Business Funding Guide

Types of business funding

Term loans. A fixed amount of capital borrowed for a fixed period at a fixed or variable rate, repaid in monthly installments. Banks and online lenders both offer them. Typical use cases: equipment purchase, expansion, business acquisition. Underwriting weighs the business's revenue history, the owner's personal credit, and (for larger loans) collateral.

Business lines of credit (LOC). A revolving credit facility — you draw what you need, pay interest only on the drawn portion, and re-borrow as you repay. Useful for managing seasonal cash flow or covering short-term gaps. Most LOCs require a personal guarantee for small businesses.

SBA loans. Loans partially guaranteed by the US Small Business Administration. The most common program is the 7(a) loan (up to $5 million), which is originated by SBA-approved banks and credit unions but carries the federal guarantee. SBA 7(a) loans price competitively and can stretch repayment over 10–25 years depending on use. The tradeoff is paperwork: SBA applications routinely take 60–90 days from submission to funding.

Invoice factoring. A factor advances you a percentage of an outstanding customer invoice (typically 80–90%) and collects the invoice directly from your customer. When the customer pays, you get the remainder minus the factoring fee. Useful for B2B businesses with long invoice cycles. Cost varies by factor and risk; effective APRs typically run from 15% to 60%.

Merchant cash advances (MCAs). A lender advances a lump sum in exchange for a percentage of your daily card sales. Repayment is automatic and varies with revenue, which sounds borrower-friendly. The catch is cost: MCAs often carry effective APRs above 80% and sometimes above 200%. The product is usually a last resort for businesses that don't qualify for term loans or LOCs.

Personal loans for business purposes

Many sole proprietors and very small businesses use personal loans to fund the business — typically when the business lacks the revenue history or collateral to qualify for traditional business credit, or when the funding need is small enough ($5,000–$30,000) that business lenders' fixed underwriting costs would push the APR higher than a personal loan's.

The pros: faster funding (1–5 business days vs. 30+ for an SBA loan), simpler application, fixed monthly payment. The cons: the loan is personally guaranteed by definition (you signed it), so business failure becomes personal-credit damage. You typically also can't deduct interest as a business expense unless you can document that 100% of the proceeds went to legitimate business use.

If you're considering a personal loan for business, compare offers on our personal loans hub. Run the Loan Calculator for the term and rate you're quoted. Verify with a tax professional whether the interest is deductible in your specific situation before counting on it.

How to choose the right product

Match the product to the use case. A piece of equipment with an 8-year useful life is a candidate for a term loan with matching amortization, not a revolving line. Seasonal payroll fluctuations are a fit for a line of credit, not a term loan. Long invoice payment cycles in a stable B2B business may be a fit for factoring.

Match the product to your stage. Established businesses with 2+ years of audited financials and collateral qualify for the broadest set of options at the best pricing. Newer businesses and very small operations have a narrower menu, and the realistic alternatives are often personal credit, SBA microloans (under $50,000), or community-development financial institution (CDFI) products.

Avoid MCAs unless you have no other option. The effective APR is almost always higher than borrowers realize at signing because the daily-repayment structure obscures the math. If you find yourself looking at an MCA, also look at whether a 24-month personal loan would solve the same problem at one-third the cost.

Documentation you'll typically need

Most business lenders ask for: business formation documents (LLC operating agreement, articles of incorporation), 2 years of business tax returns (1120/1120-S/Schedule C), 1–2 years of business bank statements, profit and loss statements, balance sheet, and the owner's personal tax returns and credit authorization. SBA loans add a business plan, debt schedule, and personal financial statement. Online lenders accept a leaner package — often just bank statements, a personal credit pull, and basic verification.