How to Choose a Small Business Loan

Borrowing is one of the most common ways small businesses buy equipment, hire, carry inventory, or ride out a slow season. The hard part is not finding money. It is finding money that costs less than it earns you. Here is how the main options compare and how to pick between them.

Start With the Job the Money Has to Do

Before comparing lenders, write down three things:

1. What the money is for. A one-time purchase, an ongoing gap, or an opportunity with a deadline.
2. How it pays you back. More revenue, lower costs, or simply time.
3. How fast you need it. Days, weeks, or months.

The answers usually narrow the field to one or two product types before you ever talk to a lender.

The Main Types of Business Financing

Product	Best for	Typical speed	Things to watch
Term loan	One-time investments with a clear payback	Days to weeks	Prepayment penalties, origination fees
Line of credit	Recurring or unpredictable cash gaps	Days to weeks	Draw fees, annual fees, variable rates
SBA loan	Larger amounts at lower rates	Weeks to months	Paperwork, personal guarantees, collateral
Equipment financing	Machines, vehicles, technology	Days	Equipment usually serves as collateral
Invoice financing	Businesses waiting on customer payments	Days	Fees stack up the longer invoices stay open
Merchant cash advance	Fast cash against future card sales	One to two days	Very high effective cost, daily withdrawals

Term Loans

You receive a lump sum and repay it with interest over a fixed schedule. Term loans fit purchases with a predictable return, like a new oven for a bakery or a second delivery van.

Lines of Credit

You get a credit limit and draw only what you need, paying interest only on the balance you use. Lines of credit fit businesses with uneven cash flow, like seasonal retailers or contractors waiting on progress payments.

SBA Loans

Loans partially guaranteed by the U.S. Small Business Administration and made by participating lenders. They often carry lower rates and longer terms than conventional options, in exchange for more documentation and a slower process.

Merchant Cash Advances

Not technically a loan. A provider buys a share of your future card sales at a discount and collects it automatically from daily receipts. Advances are fast and easy to qualify for, but the effective annual cost can be far higher than any loan. Treat them as a last resort and always ask for the total payback amount in dollars.

What Lenders Look At

Most lenders weigh some combination of:

• Time in business. Many require at least six months to two years.
• Revenue. Monthly or annual deposits, usually verified with bank statements.
• Credit. Your personal credit score and, if established, your business credit.
• Cash flow. Whether existing income can cover the new payment comfortably.
• Collateral. Assets that secure the loan, which can lower the rate.

How to Compare Offers

Two offers with the same "rate" can cost very different amounts. To compare fairly:

• Ask for the annual percentage rate (APR), which folds in fees, not just the interest rate or factor rate.
• Ask for the total cost of capital in dollars: everything you will repay minus what you receive.
• Check the payment frequency. Daily or weekly payments strain cash flow more than monthly ones.
• Read the prepayment terms. Some products charge the full cost even if you pay early.
• Note any personal guarantee, which puts your own assets on the line.

A Simple Rule of Thumb

If the money will earn or save more than it costs, within a time frame you can afford to wait, borrowing can make sense. If you are borrowing to cover losses with no plan to fix them, slow down and look at your cash flow first.

Ready to see what you might qualify for? Compare business funding options.