Business Financing Basics: Matching the Right Loan to the Need

Most business borrowing decisions reduce to a choice among five structures: a bank term loan, a line of credit, an SBA loan, an online term loan, and revenue-based financing. Any of them can put $100,000 in your account. What differs is how long you wait for it, what it costs in total, and what the repayment schedule does to your cash flow every month while you pay it back. Those differences are much larger than most owners expect, and they do not show up in the marketing. This guide compares the five head to head and then prices each one against the same $100,000 need, so you can see the spread in dollars rather than adjectives. One framing rule before any of it: match the life of the debt to the life of the thing it buys. A machine that runs for ten years can reasonably carry ten-year debt. A gap between invoicing a customer and getting paid should never carry term debt at all. Most expensive financing mistakes are a violation of that one rule, usually committed under time pressure.

A bank term loan is the benchmark: a lump sum, a fixed schedule, and, for an established business with solid financials, a rate somewhere around 8% to 12% in the current market. The catch is that banks lend to businesses that look like they do not need the money. Expect two or more years of operating history, real revenue, a personal guarantee, and underwriting measured in weeks. An origination fee of 1% to 3% is common and comes out of the proceeds, so a $100,000 approval with a 2% fee wires $98,000 to your account while you repay the full $100,000. A line of credit from the same bank is a different tool for a different job. You get a limit, you draw when needed, and you pay interest only on the drawn balance, typically at a variable rate a few points above the term-loan rate. It exists for timing problems: payroll in a slow month, inventory ahead of the season, the six weeks between billing a customer and seeing the cash. The classic failure mode is letting a draw become permanent. A line that has been maxed for a year is not a line anymore. It is an expensive term loan you never scheduled, and it should be refinanced into a real one. Two operational notes. Banks price lines with annual fees and sometimes per-draw fees, so a rarely used line is not free. And the time to establish one is when your numbers look strong, because no lender wants to open credit for a business already in a crunch.

An SBA 7(a) loan is usually the cheapest money available to a small business that a bank would not fund on conventional terms. The federal guarantee lets lenders stretch repayment to 10 years on working capital and 25 on real estate, with rates capped at a spread over prime, and the long term pushes the monthly payment well below a comparable bank loan. The companion 504 program finances buildings and heavy equipment with as little as 10% down. The trade is time and paperwork: figure 60 to 90 days to funding, a document file three years deep, and an upfront guaranty fee on top of ordinary closing costs. That makes SBA money a planning tool rather than a rescue tool. Current program terms, fee schedules, and a lender-matching tool live on the SBA's loan programs page, and the SBA guide on this site walks the application end to end.

Online term lenders solve one problem well: speed. The application takes minutes, the decision a day or two, funding often inside a week, and six months to two years of history is frequently enough. The price is the rate, commonly 15% to 40% APR, and short terms of six months to three years that keep the payment high. Some lenders quote a factor rate instead of an APR: 1.2 on $100,000 means you repay $120,000 regardless of timing, and paying early usually saves nothing. A factor rate always sounds cheaper than the equivalent APR, which is exactly why it is quoted that way. Revenue-based financing, including merchant cash advances, takes a fixed cut of daily card sales or weekly deposits until a set amount has been repaid. There is no fixed term. Strong months retire it faster, which raises the effective annual rate, sometimes well past 50%. Daily debits also tighten cash flow in precisely the weeks you can least afford it. The sector is lightly regulated compared with consumer lending and has drawn federal enforcement actions over collection and disclosure practices, so read the FTC's guidance before signing anything, and treat a confession-of-judgment clause as a reason to walk. Neither product is a scam by definition. Both are rational when the money earns more than it costs over a short window, say an inventory buy ahead of a proven season. Both are corrosive when they fund ordinary operating losses.

Underwriting varies as much as pricing does. A bank works through tax returns, financial statements, and a debt schedule. It wants a debt service coverage ratio around 1.25 (a dollar twenty-five of cash flow for every dollar of payment), a personal credit score around 680 or better, and often collateral. An SBA lender checks all of that plus program eligibility and a verified equity injection from the owner, which is why the file is thicker. Online lenders underwrite mostly from bank statements: they want deposit volume and stability over the last three to six months, and many approve scores into the low 600s because the rate covers the risk. Revenue-based financers look almost entirely at card and deposit volume, which is why they approve businesses nobody else will, at prices nobody else charges. Two constants run across all of them. Nearly every small-business product requires a personal guarantee, so the wall between business and personal finances is thinner than most founders assume. And every lender responds to clean books. Six months of tidy, separated accounts does more for your approval odds than any cover letter.

Numbers make the trade-offs concrete. Take a $100,000 need and price it five ways, using mid-range terms for each product. A bank term loan at 9% over five years costs $2,076 a month. Total interest: about $24,550. Fold in a 2% origination fee, meaning you received $98,000 while repaying on $100,000, and the effective rate is closer to 9.8%. Fees on short loans distort the rate more than fees on long ones, which matters later in this list. An SBA 7(a) at 10.5% over ten years costs $1,349 a month. Total interest if held to term: about $61,900, plus the guaranty fee. The lifetime cost is far higher, but the payment is 35% lower than the bank loan, and that is the point. The long term buys breathing room, and you can prepay once cash flow allows. A line of credit at 12%, drawn in full for four months and then repaid, costs about $4,000. For a genuine timing gap nothing else comes close, which is why this comparison is only fair when the need is truly short. An online term loan at 30% APR over 18 months costs $6,967 a month, with about $25,400 in total interest. Note the trap: the interest dollars look nearly identical to the bank loan's $24,550, but you pay them in less than a third of the time, and the monthly payment is more than triple. What sinks borrowers here is the payment, not the interest total. Revenue-based financing at a 1.28 factor repays $128,000. If your sales retire it in ten months, that is $28,000 for ten months of money, an effective annual rate well past 50%. Nothing on this list costs more per month of use. The pattern is worth sitting with. The products converge on total dollars more than you would guess and diverge wildly on speed and monthly burden. Price every offer both ways, total cost and monthly strain, before you sign anything.

Some situations look like financing problems and are not. If the margin on what you sell is negative, more volume funded by debt loses money faster. If payments on the last loan are the reason you need this one, another loan deepens the hole, and stacking a second or third advance on top of an existing one is how businesses end up handing a fixed share of revenue to three different creditors at once. Lenders who specialize in that stacking exist, and they are not doing you a favor. Before borrowing to cover a shortfall, price the alternatives. Tightening payment terms with customers, chasing your receivables, negotiating longer terms with suppliers, and cutting the two or three expenses everyone has been avoiding will often free more cash than a loan nets after fees. Raising prices is the option owners resist longest and regret least. And when the business genuinely needs outside money to survive rather than to grow, equity or a partner may be the honest answer, because equity does not have a monthly payment. None of this is an argument against debt. It is an argument for using debt on things that produce cash and using other tools on problems that consume it.

Strip the decision to three questions. What is the money for, and how long does that thing produce value? How fast do you truly need it, measured in days rather than anxiety? And what does each candidate cost, in total dollars and in monthly burden, over your realistic payoff window? Run the numbers through the business loan and equipment financing calculators on this site with your actual revenue, not the revenue you hope for. A few closing rules from operators who learned them expensively. Get the line of credit before you need it. Never let an online lender's speed decide a purchase you have known about for six months. Check a credit union alongside your bank, since many do business lending at competitive rates and the NCUA locator finds the ones near you. Read every fee, because origination charges, draw fees, and prepayment clauses move the real cost more than a half point of rate ever will. And if the honest purpose of the loan is covering losses with no fix in sight, the problem is the business model, and no financing structure repairs that.