7 Business Financing Options—And When You Should Consider Them

Paige Smith

Whether you’re starting a new business or trying to expand your current operation, business financing is critical in helping you reach your goals. There are countless business financing solutions and lenders—and each one has unique advantages and disadvantages. We’ll walk you through some popular options below. 

1. Term loan

Versatile and relatively affordable, a term loan is one of the most popular types of business financing. With a term loan, you receive a set amount of money upfront, which you then pay back in installments—plus interest—over a specific period of time. Depending on the lender, you could typically qualify to receive anywhere from $50,000 to $1 million or more in capital (online lenders like Funding Circle offer business term loans starting at $25,000). Repayment periods can be anywhere from a few months to 10 to 25 or more years, depending on whether you choose a short-term, intermediate-term, or long-term loan. 

Interest rates also vary significantly from lender to lender. Banks generally offer the lowest interest rates for term loans—between 2 – 7 percent—but they tend to have more rigid qualifications and longer approval timelines. Term loans through online lenders may have slightly higher rates, but generally come with faster delivery of funds. Average interest rates for online term loans range from 7 percent to upwards of 90 percent. 

When to use a term loan

Term loans aren’t the best options for starting a new business or covering a temporary gap in cash flow. However, they’re great financing solutions for major purchases and costly endeavors with promising ROIs. You can use a term loan to: 

  • Hire more employees
  • Open a second location
  • Build out your business’s digital infrastructure
  • Buy inventory in bulk
  • Purchase equipment
  • Purchase a new building 
  • Renovate property
  • You can use term loans for a wide variety of business needs.
  • Term loans tend to have lower interest rates compared to other types of financing.
  • Term loans give you an opportunity to build business credit.
  • It’s easier to manage your business’ budget with a predictable repayment schedule.
  • You generally need above average  credit to qualify for a term loan.
  • If you apply for a term loan through a bank, the approval process can take several months.

2. Business line of credit 

A business line of credit is a great option for short-term financing needs. Like a credit card, a business line of credit gives you access to a set amount of credit, usually anywhere from a few thousand dollars to a few hundred thousand dollars. 

If you use your credit, you can either make a minimum payment at the end of the month (and incur interest) or bring your balance back down to zero to avoid interest fees. Average interest rates for business lines of credit can be as low as 2% and as high as 80%, depending on the lender. Your business’s history of revenue, your personal and business credit scores, and the amount of time you’ve been operating can play a role in determining your interest rate.

When to use a business line of credit

Business lines of credit are helpful for short-term financing needs and temporary cash flow shortages. You can use a line of credit to: 

  • Buy inventory to meet seasonal demand
  • Pay contractors 
  • Maintain equipment 
  • Cover regular operating expenses
  • Make payroll
  • Recover from an emergency or crisis
  • There’s a lot of flexibility in how you use your line of credit.
  • You don’t have to make payments until you dip into your credit.
  • If you bring your balance back to zero each month, you have access to the full amount of credit again.
  • It’s a good back-up plan for emergencies and unexpected cash flow crunches.
  • If you don’t pay off your balance in full each month, you’ll rack up interest.
  • You may have to pay draw fees, late payment fees, and monthly maintenance fees.

3. SBA 7(a) loan

One of the Small Business Administration’s (SBA) most popular loan options for business owners is the 7(a) loan. Backed by the SBA and administered through an approved lender, the 7(a) loan is a term loan that gives eligible business owners up to $5 million for working capital, real estate purchases, and refinancing. 

The SBA can guarantee up to 85% of a loan up to $150,000 and 75% of a loan greater than $150,000. Interest rates are among the most affordable for term loans, ranging on average from 5 – 11%. Repayment periods vary from 10 to 25 years, depending on how you use your funds.  

When to use an SBA 7(a) loan

If you have excellent credit and need a versatile term loan option, the SBA 7(a) loan is a solid choice. You can use a 7(a) loan for:

  • Obtaining short or long-term working capital
  • Purchasing real estate
  • Constructing a new building 
  • Renovating an existing space
  • Refinancing business debt
  • Purchasing equipment, machinery, furniture, fixtures, and supplies
  • Starting a new business
  • Expanding an existing business 
  • You can use the funds in a number of different ways.
  • Interest rates are low compared to other term loans.
  • Long repayment terms give you time to pay off your loan without restricting your cash flow.
  • The application process usually requires a lot of paperwork.
  • It typically takes between 2 – 3 months to get loan approval.
  • You may have a tough time qualifying if you don’t have excellent credit.
  • If you own 20% or more of your business, you’ll have to provide a personal guarantee, which means your personal assets are on the line if you default on your business loan payments.

4. Microloan

A microloan is a small, short-term loan for businesses that need minor financial assistance. You can apply for a microloan through a designated microfinance institution or with an SBA-approved intermediary if you live in the US. Microloans start at a few hundred dollars and go up to $50,000. However, the average microloan through the SBA is $13,000, with interest rates ranging from 8 – 13%. 

When to use a microloan

If you’ve struggled to obtain business financing because of your credit score or location, a microloan could be the way to go. You can use a microloan for:

  • Startup expenses
  • Furniture, machinery, inventory, and supplies 
  • Working capital
  • You can qualify for a microloan fairly easily, even without great credit.
  • You can get help starting or growing your business.
  • A microloan doesn’t usually provide enough funds to cover major projects or purchases.
  • Depending on where you live, you may have a tough time finding a certified microlender.
  • Interest rates can be high compared to other term loans.

5. Invoice factoring

Invoice factoring lets you leverage your accounts receivable to increase your cash flow. Essentially, you sell your business’s unpaid client invoices to a factoring company in exchange for two lump sums of money. 

The factoring company typically pays you 70 – 90% of your total invoice amount upfront. Then, once your client or vendor pays your invoice, you get the remainder of your invoice amount minus any fees the factoring company takes. Average interest rates for invoice factoring are high, usually between 13% and 60%. 

When to use invoice factoring

If you regularly deal with cash flow gaps from delayed client payments, invoice factoring can help. You can use invoice factoring to:

  • Buy inventory
  • Purchase materials
  • Pay for labor 
  • You can get cash on hand quickly.
  • It’s generally easy to qualify.
  • You don’t have to wait for payments to come in to move forward with purchases or projects.
  • Invoice factoring can have high fees (and sometimes hidden fees).
  • Certain factoring companies may require you to factor every invoice your business receives.

6. Equipment financing

Equipment financing gives you the capital to buy equipment and machinery essential to your business operations. With equipment loans, you can finance 80 – 100% of the cost of the equipment—everything from construction machinery and vehicles to office technology. 

You typically provide a down payment, then make regular payments—plus interest—that go toward the cost of the equipment. Once you’ve finished making payments, the equipment is yours. 

Interest rates vary depending on your credit score, the price of the equipment, and how much you put down, but they range from 3% to 40%.  

When to use equipment financing

You may need new equipment to help streamline operations, improve customer service, expand, or compete with the rest of your industry. Regardless of the reason, if you need to buy or replace equipment but don’t want to tie up your cash, equipment financing may be a good solution.

Here are just a few of the types of equipment you can finance:

  • Industrial equipment like bulldozers, conveyors, and forklifts
  • Exercise equipment for gyms or workout studios
  • Cars and trucks
  • Medical equipment like lasers, imaging machines, and dental chairs
  • Restaurant equipment like commercial ovens and refrigerators 
  • Digital equipment like point-of-sale systems, inventory management software, customer relationship management software, email marketing software, project management software, and accounting and HR software
  • It’s generally easy to qualify.
  • The equipment acts as collateral.
  • You can allocate your cash flow for non-equipment related ventures.
  • You may have to pay 10 – 20% of the cost of the equipment as a down payment.
  • Equipment is a depreciating asset.

7. Merchant cash advance 

A merchant cash advance (MCA) is a financing solution based on your business’s sales. With an MCA, you get a cash advance of your future credit card sales revenue. The amount can be anywhere from a couple thousand dollars to several hundred thousand dollars, depending on your business’s average monthly credit card sales. Retail businesses, tourism businesses, and restaurants typically benefit the most from MCAs. 

Unlike a term loan, you pay off your MCA using a percentage of your future credit and debit sales. Depending on how much revenue your business brings in, it could take a few months or a couple of years to pay off. MCA interest rates are also some of the highest for business financing, ranging from 20% to a whopping 250%. 

When to use an MCA

If you need quick cash to sustain your business operations, MCAs can be a smart solution. You can use an MCA to:

  • Prepare for busy season
  • Cover upfront project costs 
  • Replenish inventory
  • You don’t need great credit to qualify for an MCA.
  • You can get cash fast.
  • With high-interest rates, it’s easy to rack up debt.
  • You typically have to make daily payments.

What to consider when choosing a financing option 

Before you move forward with business financing, it’s crucial to consider the following factors:

  • Your financial needs: How much capital do you need, and what do you plan to use it for? If you need a sizable chunk of cash, for example, you may want to apply for a term loan. If you need a smaller amount but want regular access to it, you could consider a line of credit. 
  • Your business goals: Think about what you want to achieve with your business, whether it’s opening a second store in five years or launching a new product next quarter. The right financing should propel you toward your goals, not set you back. 
  • Your timeline: How much time do you have to apply for financing and wait for approvals and funding? If you need cash right away, you may have to sacrifice lower interest rates for speed. But if you can afford to wait a few months for capital, you have more flexibility in the type of financing you choose. 
  • Your business finances: It’s important to consider how much debt your business has, and how feasible it is to make regular payments. 

As you weigh your options, make sure you consult with your business accountant to see what makes the most sense for you. 

To create this post, Gusto partnered with Funding Circle, an online small business lender that helps business owners get the funding they need at every stage of growth.
No matter what your business goals and financial needs are, there’s a financing solution for you. Ready to explore the possibilities? Funding Circle has a diverse range of loan offerings, plus affordable interest rates and flexible terms. Learn more about Funding Circle’s options or apply for financing today.

Paige Smith Paige is a content marketing writer specializing in business, finance, and tech. She regularly writes for a number of B2B industry leaders, including fintech companies and small business lenders. See more of her work here:
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