Traditional Business Financing: A Beginner’s Guide

Traditional financing is the most common way businesses get funding. Think of it as borrowing money from banks and established lenders - similar to how you might get a car loan or mortgage, but for your business.

Who This Guide Is For

✅ Perfect for you if:

• You’re new to business financing
• You have an established business (2+ years)
• You have decent personal credit (650+ score)
• You need money for equipment, expansion, or working capital
• You prefer predictable monthly payments

⚠️ Not ideal if:

• Your business is brand new (less than 1 year)
• You have poor credit (below 600)
• You need money within 24-48 hours
• You don’t want to provide collateral or personal guarantees

Key Terms You Should Know

Before we dive in, here are important terms explained simply:

• Collateral: Something valuable (like equipment or property) you promise to the lender. If you can’t repay, they can take it.
• Credit Score: A number (300-850) that shows how reliable you are at paying back loans. Higher is better.
• Interest Rate: The cost of borrowing money, shown as a percentage. A 6% rate means you pay $6 per year for every $100 borrowed.
• Term: How long you have to repay the loan (e.g., 5 years).
• Working Capital: Money to cover day-to-day business expenses like payroll and rent.
• SBA: Small Business Administration - a government agency that helps small businesses get loans.
• Line of Credit: Like a credit card for your business - borrow what you need, when you need it, up to a limit.

Traditional financing offers reliable and often cost-effective solutions, especially for established businesses with strong credit profiles.

Bank Loans & Lines of Credit

Term Loans

A term loan is a lump sum of money you receive upfront and pay back over a set period (the “term”) with regular monthly payments - just like a car loan.

💡 Real-World Example: You need $50,000 to buy equipment. You get a 5-year term loan at 7% interest. Your monthly payment would be about $990. After 5 years, you’ll have paid back the $50,000 plus about $9,400 in interest.

Types of Term Loans:

• Working Capital Loans: Money for everyday business expenses (payroll, rent, supplies)
• Equipment Loans: Loans specifically for buying equipment (machinery, vehicles, computers)
• Real Estate Loans: For buying or renovating your business property
• Expansion Loans: Funding to grow your business (new locations, hiring, new products)

Why Choose a Term Loan:

• ✅ You know exactly what you’ll pay each month (predictable budgeting)
• ✅ Usually cheaper than credit cards or alternative financing (6-10% vs. 20%+)
• ✅ Helps build your business credit score
• ✅ Long repayment periods available (1-25 years depending on what you’re buying)

What You’ll Need to Qualify:

• Strong credit scores - yours (680+) and your business’s if it has one
• Been in business for at least 2 years
• Steady income and profitable business (or close to it)
• You might need collateral (something valuable the bank can take if you don’t pay)

Business Lines of Credit

Think of this as a credit card for your business, but with better rates and higher limits. You get approved for a maximum amount (say, $100,000), but you only borrow what you need.

How It Works:

1. Bank approves you for, say, $75,000
2. You borrow $20,000 to buy inventory
3. You only pay interest on the $20,000 (not the full $75,000)
4. When you pay back $10,000, you can borrow it again
5. The credit “revolves” - it’s always available

💡 Real-World Example: You run a retail shop. In September, you borrow $30,000 from your line of credit to stock up for the holidays. In January, after holiday sales, you pay it all back. In February, you borrow $10,000 to fix your roof. You’re using the same line of credit multiple times.

Why This Is Great:

• Only pay interest on what you actually use
• Money is always available for emergencies or opportunities
• Usually 6-12% interest (much better than credit cards at 18-25%)
• Flexibility to borrow and repay as needed

Best Uses:

• Seasonal businesses: Stock up before busy season, pay back after
• Unexpected expenses: Equipment breaks, need repairs fast
• Take advantage of deals: Supplier offers 20% off if you buy now
• Smooth cash flow: Cover payroll when customers are slow to pay

SBA Loans (Government-Backed Loans)

What’s an SBA Loan? The Small Business Administration (SBA) is a government agency that helps small businesses get loans. They don’t give you money directly - instead, they guarantee part of the loan to your bank. This makes banks more willing to lend to you, even if you’re not perfect.

Why SBA Loans Are Great for Beginners:

• Banks are more willing to approve you (government backs part of the loan)
• Lower down payments (10% instead of 20-30%)
• Longer repayment terms = lower monthly payments
• Better interest rates than regular bank loans

SBA 7(a) Loans - The Most Popular Option

What You Can Use It For:

• Almost anything: working capital, equipment, inventory, buying a business
• Up to $5 million (though most get $100,000-$500,000)
• Repayment terms up to 10 years (equipment) or 25 years (real estate)

💡 Real-World Example: Maria wants to buy an existing bakery for $200,000. A regular bank wants 30% down ($60,000). With an SBA 7(a) loan, she only needs 10% down ($20,000) and gets 10 years to repay.

SBA 504 Loans - For Buildings and Big Equipment

Best For:

• Buying commercial real estate (your building or warehouse)
• Major equipment purchases (manufacturing equipment, large machinery)
• Up to $5.5 million
• Fixed interest rates for 10-20 years

How It’s Different: Uses a special structure: you put 10% down, bank provides 50%, SBA provides 40%. Great for big purchases!

SBA Microloans - Perfect for Small Businesses and Startups

The Beginner-Friendly Option:

• Loans up to $50,000 (average is about $13,000)
• Easier to qualify than big loans
• Great for startups and businesses less than 2 years old
• Comes with free business coaching and training

Best For:

• Buying inventory or supplies
• Furniture and fixtures
• Working capital
• Small equipment purchases

Asset-Based Financing

What Does “Asset-Based” Mean? You use things your business owns (assets) to get a loan. The lender gives you money based on the value of your assets, and if you can’t pay, they can take those assets.

Accounts Receivable Financing (Also Called “Factoring”)

What It Is: You have customers who owe you money (unpaid invoices). Instead of waiting 30-60 days for them to pay, you sell those invoices to a lender for immediate cash.

💡 Real-World Example: You just did $50,000 worth of work. Customers have 30 days to pay. You need cash NOW. A factor gives you $42,500 immediately (85% of $50,000). When your customers pay in 30 days, the factor keeps a fee (say $2,500) and gives you the rest ($5,000).

Why Use It:

• Get paid today instead of waiting 30-90 days
• Great for businesses with slow-paying customers
• The lender often handles collecting payments for you

The Catch: It’s expensive - you might pay 2-5% of your invoice value

Inventory Financing

What It Is: Use your inventory (products sitting in your warehouse) as collateral to get a loan.

Best For:

• Retail stores that need to stock up before busy season
• Wholesalers with lots of inventory
• Manufacturing companies

How It Works: If you have $100,000 in inventory, a lender might give you $60,000-$80,000. When you sell the inventory, you pay back the loan.

Equipment Financing

What It Is: The equipment you’re buying serves as the collateral for the loan. It’s like a car loan, but for business equipment.

💡 Real-World Example: You need a $40,000 truck for your landscaping business. The lender gives you the $40,000, and the truck itself is the collateral. If you don’t pay, they take the truck.

Why It’s Smart:

• Don’t drain your cash reserves
• The equipment makes you money while you pay it off
• Tax benefits (you can deduct depreciation)
• Easy approval (the equipment itself is the guarantee)

Do You Qualify? Here’s What Lenders Look For

Understanding Credit Scores:

• Personal Credit: Your personal score (300-850). Above 680 is good, above 720 is great
• Business Credit: Your business’s score (0-100 scale). Above 80 is solid
  • Don’t worry if you don’t have business credit yet - new businesses often rely on personal credit

What You Need to Qualify

✅ Credit Requirements:

• Personal credit score of 680 or higher (higher is better)
• No bankruptcies in the past 7 years
• No foreclosures in the past 3-5 years
• Haven’t applied for too many loans recently (looks desperate to lenders)

✅ Business Requirements:

• Been in business at least 2 years (some SBA loans accept 1 year)
• Making money consistently (profitable or close to it)
• Revenue is growing or stable (not shrinking)
• You’re not already drowning in debt

📄 Documents You’ll Need (Gather These Before Applying):

1. Tax Returns (personal and business for last 2-3 years)
2. Financial Statements:
   • Profit & Loss Statement (P&L) - shows income minus expenses
   • Balance Sheet - shows what you own vs. what you owe
   • Cash Flow Statement - shows money coming in and going out
3. Business Plan - where your business is going, how you’ll use the loan
4. Bank Statements - last 6-12 months for all business accounts
5. Legal Documents - business licenses, articles of incorporation

💡 Pro Tip: Get your documents organized BEFORE you apply. Lenders move faster when you’re prepared, and you look more professional.

The Application Process: Step-by-Step

Timeline: Usually 2-8 weeks from start to funding

Step 1: Pre-Qualification (1-2 days)

What Happens: Quick check to see if you’re likely to get approved

• Lender looks at basic info: credit score, revenue, time in business
• You get a rough idea of how much you might qualify for
• No commitment from either side

Your Action: Talk to 2-3 lenders to compare options

Step 2: Documentation (1-2 weeks)

What Happens: Gather all required documents (see list above)

• This takes time, so start early!
• Make sure everything is accurate and organized

Your Action: Create a digital folder with all documents clearly labeled

Step 3: Formal Application (1-3 days)

What Happens: Complete the official loan application

• Provide detailed information about your business
• Submit all your documentation
• Sign authorization for credit checks

Your Action: Be thorough and honest - incomplete applications delay everything

Step 4: Underwriting (2-4 weeks - longest part)

What Happens: The lender’s team carefully reviews everything

• They verify your documents
• Check your credit
• Assess your ability to repay
• May ask for additional information

Your Action: Respond quickly to any requests for more information

Step 5: Approval (1-3 days)

What Happens: You get the loan decision

• If approved: review the terms carefully (interest rate, fees, repayment schedule)
• If denied: ask why and what you can improve
• You can negotiate some terms

Your Action: Read everything before signing. Ask questions about anything confusing.

Step 6: Closing (1-5 days)

What Happens: Sign final documents and get your money

• Review and sign loan agreement
• Set up repayment method
• Funds deposited in your account

Your Action: Celebrate! Then use the money wisely for what you said you’d use it for.

Tips for Success: Increase Your Approval Chances

Before You Apply:

• ✅ Build Your Credit: Pay bills on time for 6+ months before applying
• ✅ Clean Up Your Books: Make sure your financial statements are accurate
• ✅ Reduce Debt: Pay down credit cards and other loans if possible
• ✅ Increase Revenue: Show 3-6 months of solid sales

During the Process:

• ✅ Shop Around: Apply to 3-5 lenders (within 2 weeks to minimize credit score impact)
• ✅ Be Responsive: Answer questions quickly - delays look bad
• ✅ Be Honest: Lying on applications is fraud and will get you denied
• ✅ Show How You’ll Use It: Clear plans for the money show you’re serious

Working with Professionals:

• Loan Broker: Can save time by matching you with the right lenders (usually free for you)
• Accountant: Helps prepare your financial statements professionally
• Business Consultant: Can help strengthen your business plan

Most Important Rule: Only borrow what you can comfortably repay. A good rule: your loan payment should be less than 10-15% of your monthly revenue.

Ready to explore traditional financing options? Visit our contact page for more information about our resources.