Money Can Pouring Water on Tree

So your small business needs access to more money. Whether you have to buy equipment, stock up on inventory, open another location or simply meet payroll, a number of financing options are available. But with so many business loan choices, it’s tough to determine the best one for you, and selecting the wrong option can be a serious misstep.

Here are some of the most common financing options, which we’ll explore in more detail below.

  • Term loans: Loans give you a set amount of money upfront, then you repay it in fixed monthly installments for the duration of the term. Once it’s repaid, you’re done.
  • Line of credit: Unlike a loan, a line of credit gives you access to a set amount of revolving capital. You pay interest only on the funds you withdraw, and as soon as you repay it, you’re eligible to borrow it again.
  • Credit card: Credit cards function like lines of credit, but they’re used as a form of payment. Their credit limits are typically lower than a business loan or line of credit.
  • Invoice financing and factoring: These two kinds of financing entail a lender paying you an advance on your outstanding invoices, and keeping a certain amount as a fee.
  • Equipment financing: These loans and leases allow you to obtain commercial equipment. Some forms of this kind of financing function as a simple lease, while others allow you to own the equipment when the lease ends.

As you evaluate small business loan options, ask yourself these questions to determine the best way to access capital.

What are your financial needs?

First, examine why you need money and how you plan to spend it — this helps to identify what kind of financing you need. A business in need of a large sum for a multitude of expenses may require a traditional term loan. If you need a revolving amount to make recurring inventory purchases, you may be better off with a line of credit. If your small operation has trouble getting by between receivables, invoice financing or factoring could be the ideal solution.

If you’re seeking to start or grow a restaurant or manufacturing facility, equipment financing might be the best choice. If you just need a small, flexible line of credit, a business credit card could be the right answer.

How is your financial health?

Businesses with stellar credit, revenue, and financial history will have access to more loan options, like small-business loans backed by the U.S. Small Business Administration. These typically have the lowest interest rates among financing options, but they’re the hardest to obtain. If your credit or revenue isn’t excellent, consider alternative financing, such as a line of credit from Kabbage or a loan from Funding Circle or OnDeck, to name a few options. For those with bad credit or with a new business, it’s easier to qualify for options with more lenient criteria, like invoice financing or equipment financing.

How much financing do you need?

The amount of money you need plays a large role in identifying the best financing option, as different lenders offer loans of varying sizes. For example, if you’re seeking hundreds of thousands of dollars for a set period, a term loan will probably best serve your needs. Businesses that need ongoing capital may be better served with a line of credit or credit card, since they’re revolving. If you only need enough money to cover the purchase of new equipment, look into equipment financing instead.

How long do you need to repay it?

Each financing option tends to have drastically different repayment structures, so find out which will work best for your cash flow. Both short-term and long-term loans are available, depending on how long you need to repay — anything from a few months to years. Just know that longer terms mean you’ll likely pay less each month, but be charged more interest over the life of the loan, but a short-term loan means higher monthly payments but less lifetime interest. Credit cards have flexible, lower monthly minimum payments, although if the interest rate is high and you only pay the monthly minimum, it’s easy to get caught in a debt trap.

How much can you afford in fees?

Be aware of fees and interest rates when comparing financing options to ensure you choose one that’s affordable. Many loans come with origination fees, and some alternative term loans have high effective APRs — especially if your credit score isn’t good. These fees and interest payments can eat into your cash flow, so make sure you can afford the financing option before you close.

How long can you wait to get the money?

Whether you need cash immediately or can wait a while may also help determine your best financing option. While SBA loans are usually the most affordable choice, they often require months of paperwork, then waiting for approval and processing. Other financing options, such as credit cards or equipment financing, typically take a few weeks to process. Some online alternative term loans take only a few days to approve and fund. And with other options, such as Kabbage or financing company BlueVine, funds could be approved within a day. Keep in mind that you may have to pay more for faster financing options.

With so many small-business financing choices and considerations, take the time to research and compare your options carefully. It’s also wise to consult with an accountant to ensure you understand the tax and financial implications of each option before you make a move.

Emily Starbuck Crone is a staff writer at NerdWallet, which provides clarity around decisions that help you start or grow your small business. We provide clear unbiased information, entrepreneur-focused advice, and tools for small-business loans, tax and legal issues. We also connect you with experts who can answer questions about growing your small business. Follow her on Twitter: @emstarbuck.