The Complete Guide to Business Funding Types
Understanding the full spectrum of business funding options is crucial for making informed financing decisions. Each funding type serves different purposes, offers unique advantages, and comes with specific requirements. This comprehensive guide breaks down every major funding category to help you identify the best fit for your business.
Merchant Cash Advance (MCA)
What Is an MCA?
A merchant cash advance isn't technically a loan—it's a purchase of your future credit card sales at a discount. The MCA provider gives you a lump sum upfront, and you repay by automatically remitting a percentage of your daily card transactions until the obligation is satisfied.
How MCA Repayment Works
| Component | Description | Typical Range |
|---|---|---|
| Advance Amount | Lump sum you receive | $5,000 - $500,000 |
| Factor Rate | Multiplier determining total cost | 1.15 - 1.50 |
| Holdback Rate | Daily percentage deducted from card sales | 5% - 25% |
| Repayment Period | Time to fully repay | 3 - 18 months |
Example Calculation:
- ●Advance: $50,000
- ●Factor Rate: 1.35
- ●Total Repayment: $67,500 ($50,000 × 1.35)
- ●Cost of Capital: $17,500
Best Use Cases for MCA
- ●Urgent Capital Needs: Approval in hours, funding in 1-3 days
- ●Credit-Challenged Businesses: Focuses on card sales, not credit scores
- ●Seasonal Revenue Spikes: Repayment adjusts with your volume
- ●Short-Term Opportunities: Inventory purchases, marketing campaigns
MCA Qualification Requirements
- ●Minimum 4+ months in business
- ●$5,000+ monthly credit card processing
- ●Active business bank account
- ●No minimum credit score (though 500+ preferred)
Business Lines of Credit
What Is a Business Line of Credit?
A business line of credit provides flexible access to funds up to a predetermined limit. Unlike a term loan where you receive and repay a lump sum, a line of credit lets you draw funds as needed, repay them, and draw again—similar to a business credit card but with better rates.
Types of Lines of Credit
Revolving Line of Credit
- ●Draw and repay repeatedly
- ●Interest only on outstanding balance
- ●Limit remains available as you repay
- ●Ideal for ongoing working capital needs
Non-Revolving Line of Credit
- ●Fixed draw period followed by repayment period
- ●Once repaid, line closes
- ●Often lower rates than revolving options
- ●Better for specific projects with defined timelines
Line of Credit Terms Comparison
| Factor | Traditional Bank LOC | Online/Alternative LOC |
|---|---|---|
| Credit Limit | $25,000 - $500,000+ | $5,000 - $250,000 |
| Interest Rate | Prime + 1-5% | 8% - 25% |
| Draw Period | Ongoing | 6 - 24 months |
| Approval Time | 2-4 weeks | 1-7 days |
| Credit Required | 680+ | 600+ |
Best Use Cases for Lines of Credit
- ●Cash Flow Management: Bridge gaps between receivables and payables
- ●Inventory Purchases: Stock up for seasonal demand
- ●Unexpected Expenses: Equipment repairs, emergency costs
- ●Flexible Capital: When you need ongoing access but variable amounts
Term Loans
What Is a Business Term Loan?
A term loan provides a lump sum of capital that you repay over a fixed period with regular payments (usually monthly). This is the traditional form of business financing that most people envision when they think of "getting a loan."
Term Loan Structure
Term loans come with clearly defined parameters:
- ●Principal: The amount you borrow
- ●Interest Rate: The cost of borrowing (APR)
- ●Term Length: Repayment duration (1-10+ years)
- ●Payment Schedule: Monthly, bi-weekly, or weekly
- ●Collateral: Assets securing the loan (if applicable)
Short-Term vs. Long-Term Loans
| Characteristic | Short-Term Loan | Long-Term Loan |
|---|---|---|
| Term Length | 3 months - 2 years | 2 - 10+ years |
| Typical Amount | $5,000 - $250,000 | $50,000 - $5M+ |
| Interest Rate | 10% - 45% | 5% - 15% |
| Approval Speed | 1-7 days | 2-8 weeks |
| Best For | Working capital, urgent needs | Major investments, expansion |
Term Loan Best Uses
- ●Equipment Purchases: Match loan term to equipment life
- ●Business Expansion: New locations, major renovations
- ●Debt Consolidation: Combine multiple high-rate obligations
- ●Acquisition Financing: Buying another business or franchise
SBA Loans
What Are SBA Loans?
SBA loans aren't funded by the government directly. Instead, the Small Business Administration guarantees a portion of loans made by approved lenders, reducing their risk and enabling better terms for borrowers.
SBA Loan Programs
7(a) Loan Program
- ●Most common SBA loan type
- ●Up to $5 million
- ●Working capital, equipment, real estate, debt refinancing
- ●Terms up to 25 years for real estate, 10 years for equipment
504 Loan Program
- ●For major fixed assets (real estate, large equipment)
- ●Up to $5.5 million
- ●Requires 10% down payment from borrower
- ●10 or 20-year fixed rates
Microloan Program
- ●Up to $50,000
- ●For startups and small businesses
- ●Often available with less established credit
- ●Administered through nonprofit intermediaries
SBA Loan Benefits
| Benefit | Details |
|---|---|
| Lower Down Payments | As low as 10% vs. 20-30% conventional |
| Longer Terms | Up to 25 years for real estate |
| Competitive Rates | Capped at Prime + 2.75% for most loans |
| No Balloon Payments | Full amortization over loan term |
| Counseling Resources | Access to SBA training and support |
Invoice Financing
What Is Invoice Financing?
Invoice financing allows B2B businesses to access cash tied up in unpaid invoices. Rather than waiting 30, 60, or 90 days for customers to pay, you can get 80-95% of the invoice value immediately.
Invoice Factoring vs. Invoice Discounting
Invoice Factoring
- ●Sell invoices to a factoring company
- ●Factor collects directly from your customers
- ●No debt on your balance sheet
- ●Factor assumes collection risk (non-recourse) or you retain it (recourse)
Invoice Discounting
- ●Borrow against invoices as collateral
- ●You maintain customer relationships and collections
- ●Invoices remain on your books
- ●Generally lower fees than factoring
Invoice Financing Costs
| Cost Component | Typical Range | Description |
|---|---|---|
| Advance Rate | 80% - 95% | Percentage of invoice value received upfront |
| Factor Fee | 1% - 5% per month | Cost per 30 days invoice is outstanding |
| Service Fee | 0.5% - 2% | Administrative costs |
| Reserve Release | Remaining balance | Paid when customer pays invoice |
Best Industries for Invoice Financing
- ●Trucking and freight
- ●Staffing agencies
- ●Manufacturing
- ●Construction contractors
- ●Wholesale distribution
- ●Business services
Equipment Financing
What Is Equipment Financing?
Equipment financing specifically funds the purchase of business equipment, using the equipment itself as collateral. This category includes both equipment loans and equipment leases.
Equipment Loan vs. Equipment Lease
| Factor | Equipment Loan | Equipment Lease |
|---|---|---|
| Ownership | You own equipment | Lessor owns equipment |
| Down Payment | 10-20% typical | Often $0 |
| End of Term | Equipment is yours | Return, purchase, or renew |
| Balance Sheet | Asset + Liability | Operating expense (for operating lease) |
| Tax Treatment | Depreciation + interest | Lease payments deductible |
What Equipment Can Be Financed?
- ●Manufacturing machinery
- ●Construction equipment
- ●Commercial vehicles
- ●Restaurant equipment
- ●Medical/dental equipment
- ●Technology and computers
- ●Agricultural equipment
- ●Fitness equipment
Equipment Financing Terms
- ●Amount: Typically up to 100% of equipment cost
- ●Term: 2-7 years (matched to equipment life)
- ●Rates: 5% - 30% depending on credit and equipment type
- ●Approval: 3-14 days
Revenue-Based Financing
What Is Revenue-Based Financing?
Revenue-based financing (RBF) provides capital in exchange for a fixed percentage of ongoing monthly revenue until a predetermined amount is repaid. It's a hybrid between a loan and an MCA, offering more flexibility than term loans with more predictability than daily MCAs.
How RBF Works
- ●You receive a lump sum (typically 2-4x monthly revenue)
- ●A fixed percentage of monthly revenue is remitted (typically 2-8%)
- ●Payments adjust with revenue—slower months mean lower payments
- ●Continues until you've repaid the total agreed amount (usually 1.3x-1.8x principal)
RBF vs. Other Options
| Factor | Revenue-Based Financing | MCA | Term Loan |
|---|---|---|---|
| Payment Frequency | Monthly | Daily | Monthly |
| Payment Flexibility | Adjusts with revenue | Adjusts with card sales | Fixed |
| Cost Structure | Multiple of principal | Factor rate | Interest rate |
| Equity Dilution | None | None | None |
| Speed | 3-7 days | 1-3 days | 2-8 weeks |
Choosing the Right Funding Type
Decision Matrix
| If You Need... | Consider... |
|---|---|
| Fast capital (24-72 hours) | MCA, Revenue-Based Financing |
| Lowest cost | SBA Loans, Bank Term Loans |
| Flexible access | Line of Credit |
| Equipment purchase | Equipment Financing |
| Bridge slow-paying customers | Invoice Financing |
| No daily payments | Monthly Term Loan, Revenue-Based |
| Bad credit options | MCA, Invoice Factoring |
Key Questions to Ask
- ●How urgently do I need the funds?
- ●What is my credit situation?
- ●Can I provide collateral?
- ●What repayment frequency fits my cash flow?
- ●What is my total cost of capital?
- ●What are the prepayment policies?
Understanding these options empowers you to match your specific situation with the right funding solution. Many successful businesses use multiple funding types strategically throughout their lifecycle.