The right business loan depends on what the money is for and how fast it pays back. Match long-lived assets with long-term debt (SBA or term loans, equipment financing), short-term gaps with revolving credit (a line of credit), and use expensive fast money (merchant cash advances) only when the return clearly beats the cost. Most owners overpay because they take the fastest offer instead of the right structure.
Key takeaways
- Equipment and real estate: equipment financing, SBA 7(a) or 504, commercial mortgages.
- Payroll, inventory and receivables gaps: a business line of credit.
- Expansion or acquisition: a term loan or SBA 7(a).
- Merchant cash advances are the most expensive option. Compare the effective APR before you sign.
Match the Financing to the Use
| Need | Best-fit options | Typical term |
|---|---|---|
| Equipment, vehicles, machinery | Equipment loan or lease | 2 to 7 years |
| Seasonal inventory, payroll, receivables | Line of credit, invoice financing | Revolving, renewed yearly |
| Expansion, hiring, marketing | Term loan, SBA 7(a) | 2 to 10 years |
| Buying a business | SBA 7(a), seller financing | Up to 10 years |
| Owner-occupied real estate | SBA 504, SBA 7(a), commercial mortgage | Up to 25 years |
| Fast cash for a short opportunity | Revenue-based financing, short-term loan, MCA | 3 to 18 months |
The Main Types of Business Financing
Term loans
A lump sum repaid with fixed payments over 1 to 10 years. Bank and SBA term loans are cheapest; online and private term loans are faster and more flexible. See SBA 7(a) vs. private term loans.
Business lines of credit
A revolving limit you draw on and repay as needed. You pay interest only on what you use. Compare them in line of credit vs. term loan.
SBA loans
Partly guaranteed by the U.S. Small Business Administration, with capped rates and long terms. The trade-off is paperwork and a 30 to 90 day timeline.
Equipment financing
The equipment secures the loan, so approval is easier and down payments are small. See equipment financing: how it works.
Revenue-based financing and merchant cash advances
Repaid from future revenue. Fast and flexible, but expensive. See revenue-based financing vs. MCA, and if you are already stuck in daily payments, read how to escape MCA payments with a term loan.
Commercial real estate loans
For owner-users buying their building. See owner-occupied commercial real estate loans.
What Lenders Look At
- Time in business: 2+ years for banks and SBA; 6 to 12 months for many private lenders.
- Revenue and cash flow: bank statements, tax returns and a debt service coverage test.
- Credit: personal scores of owners with 20% or more; business credit profile.
- Existing debt: especially daily or weekly MCA payments.
- Collateral: equipment, receivables, real estate or a blanket lien.
Financing by Industry
- Contractors
- Auto repair shops
- Restaurants and hospitality operators
- Manufacturers
- Professional service firms
- Medical practices
Common Mistakes
- Funding long-term assets with short-term money, which squeezes cash flow.
- Comparing factor rates to interest rates. They are not the same.
- Stacking multiple advances to cover the payments on the first one.
- Waiting until cash is tight to apply. You get better terms when you don’t need the money tomorrow.
Rough Cost Comparison by Financing Type
These are broad effective annual cost ranges, including fees, for established businesses. Your pricing depends on credit, time in business, cash flow and collateral.
| Type | Typical effective annual cost | Speed |
|---|---|---|
| Bank term loan or line | Low double digits or less | 2 to 6 weeks |
| SBA 7(a) | Prime plus a capped spread, plus guarantee fee | 30 to 90 days |
| Equipment financing | Near bank pricing for strong files; higher for startups and used equipment | 2 to 10 days |
| Online or private term loan | Mid-teens to 40%+ | 1 to 7 days |
| Revenue-based financing | Often 30% to 60%+ | Days to weeks |
| Merchant cash advance | Often 60% to 150%+ | 24 to 72 hours |
How Lenders Measure Your Ability to Repay
Most lenders use a debt service coverage ratio for the business: cash available for debt service (often EBITDA plus add-backs) divided by total annual loan payments. Banks and SBA lenders typically want 1.25 or higher. SBA and many banks also run a “global” analysis that adds the owners’ personal income and debts.
Example: A business with $120,000 of EBITDA and $20,000 of existing annual debt payments applies for a $400,000, 10-year SBA loan at 11%. The new payment is about $5,510 per month, or $66,120 per year. Total debt service is $86,120, so DSCR is 120,000 ÷ 86,120 = 1.39. That clears a 1.25 requirement.
A Five-Step Way to Choose
- Define the use and payback period. How long until this money earns itself back?
- Match the term to the payback. Never fund a five-year asset with a six-month advance.
- Calculate the payment you can carry. Keep total debt payments well under your free cash flow, with room for a slow month.
- Start with the cheapest product you qualify for: bank or SBA, then equipment financing, then private term loans, and only then revenue-based options.
- Compare offers on the same basis: total payback, effective APR, payment frequency, fees and prepayment terms.
How to Compare Loan Offers
- Total payback: every dollar you will repay, including fees.
- Effective APR: converts factor rates and fees into an annual rate. Several states now require this disclosure on commercial financing.
- Payment frequency: daily and weekly debits strain cash flow more than monthly payments.
- Origination and other fees: are they deducted from the funds you receive?
- Prepayment terms: is there a penalty, or a discount for paying early?
- Collateral and guarantees: blanket liens, personal guarantees and confessions of judgment.
Documents to Have Ready
- Last 3 to 6 months of business bank statements
- Two years of business and personal tax returns (bank and SBA loans)
- Year-to-date profit and loss statement and balance sheet
- Debt schedule listing every current loan, lease and advance
- Business formation documents and ownership breakdown
- Accounts receivable aging (for lines of credit and invoice financing)
- Equipment quotes or purchase agreements, if applicable
Financing for Startups vs. Established Businesses
Businesses under a year old have fewer options. The most realistic paths are equipment financing (the asset secures it), SBA loans with a strong owner background, collateral and an equity injection, business credit cards, and personal or home equity financing used carefully. After 6 to 12 months of steady deposits, private term loans and lines of credit open up. After two years with profitable tax returns, bank and SBA pricing becomes available.
How to Improve Your Approval Odds
- Keep business and personal finances in separate accounts.
- Avoid overdrafts and negative balance days in the months before you apply.
- Pay down revolving balances to lift personal credit scores.
- Build business credit with vendor accounts that report to business credit bureaus.
- Apply before cash gets tight. Lenders see urgency in your bank statements.
- Consolidate expensive advances into a term loan before seeking new credit.
Three Example Scenarios
| Business | Need | Best fit |
|---|---|---|
| HVAC contractor, 4 years, $2M revenue | Two service vans and payroll during a big job | Equipment financing for the vans plus a line of credit for payroll |
| Restaurant, 18 months, two daily MCA debits | Lower payments and stabilize cash flow | Consolidation term loan, then SBA refinance after 12 months of clean statements |
| Manufacturer, 10 years, buying a competitor | $1.5M acquisition | SBA 7(a) with seller financing for part of the price |
Frequently Asked Questions
What is the easiest business loan to get?
Equipment financing and revenue-based options are usually easiest because the equipment or revenue secures them. Merchant cash advances are easy to get but the most expensive.
What credit score do I need for a business loan?
Banks and SBA lenders typically want 650 to 680+. Many private lenders work with scores in the 600s if revenue is strong.
How long does it take to get a business loan?
Online and private loans can fund in 1 to 7 days. Bank loans take 2 to 6 weeks. SBA loans often take 30 to 90 days.
Should I get a line of credit or a term loan?
Use a line of credit for recurring, short-term cash needs and a term loan for one-time investments that pay back over several years.
Can a startup get a business loan?
Options are limited in the first year. Equipment financing, SBA loans with strong owner experience and collateral, and business credit cards are the most common paths. Most private lenders want at least 6 to 12 months of revenue.
Does applying for a business loan hurt my credit?
Many lenders use a soft pull to pre-qualify and a hard pull only at final approval. Ask before you apply, and avoid applying with many lenders at once.
How much can my business borrow?
It depends on cash flow. Banks and SBA lenders size loans so total debt payments leave a DSCR of about 1.25 or higher. Private lenders often cap advances at 50% to 150% of average monthly revenue.
What documents do I need for a business loan?
Expect bank statements, tax returns, a year-to-date profit and loss statement, a balance sheet, a debt schedule and formation documents. Private lenders may need only bank statements and an application.
Have a deal in mind? Not sure which structure fits your business? Tell us about the deal and we will match it with the lenders that fit.