Small Business Financing: A Plain-English Guide for Business Owners

SBA Loans

SBA loans are the gold standard for small business financing. The Small Business Administration doesn't lend money directly — it guarantees a portion of the loan so banks are willing to lend to businesses they'd otherwise pass on.

The most common type is the SBA 7(a) loan. It's flexible: you can use the funds for working capital, buying equipment, refinancing debt, or even buying another business. Loan amounts go up to $5 million, and terms can stretch to 25 years for real estate.

The tradeoff: SBA loans take time. Expect 30 to 90 days from application to funding. You'll also need at least two years in business, a credit score around 680 or higher, and the patience for a fair amount of paperwork.

SBA Microloans are for businesses that need less — up to $50K. They're issued through nonprofit intermediaries and often designed for startups and underserved business owners who wouldn't qualify for a conventional bank loan.

One important note: most 501(c)(3) nonprofits do not qualify for SBA loans. If you're running a nonprofit, see our nonprofit financing guide instead.

Business Line of Credit

A line of credit works like a credit card for your business — you draw what you need, when you need it, and only pay interest on what you use. It's the right tool for managing cash flow gaps, covering payroll in a slow month, or handling unexpected expenses without having to apply for a new loan each time. Lines of credit are revolving: once you pay down what you've drawn, that amount becomes available again.

What you need to qualify: Most lenders want to see at least one year in business, annual revenue above $100K, and a credit score around 620 or better. Online lenders (such as Bluevine, Fundbox, and OnDeck) have faster approvals and more flexible requirements than traditional banks — but their rates are higher. If you can wait a few weeks and qualify with a bank, it'll be cheaper.

The biggest mistake people make with lines of credit: treating them like a term loan. A line of credit is for short-term gaps, not long-term growth.

Equipment Financing

Equipment financing is straightforward: you borrow money to buy a piece of equipment, and the equipment itself serves as collateral. If you stop paying, the lender takes the equipment.

Because the loan is secured, qualification is easier than most other financing types — lenders care more about the value of the asset than your revenue history. Approval can happen in days, and terms typically match the useful life of the equipment (3–7 years).

Lease vs. buy: Equipment financing gets you ownership at the end. Leasing keeps payments lower and lets you upgrade more often. If the equipment will still be valuable in 5 years, buy. If it'll be obsolete, lease.

Invoice Factoring

If your business sells to other businesses — and you're constantly waiting 30, 60, or 90 days to get paid — factoring might be the answer. You sell your unpaid invoices to a factoring company at a small discount (typically 1–5%). They pay you immediately, then collect from your customer directly.

Important distinction: Invoice factoring is not a loan. You're selling an asset (your receivable), not borrowing against it. That means no debt on your balance sheet, no covenants, and no personal guarantee in most cases.

Inventory Financing

Product businesses face a specific problem: you need to buy inventory before you can sell it. Inventory financing lets you borrow against the value of your inventory — typically 50–80% of its cost (not its retail value). The inventory itself is the collateral.

• Lenders value inventory at cost, not what you can sell it for
• If your inventory is mostly held by Amazon (FBA), most lenders will exclude it from the calculation
• For Amazon and marketplace sellers, Amazon Lending and services like Payability are often better options — they lend against your sales velocity rather than your physical stock
• Inventory financing typically becomes accessible once you're doing around $500K+ in annual sales

Revenue-Based Financing

Revenue-based financing (RBF) gives you a lump sum of capital today in exchange for a fixed percentage of your future revenue until you've repaid the agreed-upon amount. It's non-dilutive (you keep your equity), the payments flex with your revenue (slow month = smaller payment), and approval is based on your revenue track record rather than your credit score or collateral.

It's particularly well-suited for businesses with recurring revenue — SaaS, subscription boxes, agencies with retainer income.

Merchant Cash Advance

We're going to be honest with you: a merchant cash advance (MCA) should almost always be your last resort. An MCA gives you a lump sum today in exchange for a fixed percentage of your future daily card sales until you've repaid the advance plus a factor rate. The factor rate looks small (1.2x, 1.4x) but when you do the math, the effective APR can easily exceed 80–100%.

That said, MCAs exist because they serve a real need: they're fast (funded in 24–72 hours), they don't require strong credit, and the payments are automatic and tied to sales volume. Just go in with eyes open. If you're using an MCA to cover operating losses, it will accelerate the problem, not solve it.

Small Business Grants

Grants are money you don't have to pay back. The catch: grants are competitive. Federal grants require significant reporting. Many private grants are designed for specific demographics (women-owned, veteran-owned, minority-owned) or specific industries. And the application process can take months.

That said, they're worth knowing about. There's real money available from the federal government, state programs, community foundations, and major corporations — and most small business owners never apply.