How To Select The Right Financing Plan For Your Small Business

Key takeaways

• Compare your financing options before borrowing, since credit cards, lines of credit, loans, and microloans each carry different costs and timelines.
• Match the amount you borrow to a specific need, and never take on more than your business can realistically repay.
• Check each lender’s requirements early, because banks often expect about two years in business while many online lenders may approve you within six months.
• Prioritize a repayment plan by weighing how fast you need the funds against the terms your cash flow can sustain.

What is small business financing?

Small business financing is the money a business borrows or raises to start, run, or grow. It covers everything from credit cards and lines of credit to loans, cash advances, and government-backed programs. Each option has its own terms, costs, and timelines, so the right choice depends on how much you need and how quickly you can pay it back.

Common small business financing options

Most small and medium-sized businesses choose from a handful of common financing options. Here are the ones worth knowing.

• Business credit cards: Cards with terms built for businesses. They let you defer payments and free up cash while meeting your obligations.
• Lines of credit: Flexible, pre-approved funds. You draw what you need and pay interest only on the amount you use.
• Merchant cash advance: An advance against future earnings, repaid as a share of your card sales.
• Secured and unsecured loans: Secured loans need collateral and offer lower rates. Unsecured loans need no collateral but carry higher rates or stricter terms.
• Microloans: Small loans of up to $50,000 delivered through nonprofit, community-based intermediary lenders. In the U.S. these are largely provided through the SBA Microloan program, with an average loan around $13,000.
• SBA loans: Loans guaranteed by the U.S. Small Business Administration, so rates and terms tend to favor small businesses.
• Equipment financing: A loan taken specifically to pay for the tools or equipment your business needs to operate.

How much money do you actually need?

A clear understanding of your business’ financing needs will give you valuable clues in terms of which type of credit would best meet them.

For instance, a business credit card or line of credit is a great option if you need to quickly set up and cover day-to-day company-related expenses since funding takes only hours or days to procure. However, these methods come with relatively high interest rates, especially for newer businesses or those with a lower total income level.

Microloans and equipment financing loans are excellent choices when you need to pay for specific machinery or in-store improvements, but the path to funding may be longer, requiring weeks or even months worth of paperwork and evaluations.

For a more detailed look at the terms of each option, check out the handy lending guides created by SCORE (The Service Corps of Retired Executives), a non-profit organization that provides free consultation to entrepreneurs.

Keep in mind that it’s never a bad idea to consult with financial advisors, accountants, or even fellow business owners before taking on new financial obligations. Many professionals are willing to share their knowledge and expertise for free or for a nominal fee through webinars, professional networking groups, and online mentorship events, so don’t be afraid to reach out and ask for help if you feel overwhelmed by the many financing options and lenders out there.

Will your business qualify for credit?

Even if your personal credit score is great, that is no guarantee for your business’s score. This is because lenders often look at other credit qualifiers such as the age of the business, its annual revenue, cash flow, and available collaterals to get a clear picture of the organization’s overall eligibility for credit.

Some credit options vary widely by lender. Traditional banks often want a business line of credit applicant to be operating for about two years, while many online lenders now approve businesses with as little as six months to a year in operation.

Since younger businesses are considered more risky investments, interest rates may also be higher during these early years, so, if possible, you would be wise to wait until your business is more mature and your finances are in good financial health before applying for the first time.

By the way, paying your bills on time is a great way to improve your business’s credit score, so it’s always a good idea to adopt an efficient bill pay tool, such as Melio, that lets you schedule payments in advance and get a clear view of your finances.

How soon do you need the money and when can you pay it back?

For better or for worse, hasty decisions influence long-term results. Taking on new financial obligations may be a necessary step for growing your business but it’s crucial to go into it with a clear head.

Rather than being at the mercy of lenders or high-interest rates just because you needed capital fast, always try to secure your financing channels well in advance, never borrow more than your business can realistically pay, and form a well-thought-out repayment plan that fits both your needs and your abilities.

If you only need a little extra float, you can use Melio to pay your business bills with a credit card. That defers the cost to your next billing cycle and frees up cash, with no loan application to fill out.

How to choose the right financing plan for your business

Choosing the right plan comes down to matching an option to your real needs. Work through these steps.

1. Pin down how much you need and what you will use it for.
2. Check whether your business meets the lender’s credit, revenue, and time-in-business requirements.
3. Weigh how fast you need the funds against the cost and repayment terms.
4. Compare a few options side by side, then pick the one that fits your cash flow.

Move your business forward with the right financing

The right financing gives your business room to grow without straining your cash flow. Take time to compare your options, borrow only what you can repay, and plan ahead. And when it comes to paying your bills, Melio helps you schedule payments, choose how you pay, and keep more cash on hand. Sign up for Melio to take control of how your business pays.

Small business financing FAQs