M. That same 10% of your company is now worth $5M - and recall that in this scenario you sold it for $1M. Obviously that’s all fine and dandy - an investor took a risk on you and they should be rewarded for it. However, what if you - as a savvy founder - were able to obtain that same $1M that you had originally needed, but split it up and took out $500k in debt, and then only sold 5% of your company for $500k - so that you still ended up with the same capital that you would have had otherwise, but you sold only half of the equity. 
Later on, using the same scenario, the 5% of equity that you sold would be worth $2.5M - meaning that the 5% of the company that you DIDN’T sell would also be worth a cool $2.5M. You just preserved $2.5M in equity that you now own instead of the investors owning it. You get to keep that cash during a liquidation event instead of them.
Now obviously, in this scenario, you’ve also taken out debt - and so you’ll be paying interest on that debt as well. So it’s not a perfect comparison. But it’s easy to also calculate the interest payments you’ll be making on the proposed $500k of debt, especially if you have concrete offers from financiers with hard numbers so that you can simply run the math. 

And so the next step is easy: you take the $2.5M of equity that you preserved, subtract the interest payments that you’ll need to make as a result of the debt, and voila: You have your “Preserved Value”. Depending on a number of factors, the preserved value can sometimes be in the millions - and many founders simply sell that value to equity investors without giving it a second thought.