Small Business Loans: Complete Guide to Financing Options (2026)

The Small Business Financing Landscape

Small business loans range from 6% to over 100% APR. Understanding each option helps you avoid costly mistakes and secure the right financing for your needs.

1. Term Loans: The Traditional Choice

Receive a lump sum upfront and repay over a fixed period with regular monthly payments. Think of it like a car loan for your business.

Short-Term Loans (3-18 months)

Interest Rates: 12-40% APR

Best for: Inventory purchases, cash flow gaps, or immediate opportunities

Typical use: Bridge short-term needs until revenue catches up

Medium-Term Loans (1-5 years)

Interest Rates: 8-25% APR

Best for: Equipment, renovations, or expansion projects

Typical use: Mid-size investments with clear ROI timeline

Long-Term Loans (5-25 years)

Interest Rates: 6-12% APR

Best for: Real estate, business acquisitions, major investments

Typical use: Large purchases matched to asset lifespan

Requirements Comparison

Traditional Banks: Need 720+ credit, 2+ years in business, comprehensive documentation. Best rates but hardest to qualify.

Online Lenders: Accept 600+ credit, 6-12 months in business, faster approval. Higher rates but easier qualification.

2. Lines of Credit: Flexible Working Capital

Draw funds as needed up to your credit limit. Pay interest only on what you use. As you repay, credit replenishes.

Unsecured Lines

• Amount: $10K-$100K
• Rates: 10-20% APR
• Requirements: No collateral, higher rates, lower limits

Secured Lines

• Amount: $100K-$1M+
• Rates: Prime + 2-6%
• Requirements: Requires collateral, lower rates, higher limits

Best Uses for Lines of Credit

• Seasonal cash flow gaps
• Ongoing working capital needs
• Emergency expenses and repairs
• Bridge 30-90 day invoice payment cycles

3. SBA Loans: The Gold Standard

Government-guaranteed loans with the lowest rates but longest approval times (30-90 days). Worth the wait for large amounts.

SBA 7(a) Loans

• Maximum Amount: $5M
• Terms: 10-25 years
• Rates: Approximately 7-10%

Most flexible SBA program. Use for working capital, equipment, real estate, debt refinancing, or acquisitions.

SBA 504 Loans

• Maximum Amount: $5.5M
• Terms: 10-20 years
• Down Payment: 10% only

Real estate and heavy equipment specialist. Unique structure: 50% bank, 40% CDC, 10% your investment.

SBA Microloans

• Maximum Amount: $50K
• Maximum Term: 6 years
• Rates: 8-13%

Startup-friendly. Through nonprofit lenders for underserved communities and limited credit history.

SBA Loan Requirements

• Credit Score: 680+ minimum (700+ preferred)
• Time in Business: 2+ years with consistent revenue
• Cash Flow: DSCR of 1.25+ (debt-service coverage ratio)
• Documentation: Extensive: 3 years tax returns, financials, business plan

4. Invoice Factoring: Quick Cash from Receivables

Sell unpaid invoices for immediate cash. Receive 70-90% upfront, remainder (minus fees) when customer pays.

Recourse Factoring

• Fees: 1-3% per month
• Risk: Lower fees but you're liable if customer doesn't pay

Non-Recourse Factoring

• Fees: 2-5% per month
• Risk: Higher fees but factoring company assumes customer default risk

Best Uses

• B2B businesses with net-30/60/90 payment terms
• Rapid growth outpacing cash flow
• Slow-paying customers creating cash crunches

Cost warning: 1-5% monthly equals 24-60% annualized. Use strategically, not as permanent solution.

5. Equipment Financing: Asset-Based Funding

Finance business equipment using the equipment itself as collateral. Easier approval than unsecured loans.

Equipment Loans

Interest Rates: 5-30% APR

Pros:

• Own equipment when paid off
• Section 179 tax deductions ($1.16M)
• No usage restrictions
• Better long-term value

Cons:

• Higher monthly payments
• Responsible for maintenance

Equipment Leases

Payments: 20-30% lower than loans

Pros:

• Lower monthly payments
• Easier equipment upgrades
• Maintenance often included
• Preserve working capital

Cons:

• Never own the equipment
• Usage restrictions
• More expensive long-term

What You Can Finance

• Construction: Excavators, bulldozers, loaders, vehicles
• Manufacturing: CNC machines, 3D printers, forklifts
• Medical: Imaging equipment, dental chairs, surgical tools
• Restaurant: Commercial ovens, coolers, POS systems
• Transportation: Commercial trucks, vans, fleet vehicles
• Agriculture: Tractors, irrigation, harvesting machinery

Benefits: 100% financing available, easier approval (equipment equals collateral), preserves working capital, substantial tax advantages.

How to Choose the Right Loan

By Purpose

• Equipment: Equipment financing
• Real estate: SBA 504 or long-term bank loan
• Working capital: Line of credit
• Business acquisition: SBA 7(a)
• Cash flow gaps: Line of credit or invoice factoring

By Timeline

• 24-48 hours: Online lenders, lines of credit
• 1-2 weeks: Equipment financing, online term loans
• 4-12 weeks: SBA loans, bank loans (best rates)

By Business Stage

• Startup (under 1 year): Equipment financing, SBA Microloan
• 1-2 years: Online term loans, equipment financing
• Established (2+ years, good credit): SBA loans, bank term loans

Red Flags and Warning Signs

Avoid These Dangerous Practices

• Upfront fees before approval: Legitimate lenders charge at closing, not before
• Pressure tactics: High-pressure sales indicate predatory lending
• Vague terms or hidden fees: Lenders must clearly explain rates, fees, and terms
• Factor rates over 1.5: Translates to 100%+ APR. Avoid unless emergency
• No credit check promises: Often indicates predatory practices or scam
• Confession of judgment clauses: Allow lenders to seize assets without court order

Protect Yourself

• Compare 3-5 lenders before deciding
• Calculate true APR and total repayment amount
• Read all terms before signing anything
• Check BBB ratings and state licensing
• Never borrow more than you can sustainably repay

Merchant Cash Advances: A Word of Caution

AVOID MCAs Unless Absolutely Necessary

MCAs cost 40-350% APR and use factor rates (typically 1.2-1.6) that disguise true costs.

Example: Borrow $50K at 1.4 factor rate equals $70K total repayment. If repaid over 6 months, that's 80-90% APR.

Why MCAs Are Dangerous

• Daily automatic withdrawals strain cash flow
• No payment flexibility during slow periods
• Creates debt traps. Many need second MCA to pay first
• No regulatory protection
• Personal liability even after business closes

Only consider if: Extreme emergency where cost of NOT having capital exceeds MCA cost, and you can repay within 3 months max.

Bottom Line: Choose Wisely

The right financing accelerates growth. The wrong financing traps you in expensive debt.

Prioritize

1. Lowest total cost (not just monthly payment)
2. Flexibility to prepay without penalties
3. Terms matched to asset life (don't use 10-year loan for equipment lasting 5 years)
4. Sustainable payments that maintain healthy cash flow

EquipRates helps you compare equipment financing options from multiple lenders, ensuring competitive rates and terms. Take time to explore your options. It pays dividends for years to come.

Ready to get started? Use our equipment financing calculator to estimate your payments, or check your eligibility to see what you qualify for. Read our common financing mistakes guide before signing any loan agreement.