Business financing comes in many forms, each suited to different needs: term loans for large capital investments, SBA loans for lower rates and longer terms, equipment financing when assets serve as collateral, and lines of credit for flexible working capital.
Understanding the true cost of financing—monthly payments, total interest, and impact on cash flow—is critical before you borrow. The cheapest monthly payment often costs the most over time, and taking on debt you can't service is one of the fastest ways to fail.
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Step-by-step workflow
Identify your financing need
Are you buying equipment, covering working capital gaps, or funding expansion? The right financing type depends on your use case: equipment loans for assets, lines of credit for short-term needs, term loans for growth capital.
Calculate affordable payments
Use the business loan calculator to model payments at different amounts, rates, and terms. Your monthly payment should not exceed 15–20% of monthly revenue, and you should have room in your budget for seasonal dips.
Compare SBA vs conventional loans
SBA 7(a) loans typically offer rates 1–2% lower and terms up to 25 years (vs 5–10 for conventional loans), but require more documentation and take longer to close. Model the payment difference to see if SBA is worth the extra work.
Understand total cost of capital
Look beyond monthly payments. A 7-year loan at 8% costs substantially less in total interest than a 10-year loan at 9%, even if the monthly payment is lower. Compare total interest, not just payment affordability.
Typical financing costs by loan type
These are current market ranges for small business financing (as of 2024). Your actual rate depends on credit profile, collateral, and lender.
Common mistakes to avoid
Focusing on monthly payment instead of total cost
A $100K loan at 10% for 10 years costs $59,370 in interest. The same loan at 8% for 7 years costs $31,750—and you're debt-free 3 years sooner. Always compare total interest and time to payoff.
Borrowing for operating expenses instead of growth
Debt should fund revenue-generating assets or cost-reducing investments—not cover losses. If you're borrowing to make payroll or pay rent, you have a revenue problem that debt will only make worse.
Not reading the prepayment terms
Many business loans have prepayment penalties or restrictions. If you plan to pay off early (or refinance), make sure the terms allow it without excessive fees.
Key financial considerations
- → SBA 7(a) loans typically offer the best rates (7.5–10% APR) and longest terms (up to 25 years), but require strong financials and more documentation.
- → Equipment financing is often easier to qualify for because the equipment serves as collateral—rates are typically 8–12% APR.
- → Lines of credit are ideal for working capital gaps and seasonal inventory—you only pay interest on what you draw, not the full limit.
- → Monthly debt service (all loans combined) should not exceed 15–20% of monthly revenue, and you should model affordability at 70% of normal revenue to account for downturns.
- → Avoid merchant cash advances (MCAs) unless absolutely necessary—effective APRs often exceed 40–200%, and daily repayments crush cash flow.