Guide to Loan and Financing Options for Small Businesses

Explore the borrowing options for your business, including bank loans, government programs, and alternative financing.

By , Attorney University of North Carolina School of Law
Updated 1/12/2023

When your small business needs funds, you have a range of financing options to choose from. Whether you need money quickly to make payroll or you want to purchase a bigger warehouse, you can usually find a small business loan with the terms you're looking for.

To pick the best financing option for your business, you'll need to consider:

  • how much cash you need
  • how quickly you need funding
  • what you need the money for, and
  • when you can pay the loan back.

Read on for an overview of several loan types for small businesses.

SBA Loans

One of the best financing options for small businesses—if you can qualify—is a loan backed by the Small Business Administration (SBA). If you meet its fairly stringent requirements, the SBA will guarantee your loan at an SBA-approved lender.

For an SBA loan, at the very least, your business needs to be U.S.-based and for-profit, and you have to have personally invested in it. Additionally, you must use the loans for business purposes and have looked elsewhere for financing options before turning to the SBA.

The SBA offers various low-rate business loan programs, each with its own requirements and purpose. The three more common SBA-backed business loans are:

  • 7(a) loans. If you qualify for what's the most common SBA loan program, you can borrow up to $5 million. This loan is best for purchasing real estate, building on your property, starting a new business, or purchasing an existing business.
  • 504 loans. This long-term, fixed-rate loan is for businesses looking to purchase major fixed assets like machinery and warehouses. You can borrow up to $5 million but can't use any of the money toward refinancing existing debt or funding working capital or inventory.
  • Microloans. The SBA provides funds to local nonprofits (known as "intermediaries") who then provide microloans to eligible small businesses. You'll need to meet the lending requirements set out by the SBA intermediaries. If you qualify, you can borrow up to $50,000, which can be used to rebuild or expand your current business, but not to pay existing debts or to purchase real estate.

The SBA loan programs also include no or low down payments and longer payment terms. But the application process is intensive, and it's hard to meet the SBA-approved lenders' funding requirements.

Term Loans (Short-Term and Long-Term)

You're probably familiar with term loans already. You apply with a lender, and, if you qualify, they extend a fixed-term loan that you'll make monthly payments on. Your interest rate, down payment, and term will be up to your lender and are determined based on your credit score and existing assets, debts, and business income.

You might need to individually sign for (or "personally guarantee") your business loan or offer up collateral to get approved.

Depending on your lender, you could receive same-day funding or it could take more than a month. You can talk to a loan officer at a national or local bank or you can try an online lender. You can usually get your money quicker with online lenders, but do your research to make sure they're reputable and upfront with their terms and fees.

You can apply for a long-term loan if you need a significant lump sum or a short-term loan if you're looking for a smaller loan. Regardless of the loan amount, make sure you're choosing a loan with a payment term that you can meet.

Business Lines of Credit

Instead of receiving one chunk of money up front and paying it back over time, business lines of credit allow you to borrow a little at a time up to a certain amount. As with a credit card, you get approved for a certain amount, and then you can borrow on that amount over time. You'll need to pay back any money you borrow, usually on a weekly or monthly schedule, with interest.

There are two types of credit lines:

  • Fixed (or "non-revolving") line of credit. With a fixed line of credit, you have a set credit limit that you can borrow from. You can borrow from your line of credit one time or multiple times up to the amount you're initially approved for. You pay your balance off over a set time—usually six to 18 months.
  • Revolving line of credit. A revolving line of credit usually doesn't have a fixed term. The amount you can borrow goes back up (up to the maximum limit) as you pay back what you've borrowed.

For example, suppose Paulina's surf shop is approved for a revolving line of credit of up to $30,000. She borrows $10,000 right away, leaving her with $20,000 to borrow from. Paulina's shop flourishes in the summer, and she's able to pay back $7,000 in principal of the $10,000 she originally borrowed. Now, instead of her maximum credit line being $20,000, it's $27,000 and she owes only $3,000.

Business lines of credit can work great for businesses that need fast financing to deal with unexpected expenses or just some temporary help during a slow time. But while they're fast and flexible, business lines of credit often require a personal guarantee or even collateral. You'll need a good credit score to qualify and a way to show that you can pay back what you owe, such as previous income statements.

Merchant Cash Advances

Merchant cash advances (MCAs) are a riskier type of loan option for many. They offer a lump sum up front in exchange for a portion of your future sales—usually through credit card sales.

With an MCA, you'll only be able to borrow an amount that's reasonable when considering your sales numbers. After you apply, the MCA provider will approve you for a specific loan amount and designate a factor rate. The factor rate is usually based on your business's:

  • previous sales
  • projected sales
  • time in business, and
  • specific industry.

The factor rate is determined at the beginning. It represents the amount you'll pay in addition to your principal, and it typically ranges between 1.1 and 1.5. When you multiply your factor rate by your principal, you'll get the total amount you owe the provider. For example, if you borrow $1,000 and your factor rate is 1.2, then you'll owe $1,200.

Unlike an interest rate, your factor rate doesn't change, so you'll be able to calculate how much you owe from the start.

Apart from your principal and factor rate, you and your MCA provider will agree to how much and how often your individual payments will be. Payments are usually daily or weekly. The amount you need to pay every day or every week is usually reflected by a certain percentage of credit card sales for that day or week.

For example, your MCA provider might require 10% of your daily credit card sales. The provider will continue taking a portion of your sales (in this example, 10%) until the total amount owed is paid in full.

So, going back to our original example, suppose you owe $1,200 and the provider will take 10% of your daily credit card sales. Your daily credit card sales are consistent this time of year and are approximately $100. Accordingly, your provider will take $10 (10% of $100) from your sales every day for 120 days—that is, until the $1,200 is fully repaid.

Your MCA provider will generally arrange with your credit card processor to take their percentage directly off the top before your card processor distributes the money to you.

This loan option is fast and easy for businesses looking for a quick turnaround, but factor rates can be high, and the frequent payments could put your business at risk if revenue slows.


As mentioned earlier, microloans are loans for smaller amounts. They generally go up to $50,000, and they're often offered by nonprofits to specific kinds of businesses. Microloans are usually given to businesses owned by underserved populations, including:

  • racial minorities
  • women
  • veterans, and
  • people with disabilities.

Microloans can have varying Interest rates—from 0% to around 20%. They usually have short repayment periods.

Invoice Financing and Factoring

Invoice financing and factoring involve leveraging your unpaid invoices for cash value.

Invoice Factoring

With invoice factoring, you sell your unpaid invoices to a debt buyer for a portion of what you're owed. You'll get immediate payment and pass the stress of collecting on unpaid invoices to the debt buyer. But you'll only recover a portion of what you're owed.

For example, if you have $3,000 in unpaid invoices, you could potentially sell them to a debt buyer for $2,000. You might find that invoice factoring works best for your business if collecting on unpaid invoices is more trouble than the invoices are worth.

Invoice Financing

With invoice financing, instead of selling off your unpaid invoices, you can use them as collateral to qualify for a loan. But because there's some risk to the lender with unpaid invoices serving as collateral, your invoices will only be worth a portion of their outstanding balance.

For instance, if you have $5,000 in outstanding invoices, a lender might accept the invoices as collateral for a $4,000 value. But you'll still want to be sure to collect your unpaid invoices once they become due so you can pay back the loan. Invoice financing is usually best for businesses that need quick cash to hold them over until their invoices become due and are paid.

Personal Loans

Instead of applying for a loan on behalf of your business, you can apply for a personal loan. Applying for a personal loan can make sense for business owners who have brand new businesses or don't have a consistent enough revenue stream for their business to qualify for a loan.

A personal loan can get you money when a business loan can't, but a personal loan makes you personally liable for paying it back. So even if your business fails and is out of funds, you'll still be on the hook for the loan.

You can also ask friends or family members for a personal loan. But you're usually better off asking your loved ones to invest in your small business. Investing can be a more worthwhile option because it offers them better protections and potentially better payoff.

Specific-Use Loans

Instead of the more common general-use loans, you can look at loans designed for and that must be used for specific purposes. Specific-use loans include:

  • real estate loans
  • equipment loans, and
  • vehicle loans.

With other business loans and financing options, you're usually looking to put your loan money toward several expenses—like remodeling, inventory, and payroll. But if your business has only one expense it needs help with, a specific-use loan could make more sense.

For instance, suppose Jerry decides to open a cafe in a college town. He signs a lease for a spot that used to serve hot deli sandwiches. His lease includes the space and all of the equipment currently in the space, including chairs, tables, and a toaster to make breakfast sandwiches. But Jerry also needs a commercial espresso machine to compete with the other local coffee shops.

Because Jerry doesn't have enough cash on hand for the machine and he's set to open in a few weeks, he decides to apply for an equipment loan. He's approved, and the loan provides him with the $15,000 needed to purchase the espresso machine. Jerry can open his doors in time for the fall semester.

Specific-use loans often offer more flexible terms than general business loans, such as negotiable term lengths. You can also usually get approved with a low down payment or lower credit score. They can also be a good alternative to business lines of credit for larger loans because interest rates can be significantly lower for specific-use loans.

Additional Guidance on Business Loans

In addition to reviewing your lending options, you'll need to know how to get a business loan. For more information, see our article on the steps to secure a business loan.

If you've found a loan with a straightforward application and the terms you want, then you can work through the process on your own. But if your business has an unusual income stream or requires specific loan terms, it might be a good idea to talk with a business finance lawyer.

An attorney can help you choose the right loan and lender and prepare your paperwork for the application. They can also, review and negotiate the loan agreement and create a business plan to incorporate your loan.

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