Business loans
Growing a business often requires capital. Learn the options, what lenders look for, and how to avoid costly mistakes.
Types of business financing
SBA Loans
Government-backed loans with favorable terms. Lower rates and longer terms but slow approval (weeks to months). Best for established businesses.
- 7(a) loans up to $5M
- 504 loans for real estate/equipment
- Microloans up to $50K
Term Loans
Lump sum repaid over fixed period. Traditional option from banks and online lenders. Rates and terms vary widely by lender and credit.
- 1-10 year terms typical
- Fixed monthly payments
- Collateral may be required
Lines of Credit
Revolving credit you draw as needed. Pay interest only on what you use. Good for cash flow gaps and variable expenses.
- Draw and repay as needed
- Only pay interest on used amount
- Usually requires annual renewal
Equipment Financing
Loan secured by the equipment itself. Easier to qualify since equipment is collateral. Watch for rate markup on dealer financing.
- Equipment serves as collateral
- Often 80-100% of equipment cost
- Terms match useful life
What lenders evaluate
Understanding the criteria helps you prepare and qualify for better terms.
| Factor | Importance | Notes |
|---|---|---|
| Time in business | High | 2+ years preferred. Under 1 year is very difficult for traditional loans. |
| Annual revenue | High | Minimum thresholds vary. $100K+ opens more doors. $250K+ for best options. |
| Personal credit | High | Your personal score matters, especially for smaller businesses. 680+ helps. |
| Business credit | Medium | Separate from personal. Build it with business credit cards and tradelines. |
| Cash flow | High | Lenders want to see consistent positive cash flow covering debt service. |
| Collateral | Medium | Real estate, equipment, inventory. Reduces lender risk and can lower rates. |
Red flags to watch for
Daily or weekly repayment
Merchant cash advances and some online loans use aggressive repayment. APRs can exceed 100%.
Factor rates instead of APR
A 1.3 factor rate sounds low but equals 30%+ APR. Always calculate true annual cost.
Personal guarantee required
Common but serious. You're personally liable if business can't pay. Understand the risk.
Prepayment penalties
Some loans penalize early payoff. Locks you into high-cost debt.
Before applying for business financing
Tools for business owners
Understand your costs and compare options.
Business Loan FAQs
SBA loans are partially guaranteed by the government, so banks take less risk. This means better rates and terms but more paperwork and longer approval. Conventional loans are faster but often more expensive.
It's harder but possible. Options include secured loans, merchant cash advances (be careful with costs), or equipment financing where the equipment is collateral. Focus on building revenue and improving credit for better options.
Depends on revenue, cash flow, time in business, and creditworthiness. Rules of thumb: 10-30% of annual revenue for unsecured, more for secured. SBA 7(a) goes up to $5M. Start with what you actually need, not the maximum.
Depends on opportunity cost and risk tolerance. Borrowing preserves personal savings but costs interest. Personal funds avoid debt but tie up your safety net. Many owners use a mix.