Running a business takes money. Whether you need to hire help, get through a slow month, or finally take that next step — most business owners need outside funding at some point.
The problem? There are a lot of options out there, and not all of them are on your side.
This guide breaks down the main types of small business financing in plain language — so you can find what works for your business and avoid what doesn’t.
About Business Loans
A business loan is money you borrow from a lender and pay back over time, usually with interest. That means you will pay back more than you borrowed. The key things to understand are:
- The term: how long you have to pay it back (weeks, months, or years).
- The requirements: what documents or credit history the lender needs from you.
- The rate: how much a lender charges you for funding. Interest is usually expressed as a percentage of what you borrow. The higher the rate, the more you’ll repay. Typically, business lenders will quote interest as an annual percentage rate (APR). A higher rate means you will repay more of the borrowed amount.
One useful benchmark: look up the current prime rate before you borrow. Some lenders offer rates near or below prime. If someone is quoting you 20%, 30%, or higher, that is a signal to slow down and ask more questions.
Who Gets A Loan
Some lenders work with businesses that are brand new. Others want to see two or more years of history. Some care mostly about your credit score – and they will often use your personal credit score to determine the loan amount and interest rate offered. Others care more about your character and your business plan. Knowing which type of lender fits where your business is right now saves you time and protects you from bad deals.
Main Lenders
CDFIs (Community Development Financial Institutions) are often nonprofit organizations designed specifically to serve small businesses. Unlike banks, they are not trying to make a profit off you. They offer lower-interest loans, financial coaching, and real relationships. If you are a minority-owned, women-owned, or immigrant-owned business, or if you have never had a business loan before, a CDFI is often your best starting point.
Credit Unions are member-owned financial institutions. Each credit union has specific requirements for becoming a member, and many are open to a broad number of people. Some offer small business loans and banking services, often at better rates than large banks. If you’re also looking for a local business bank account, this is worth exploring.
Microlenders offer smaller loans (microloans), often under $50,000, designed for businesses that are just getting started or need a small amount of capital to grow. They are a great way to build business credit for the first time.
Traditional Banks like Wells Fargo or TD Bank offer a range of business loans, but they typically have stricter requirements — stronger credit scores, longer business history, and more documentation. If you already have a relationship with a bank, it is worth asking what they offer.
SBA Loans are associated with the U.S. Small Business Administration (SBA), which does not lend money directly, but it backs loans made by approved lenders, which lowers the risk for the lender and often gets you better rates. SBA loans often offer lower rates and longer repayment terms than you would find elsewhere. The application process takes time, so plan ahead.
⚠️ One option to avoid: Merchant Cash Advances
Merchant Cash Advances (MCAs)
MCAs are not loans. They are advances against your future sales, and they are one of the most expensive and risky forms of funding available to small business owners. Here is what you need to know:
- Because these cash advances are not classified as loans, most lending laws do not apply. The fees they can charge have no legal cap.
- MCAs carry extremely high costs, with annual percentage rates frequently between 70% and over 400%, coupled with daily repayment schedules that can heavily impact cash flow.
- Repayment is taken automatically, often every business day, directly from your bank account.
- The high costs, rigid repayment terms, and potential for falling into a cycle of debt can create serious financial challenges for business owners. Many small business failures are attributable to multiple MCAs.
The rule is simple: if it sounds fast and easy, look closely. Legitimate lenders take time because they are making sure the loan is right for your business. If a lender offers you money in hours with almost no questions asked, the full cost is likely very high and critical information is buried in the fine print.
Before you apply for anything
A few things worth knowing regardless of which lender you choose:
- It may not be what you expect to hear, but the best time to apply for a business loan is before you need it. Waiting until your business is very tight on funds and you feel desperate will make it difficult for a lender to provide the best option. Apply when your business is stable, not when you’re in crisis.
- Start small. Instead of thinking of a loan as money to cover an urgent gap, think of it more like a relationship you are building. You don’t need a large loan to start that relationship on strong footing. A smaller loan paid back on time opens doors for bigger funding later.
- Bring your documents. Most lenders will ask for bank statements, tax returns, and some form of business plan. Find out what documents are typically required by your lender and have these ready to speed things up.
- Ask questions. A good lender will want you to understand what you’re signing. If someone rushes you or avoids your questions, that is a red flag.
Not sure where to start? Our team can help you find the right fit for your business.