Small Business Financing, Explained

Small business financing is confusing on purpose. Every product has its own vocabulary, every funder quotes cost a different way, and almost nobody explains which tool fits which problem.

This is the plain version. What each option is, what it really costs, who it fits, and — just as important — when it is the wrong choice.

The single rule underneath all of it: match the term of the money to the life of what it is buying. Short-term capital solves short-term gaps. It is an expensive and dangerous way to buy long-term assets.

Working capital and merchant cash advances
What it is: A lump sum repaid from your revenue — either fixed daily or weekly ACH debits, or a percentage split of your daily card sales.

How it is priced: A factor rate, not an interest rate. A 1.35 factor on $50,000 means you repay $67,500 — the $17,500 cost is fixed on day one and generally does not shrink if you pay early.

What it really costs: Convert it before you sign. Because you begin repaying immediately and never hold the full balance, the effective APR is far higher than the factor rate suggests. Factor rate vs. APR, explained.

Right for: A short, definable gap where speed matters and the capital produces more than it costs — taking a contract, buying discounted inventory, covering payroll on work already sold.

Wrong for: Recurring shortfalls, buying long-lived assets, or plugging a hole created by underpricing. Financing does not fix a pricing problem; it makes it more expensive.

Business lines of credit
What it is: A revolving limit you draw against and repay, over and over. You pay only on what you use.

Why it is the goal: For any business with lumpy but repeating cash cycles, this is the correct structure. It costs less than an advance, and the money is there before you need it rather than after.

The catch: It is the hardest of these to qualify for. Funders want time in business, consistent deposits, and clean bank statements. If you cannot get one today, treat it as the thing you are building toward.

Invoice financing
What it is: You advance against invoices you have already earned. The funder is repaid when your customer pays.

Why it is underrated: The cheapest capital in your business is usually money you are already owed, collected faster. This is not new debt so much as accelerating your own receivable.

Right for: B2B businesses with slow-paying customers — construction, staffing, wholesale, trucking, professional services.

Watch for: Cost is tied to how long your customer takes. If they pay in 90 days instead of 30, it costs three times as much.

Purchase order financing
What it is: Funds paid to your supplier so you can fulfill an order you have already won.

Right for: You have the contract and the margin, but not the cash to buy materials or inventory. Common in wholesale, manufacturing, and construction.

Watch for: It is priced against a specific transaction. Your customer’s creditworthiness matters as much as yours.

Equipment financing and leasing
What it is: The equipment itself secures the loan, so approval leans on the asset, not just your credit.

Why the term matters: A machine that earns for eight years should be paid for over years. Buying it with a six-month advance is how profitable businesses fail.

Lease vs. finance: Financing means you own it at the end. Leasing keeps payments lower and is better when the equipment goes obsolete quickly.

SBA loans
What it is: A bank loan partially guaranteed by the Small Business Administration.

The trade: The lowest rates and longest terms available to a small business — in exchange for the heaviest paperwork and the longest wait. Weeks to months, not days.

Right for: Planned expansion, acquisition, real estate, refinancing expensive debt. Anything you can see coming.

Wrong for: Anything urgent. If you need money this week, this is not the product.

Bridge loans
What it is: Short-term financing that covers the gap until permanent money arrives.

Right for: You are closing on an SBA loan, a property sale, or a large receivable, and you have a real gap in between with a definite end.

Watch for: Only borrow against money that is genuinely coming. A bridge to nowhere is just expensive debt.

Collateral-based loans
What it is: Financing secured by commercial real estate or other hard assets.

The trade: Better rates and larger amounts, because the lender has recourse. In exchange, you are putting an asset at risk.

How to compare any two offers
Ignore the marketing. Get these five numbers on every offer:

Amount funded — what actually hits your account, after fees
Total repayment — every dollar you will pay back
Payment and frequency — daily, weekly, or monthly
Term in days
The APR
Then put them side by side. An offer with a lower factor rate and a shorter term can easily cost more than one with a higher factor rate over a longer term. The only way to see that is to convert both.

If you are a New York business borrowing under $500,000, funders are required by the Commercial Finance Disclosure Law to hand you a standardized disclosure — including the finance charge and an estimated APR — before you sign. Several other states have similar rules. If a funder will not give you an APR, that itself is information.

The questions worth asking before you sign
What is the total repayment, in dollars?
What are the fees, and are they taken out of what I receive?
Is there a prepayment discount, and exactly how much?
What happens if a payment fails?
Are there personal guarantees or confessions of judgment?
Can I take additional financing while this is outstanding?
That last one matters more than people expect. Stacking advances is the fastest route from a cash gap to a cash crisis.