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Go-to Guide for Small Business Loans & Funding

If you are starting a new business or in growth mode, you may be considering small business loan and funding options. Or perhaps you need a new piece of equipment to improve your business efficiency, or you’re going through a slow season and need some funds to pay bills and payroll.

Either way, you should be aware of all the small business funding options available to you. You should also have a clear plan for how you’ll use the loan or funds you receive and a solid understanding of what criteria lenders look for.

Keep reading for our comprehensive guide on the types of small business loans and how to set your company up for success when you receive funding!

What is a Small Business Loan?

A small business loan is money you borrow from a bank or other financial institution to help your business grow. You might use these funds to purchase equipment, hire new employees, or pay off debts. You'll have to pay back the loan with interest over time, but if you're able to pay it off quickly and keep your business running smoothly, it can be a great way to get started—or expand—your operations without having to rely on your own savings or credit cards.

How Do I Know if I Need a Small Business Loan?

If you're thinking about starting or expanding your business and need some extra cash for supplies, equipment, or other expenses related to getting things off the ground, then maybe it's time for a small business loan. If you're looking at starting up but don't know where the money's going to come from, then also consider applying for one of these loans before making any final decisions about how much funding will be needed for operations once everything gets started up properly (so that you don't end up having too much debt).

What Do I Need to Qualify for a Small Business Loan?

When you apply for a small business loan, lenders will review and require certain criteria. At a high level, these include the three Cs of credit, which are:

  • Character

  • Capital

  • Capacity


How is your credit history? What are your personal and business credit scores? Yes, there is such a thing as a business credit score!

Similar to your personal credit score, your business credit score is a number that will indicate your creditworthiness; however, it is calculated differently. This score typically ranges from 0 to 100, or, if using the FICO Small Business Scoring Service, from 0 to 300. It is based on the information in your business’s credit report, including payment history and the amount of debt you have compared with how much money you make.

You can build your business credit score by:

  • Establishing a business name, legal entity, and employer identification number (EIN).

  • Opening a business bank account and obtaining a Data Universal Numbering System (DUNS) number.

  • Paying off your credit and loans on time.


Do you have anything that can be used as collateral in case of default? If you have assets that can be used as collateral, your lender may be more comfortable with your business’s ability to repay a loan. Collateral can include inventory, equipment, accounts receivable, and real estate.


How much money do you make, and how much is available to put toward the loan payments? How much debt do you currently have?

The more debt you have, the more risk your lender takes on. Lenders will want to see that you can afford to repay a loan, or they won’t issue one. Your lender will likely look at your cash flow, which is the difference between what you bring in and what goes out.


How is the industry doing? The economy affects every business, but some industries are more sensitive than others. If your company is in an industry that’s suffering, you may have a harder time finding financing from banks or credit unions. Your lender will also look at how competitive your industry is and whether there are many other companies offering similar products or services locally.

Then, there are certain industries some lenders won't finance at all, such as adult-oriented businesses, casinos and other types of gambling, marijuana, and firearms.

Once you gather all the appropriate documentation and understand the criteria lenders will review, you'll need to determine which type of small business loan is best for you.

Types of Small Business Loans

There are many different types of small business loans you can apply for, each one with its own benefits and drawbacks. Here’s a brief overview of the most common types:

SBA Loans

The U.S. Small Business Administration offers a number of small business loans through its network of lenders, including 7(a) and Microloans. SBA loans are known for their low-interest rates and long repayment terms. The 7(a) loan is the most popular type, providing a range of funding options for businesses across the country. It’s also the largest program in terms of dollar volume; in October 2021, the agency announced that it funded $44.8 billion to small businesses through more than 61,000 traditional loans for fiscal year 2021.

Term Loans

Term loans provide businesses with an upfront lump sum of cash. In exchange, you’ll have to pay back a fixed monthly amount over a set period of time. The loan’s interest rate is based on the prime rate plus a margin set by the lender. Repayment terms usually vary between one and five years. The interest rate is locked in for the life of the loan; if you pay it off early, you’ll lose some or all of your savings.

Term loans are ideal for businesses that need quick cash and don’t want to be tied down by a long-term repayment plan.

Business Lines of Credit

A business line of credit is similar to a credit card with a revolving balance. You can use it for any purpose, but you’re only required to pay back what you borrow (usually on a weekly or monthly basis). The amount is based on your company’s cash flow and the bank’s appetite for risk. Lines of credit are best suited for businesses that have an unpredictable income stream or large expenses they need to cover before they get paid by customers.

Many small business owners like the flexibility of business lines of credit and that they can keep using funds as long as they pay on time and don't exceed their credit limit. Just beware of their possible extra fees, such as draw fees, monthly maintenance fees, or inactivity fees.

Equipment Financing

Equipment financing is another very common type of business loan. It allows you to purchase a piece of equipment, vehicle, machinery, furniture, or software. The equipment serves as the collateral (one benefit of this type of loan), and pay it back over time with interest. Equipment loan repayment terms are typically based on the anticipated life of the equipment you're purchasing.

Your equipment loan can cover up to 100% of the equipment value, but you'll want to make sure that your business can afford to pay back the loan. The lender will also consider how often you use the equipment and if it's necessary for your business operations. Some will even pay for related costs like installation, delivery, assembly, and other expenses to get it up and running.

Invoice Financing

With invoice financing, your outstanding customer invoices serve as collateral. Your lender will advance you a portion of the invoice value, which lets your business pay its suppliers and vendors. You can use this financing to buy inventory or raw materials, meet payroll, and other expenses. When the customer pays their invoice, then pay the lender for the amount borrowed, plus fees and interest.

Beware of the high rates and fees and low financing amounts that accompany invoice financing.

Merchant Cash Advance

With a merchant cash advance (MCA), your business receives a lump sum of cash. You can use this money to meet payroll and other expenses until you receive payments from your customers.

This type of financing is usually accompanied by significantly high annual percentage rates–sometimes up to 350%!–making it less than ideal for many small businesses. Ensure you calculate the MCA fees into the APR, as MCA providers usually charge their fees as factor rates instead of typical interest rates.

Alternative Small Business Funding Options

Keep in mind that there are options besides loans! Consider these other sources when searching for new funding opportunities.


Crowdfunding is one of the best ways to get funding for your small business. It allows you to tap into a large pool of potential investors with minimal effort or cost on your part–though you'll need to account for any fees or taxes.

Crowdfunding platforms like Kickstarter and Indiegogo allow you to create a profile page where people can learn about your project, view any videos you post, and make financial contributions in exchange for rewards (usually merchandise related to your business). Another perk is you'll get pre-launch customer feedback!

Family & Friends

If you’re starting a business on a shoestring budget, the first people you should consider asking for help are your family and friends. With their support and encouragement, you'll feel more confident about taking risks and making important decisions. Plus, they might be able to offer some guidance or insights that will help your business succeed.

Of course, borrowing from friends and family can be shaky waters. Consider doing so carefully and ensure both sides have a clear understanding of the expectations of what the investment entails, repayment, and potential ownership or interest. It may be wise to put an agreement in place, even if it is a close friend or family member.

Angel Investor

Angel investors are wealthy individuals who invest in startups and small businesses. They provide capital for the company in exchange for equity. Angel investors often have experience as entrepreneurs or business professionals, which can be helpful when making decisions about your company's future. However, like any investor, they're looking for a return on their investment and may not be interested if your business doesn't have any revenue streams yet or has too much competition from other companies.

Business Grants

Business grants are government-funded financial awards that are given to businesses with the intention of helping them expand or launch. The exact requirements vary depending on the type of grant, but most require that you have a specific business plan in place and have already begun making profits. Many have strict requirements and may involve a lengthy application process.

For example, Small Business Innovation Research Grants are awarded by the U.S. government to help fund research and development projects for small businesses. Others are only available to minorities and women-owned businesses, with specific requirements on how many employees you hire each year.

Explore All Small Business Funding Options

The best way to fund your business is by taking advantage of all the options available to you. In addition to loans and financing, explore different funding sources, like grants and crowdfunding sites. You may find that one option works better than others for your particular business model or stage.

And if you want to ensure any funding you've received is properly accounted for, you'll need an experienced accountant to take the wheel! Contact Check & Balance today to discuss your needs by scheduling a free consultation.


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