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How Business Financing Works
The main types of business financing, who provides it, how decisions are made, and what affects the total cost.
Not yet reviewed
This guide is a draft awaiting factual and compliance review. It's for general education only and is not financial, legal, or tax advice.
The basic idea
Business financing gives a company access to money now in exchange for repaying it later, usually with added cost. That cost may be expressed as interest, fees, a factor rate, or a share of future revenue, depending on the product.
Financing can come from banks, credit unions, online lenders, specialty finance companies, and government-backed programs such as those guaranteed by the U.S. Small Business Administration (SBA).
Debt vs. other forms of capital
Most small business financing is debt: you borrow and repay, and you keep full ownership. Equity financing, by contrast, means selling a share of ownership to investors. Some products, like invoice factoring, are technically the sale of an asset rather than a loan.
What funding sources typically review
- Time in business
- Revenue amount and consistency (often from bank statements)
- Business and personal credit history
- Existing debt and cash flow available to repay new debt
- Collateral, if the product is secured
- Purpose of the funds and the amount requested
The typical process
You submit an application, provide supporting documents, and the funding source evaluates your request. If approved, you receive an offer with specific terms. You review it, accept or decline, complete any closing requirements, and the funds are disbursed. Every funding source sets its own criteria and timeline.
What determines your total cost
Two offers for the same amount can cost very different amounts. Total cost depends on the rate, fees, the repayment term, the payment frequency, and whether there are prepayment penalties. Always compare the total amount you'll repay, not just the payment.
| Type | How you receive funds | How you repay |
|---|---|---|
| Term loan | Lump sum | Fixed payments over a set term |
| Line of credit | Draw as needed up to a limit | Repay what you draw, plus interest |
| Equipment financing | Funds the equipment purchase | Fixed payments; equipment often serves as collateral |
| Invoice factoring | Advance against sold invoices | Customer pays the factor; you receive the remainder minus fees |
| Revenue-based financing | Lump sum | A share of ongoing revenue until a set amount is repaid |
Frequently asked questions
Does applying for business financing affect my credit?
It depends on the funding source. Some use a soft inquiry for preliminary review and a hard inquiry before final approval. Ask how credit will be checked before you consent.
Is the lowest monthly payment the cheapest option?
Not necessarily. A longer term can lower the payment while increasing the total amount repaid. Compare total repayment cost.
Related financing
Want to talk through your situation? Speak with a specialist.