There are a few different types of business loans offered by lenders—and many variations on those loans that cover everything from short-term financing and invoice factoring to long-term loans with all sorts of repayment terms.
Finding the right business funding solution may take some time as you review your business needs and explore the options available. It’s a little like buying an office chair: you can grab the first one you see and hope for the best, or you can look for the right one that will serve you well (and make you more productive without causing some long-term damage).
Business credit card
A credit card might not seem like a business loan, but it is a financing solution that allows you to make purchases for your business without having the cash upfront (or without using your working capital).
Most businesses can quickly qualify for a business credit card (even if they’ve been turned down for a loan), and the credit is available to use as soon as that card arrives. Besides being a quick and simple solution for financing, a business credit card can help you build your credit. Some cards offer an introductory interest rate that’s a low as 0%, and it’s nice to take advantage of rewards programs that come with some cards.
Perhaps the biggest disadvantage to a business credit card is the longer term higher interest rates. Even if you get an introductory low-interest rate, the rate can increase to up to 24%. The advantage is that you can use it for any business purchase—from office supplies to training materials to vehicles!
The ideal solution for cash flow (and working capital needs) is to have your invoices paid promptly without extending credit to the customer. However, in many industries, net terms invoice payment options (30 days, 60 days) are simply the expectation of all business customers. Letting your customer pay in 30 days means you’re carrying credit (or floating the net terms) for other businesses. This puts a strangle on your cash flow, it is risky, and often costly. There’s now a new type of product available called credit-as-a-service or ‘digital net terms’ platforms. This is a perfect invoice finance solution for both large and small B2B companies who usually offer net terms, but would benefit from receiving immediate payment of invoices.
Resolve Pay is the best example of credit-as-a-service or ‘digital net terms’. They’re a complete net terms and credit management solution. Resolve Pay advance pays up to 90% of net terms invoices while giving your customer 30, 60, or 90 days to pay—regardless of the invoice amount. The payment is made within 1 day - meaning you get cash in the bank and fast. Resolve Pay looks after every aspect of offering net terms and credit. It doesn’t matter if you need to reduce risk, improve cash flow, or manage credit checks and Accounts Receivable tasks such as chasing down payments and processing receipts - Resolve Pay takes care of it all.
While a business credit card is a very popular financing choice for new businesses, another option is a startup loan. The startup loan category also covers some of the other financing options we’ll discuss below (like SBA loans, lines of credit, and equipment loans), but it can be a general startup loan that covers the costs faced when beginning a business.
Depending on eligibility, you may seek a microloan of $500, or go well into six figures, and the lump sum is usually available within a few weeks. These funds can cover everything from your lease, to purchasing inventory, and hiring and training staff. Interest rates vary (from 0-17%), and are dependent on your credit score, your business plan, and whether your loan is from a traditional lender such as a bank.
Generally, you’ll need a credit score of at least 680 to qualify for a startup loan, and you’ll need to provide strong evidence that you can start and succeed in your business. Lenders may also want collateral, usually in the form of personal assets.
Startup loan terms can be up to 25 years, giving you a generous amount of time to grow your business and pay off the loan.
One of the biggest challenges for B2B startups is handling net credit terms. Most small businesses can’t run credit checks on every new customer—and struggle to identify the right net terms that will attract customers without putting the business's working capital at risk.
Resolve Pay is a solution that conducts credit assessments (both soft checks, and very simple credit checks) to provide businesses with an accurate analysis of what credit terms to extend. This allows you to confidently offer net terms to customers—a powerful incentive for businesses to come on board when you’re just starting up.
Business line of credit
A business line of credit is very similar to a personal line of credit. Once approved, you receive access to a set amount of money that you draw from like a bank account. You pay interest on the amount you use, and the remainder of the line of credit is always ready for you.
If your business fluctuates seasonally, this may be a good funding option to cover short-term seasonal spending and cash flow needs or to pay for unexpected expenses.
To qualify for a business line of credit, you’ll need to show that your business is bringing in visible income (usually at least $50,000 annually), and you have a decent credit score. Most lenders offer credit limit amounts of $1,000-$500,000.
If your business's annual revenue or credit score is at a certain level, you may need to give a personal guarantee in order to receive approval. In this case, a personal asset (like property) is provided and could be seized if you don’t honor the terms of the line of credit.
Small Business Administration (SBA) loan
The Small Business Administration is a government agency whose purpose is to help small businesses. Advantages of an SBA loan include the amounts offered ($50,000-$5,000,000), terms up to 25 years, and the SBA itself guarantees a portion of the loan. The most common type of loan is the SBA 7 (a) which is ideal when you have a for profit business, fit the definition of a small business operating in the US, have demonstrated financing needs, show the funds will be used for ‘sound business purposes’ and are not delinquent on any US government debts.
SBA 7 loans have a repayment schedule with fixed monthly payments for fixed rate loans, and a variable repayment schedule if the loan is on a variable rate.
The downside is the length of time businesses usually wait for approval. It can take months after submitting an application for the loan to be approved. As part of the application, you need to provide at least 2 years of business and personal tax returns, as well as a YTD Profit/Loss statement and balance sheet, and a well-written business plan.
After approval, you receive the entire amount of the loan (although it’s common to wait another month for the funds to become available in your bank account), and pay it back according to the terms.
SBA loans are actually funded by lenders (not the government), but the SBA guarantee means a personal guarantee isn’t required. The guarantee amount is 85% for loans up to $150,000, and 75% for loans over $150,000.
Short term loan
Short-term loans are usually for 1-3 year terms—a much shorter time frame compared to other financing options or loan products. They are also approved quickly—sometimes within 24 hours! This makes it a great solution for businesses that might be facing sudden expenses, or need cash to take advantage of an opportunity.
If you’ve got good credit, and your business has a good track record, the chances of getting a short term bank loan are good, although the lender may require collateral like property or equipment as a guarantee. Because the term is shorter, lenders consider a short-term business loan to be lower risk, so borrowers that have a poor personal credit score may also qualify.
Business term loan
A slightly different name here, but the business term loan has been the standard for basic business financing for a while. Also known as an installment loan, it offers lower interest rates (often starting around 6%), and a fixed rate so the loan repayment terms won’t change during the 1-5 years of repayment.
Having a set payment makes it easier to budget and manage finances, and business term loans are often available just a few days after applying.
Merchant cash advance or ACH loan
Just like getting a cash advance on a paycheck, a merchant cash advance (or ACH loan) allows you to borrow money now that you’ll pay back when your business gets paid. It’s like a loan that’s guaranteed by the credit card sales from your business.
And, just like a payday advance, it’s fairly easy to qualify for, but you pay much higher interest— varying from 20% and up to 50% depending on the perceived credit profile of your business. If your business can show through a few months of bank statements or receivables that you’re consistently receiving credit card payments, you’ll probably be approved for a merchant cash advance.
This type of financing is popular with entrepreneurs, newer businesses (or those with an immediate cash flow concern), and businesses that may not have collateral to qualify for a more traditional loan. You need strong daily revenue numbers, and the payment is based on a percentage of daily revenue, so on off days, your payments are lower.
As the name implies, equipment financing is a type of small business loan that allows you to purchase equipment. But it’s not just for equipment like a vehicle or a machine. Equipment loans can also fund hardware and software, office equipment, or other larger ticket items.
The equipment you are purchasing becomes the collateral against the loan. The lender's risk is absorbed by the equipment’s value. This does mean you likely can’t use it to buy used or refurbished items, but it saves you from putting cash out for large ticket items you need to run your business or grow/improve operations.
Interest rates on equipment financing are generally good (as low as 8%), and funds are available quickly after approval. It can be more difficult to get approved if you’ve got poor credit (in this case, below 650), but this may be waived if you can show good business cash flow for at least the last quarter or two. And, because the equipment is collateral for the loan, startups and those with poorer credit may find this a viable financing option. Some types of equipment (expensive parts) can’t be financed easily. In this case asking the supplier to offer a solution like Resolve Pay may be your best bet.
Need physical space to operate your business? A commercial mortgage (also known as a commercial real estate loan) is almost a must for you. Businesses use commercial mortgages to purchase all sorts of property, from retail spaces to manufacturing buildings to office space so the business can stop paying for a lease. Commercial mortgages can also cover the cost of construction or upgrades to an existing space.
Aside from using a commercial mortgage to buy a property, established businesses may also work with their existing commercial mortgage and refinance to gain better terms and/or lower payments in exchange for a longer mortgage.
Depending on your financing needs (for example, whether you are purchasing a ready-to-use space, or building from the ground up), you’ll need to provide extensive information to the lender along with strong supporting financial documents.
Buying commercial property takes time, and often requires a commercial real estate lawyer, an environmental site assessment, market analysis, and design/development blueprints if you are building or using loan funds to make any changes to the property. It’s not a quick/easy process, but gives businesses the ability to purchase property at a good interest rate—starting at 4.25%—spread the cost over 20-25 years, and build equity.
Accounts receivable or invoice financing
Accounts receivable financing—also known as factoring or invoice financing—is very much a good news/bad news option for businesses. The good news is you can bring in a company that will take on the collection of your businesses’ unpaid invoices and pays you up to 80% of the outstanding invoice within a few days. The factoring (or invoice financing) company charges a factoring fee on each invoice—5% is average.
For some businesses, unpaid invoices (even those with as little as net 30 terms) can create substantial cash flow challenges. After all, you still have to pay for the cost of the goods sold, even when you haven’t received payment from your clients. So factoring offers a bridge between invoicing and getting paid.
The factoring company evaluates the credit of your customer with the unpaid invoice—not your business’ credit or your personal credit. If you’re currently facing credit difficulties, this can be helpful in terms of increasing cash flow, but it comes at a cost.
The disadvantage? Your customer is now dealing with another company to pay their outstanding invoice. This can impact your relationship with them. Bringing on a factoring company can send the message that your business is experiencing cash flow challenges, and suggest you may not be able to handle large orders or increased business—this has a long-term negative impact.
The factoring company doesn’t guarantee they’ll take every invoice. They do a credit check on each company and then make a determination. Businesses that use factoring are often already struggling, and it may feel like the process is a last (undesirable) resort to creating some cash flow.
As we mentioned, factoring can put a strain on your relationships with your customers. That’s where Resolve Pay comes in. Without negative impact on your customers, you can bring Resolve Pay onboard to give advances on outstanding invoices. This can provide immediate cash flow and financial relief for small businesses, all while improving relationships with customers.
Resolve Pay’s credit assessment uses proprietary financial databases and algorithms, along with real humans, to assess your customers without needing a single thing from them. It’s called a ‘quiet’ business credit check. When a customer is approved, Resolve Pay provides an advance of up to 90% of each invoice. And this is paid into your account within 1 day.
Business acquisition loan
This is financing specifically for buying another established business or a new or existing franchise. Loan amounts range from $5,000 to $5,000,000, and the terms range from 10 to 25 years or can be revolving. Interest rates can start at less than 6%.
Receiving a business acquisition loan can provide the working capital that allows you to focus on growing a new business without having to struggle with nickel-and-diming to keep the doors open.
Lenders will need to see financials from the business you want to purchase that confirm the business’ viability and profitability, as well as information that supports your ability as a business owner to successfully run the business.
Friends/ family/ personal loans
For those who have a friend or family member willing to lend money, a private loan is often a consideration. These types of small business loans can work out great, or create a strain on relationships. It’s important to have clear terms and treat the arrangement like the business agreement that it is.
Others who have strong personal credit may decide to take out a personal loan for their business. Again, this can work out well if it helps to grow the business, but if there are further financial challenges, a personal loan may add stress to the business and the business owner.
Tips for how to get a small business loan
There are a few things that every lender will look at during the application process. One of the first is actually your own personal credit. Even though the loan is for the business, they’ll look at how your personal credit might reflect on your business. Here are some things for small business owners to know loan companies will be looking at when assessing a loan:
- Monthly revenue. At least the last 3 months, but longer periods of time depending on the type of loan you're applying for. Lenders want to see consistent amounts of revenue month over month (generally about $8,000+/month for most business loans).
- Cash flow analysis. This is to measure debt load. Lenders will want to see the timing of your cash receivables and if you'll be able to make the daily/weekly/bi-weekly/monthly payments on the loan. Secondly, the amount of cash you normally have on hand to know how large of a payment, and ultimately loan size, you can handle.
- Time in business. Most lenders require at least 6 months of history as a business, although some loan options will accept at least 3 (this excludes start-up loans).
- Business industry. Some lenders won't fund certain industries. Other lenders view certain industries as "riskier" than others. For example, the restaurant industry has struggled to be approved for business loans since the Covid pandemic began.
- If you are seeking a small business loan for an existing business, make sure your business is handling its current financial commitments
- Know what debt load your business can handle before applying for a loan
- Explore your financing options so you can get the best product for your unique needs
- Be realistic. Statistically, more small business loans are denied than approved. If this is your experience, there are still viable options for you.
Cash flow challenges are common in many businesses. Fortunately, there are a variety of solutions available. Finding the right one for your business can make operations run smoothly and set up your organization for growth and increased profits.