Business financing can help a company purchase equipment, manage working capital, expand facilities, acquire another business or cover temporary cash-flow requirements.
But borrowing also creates repayment obligations. The appropriate financing structure depends on the purpose of the funds, the company’s financial position and the lender’s requirements.
For U.S. businesses, the Small Business Administration currently identifies three major SBA-backed loan programs: 7(a), 504 and Microloan.
Here are seven financing categories to understand.
1. SBA 7(a) Loans
The SBA 7(a) program is the agency’s primary business loan program.
According to the SBA, 7(a) financing can be used for purposes including real estate, working capital, equipment, supplies, business acquisition and certain debt refinancing. The maximum loan amount is $5 million.
Eligibility requirements apply, and businesses generally must operate for profit in the United States, meet SBA size requirements, be creditworthy and demonstrate ability to repay.
2. SBA 504 Loans
The 504 program is designed primarily for major fixed assets.
The SBA says 504 financing can be used for projects involving buildings, land, long-term machinery and equipment. The program provides long-term, fixed-rate financing and has a maximum loan amount of $5.5 million.
This type of financing is different from a general-purpose working-capital loan.
3. SBA Microloans
Microloans can be useful for smaller financing requirements.
The SBA Microloan program provides loans of up to $50,000 through approved intermediary lenders. The average microloan is approximately $13,000, according to the SBA.
Funds can generally be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment. They cannot be used to purchase real estate or pay existing debts under the SBA Microloan program.
4. Business Lines of Credit
A business line of credit provides access to funds up to an approved limit.
Instead of receiving one large amount and immediately paying interest on the entire balance, a business generally draws money when needed and repays what it uses according to the agreement.
Lines of credit can be useful for uneven cash flow, but fees, interest rates and repayment conditions vary.
5. Equipment Financing
Equipment financing is designed specifically for business equipment.
Examples include vehicles, manufacturing machinery, computers, medical equipment or specialized tools.
The equipment itself may serve as collateral, depending on the lender and structure.
The key consideration is whether the equipment is expected to generate enough business value to justify the financing cost.
6. Traditional Bank Loans
Banks offer various forms of business financing.
Depending on the borrower and loan, a bank may evaluate financial statements, credit history, business history, collateral, cash flow and repayment capacity.
Businesses with established operations may have more financial documentation available for underwriting.
7. Online Business Financing
Online lenders can provide financing through digital applications.
Approval processes and requirements vary significantly.
Some products may be faster to obtain than traditional bank financing, but speed should not be the only consideration. Borrowers should compare the total financing cost, fees, repayment schedule, collateral requirements and consequences of missed payments.
How to Compare Business Loans
Never compare loans only by the advertised interest rate.
Consider:
- Total borrowing cost
- Interest rate
- Origination fees
- Repayment period
- Monthly payment
- Prepayment terms
- Collateral
- Personal guarantees
- Variable versus fixed rates
- Late-payment consequences
The SBA notes that loan terms and eligibility can vary by program and lender.
Match the Loan to the Purpose
A common financing mistake is borrowing for the wrong reason.
Long-term assets may require longer-term financing, while temporary cash-flow needs may be better suited to a working-capital facility.
For example, financing a piece of equipment with a structure designed for short-term cash needs could create unnecessary payment pressure.
Prepare Before Applying
A lender may request business financial statements, tax information, bank statements, ownership information, debt details and a business plan.
The SBA recommends financial projections when preparing a funding request, including projected income statements, balance sheets and cash-flow statements.
Final Thoughts
There is no single best business loan for every company.
The appropriate financing depends on the amount required, intended use, business history, creditworthiness, repayment ability and lender requirements.
Borrowing should be treated as a business decision rather than simply a way to obtain cash. Before signing an agreement, understand the total cost and whether the expected business benefit justifies the repayment obligation.
For U.S. businesses considering SBA financing, the official SBA program information should be reviewed because eligibility, terms and program rules can change.