The Real Financing Menu for a Small Business

Key takeaways

• The cheapest term money has a published price and it is not zero: SBA's FY2026 upfront guaranty fee is 3% of the guaranteed portion on loans of $150,001 to $700,000, and the variable-rate ceiling above $350,000 is the base rate plus 3.0%, or 9.75% against the 6.75% bank prime loan rate in the Federal Reserve's H.15 release for 18 August 2026.
• Coverage is the gate, not the pitch. SBA requires operating cash flow over debt service of at least 1.15, and at least 1:1 globally, so a loan costing $78,460 a year in payments needs roughly $90,230 of operating cash flow before a lender can write the file.
• A seller note only counts as your down payment if it never pays you back on schedule: SOP 50 10 8 admits seller debt into the required 10% equity injection only on full standby, meaning no principal or interest for the life of the 7(a) loan, and only up to half of that injection.
• Two states now force the number the industry avoided printing. California Financial Code section 22802 requires the total cost of financing expressed as an annualized rate on offers of $500,000 or less; New York's 23 NYCRR 600 requires APR disclosure up to $2,500,000, sales-based financing included.

Five products, not one decision

An owner who needs money is usually told to "get financing," as though there were one thing to get. There are five, they are underwritten by different people against different collateral on different timetables, and the one you can get is rarely the one you would pick.

The menu: a term loan, most often SBA-guaranteed, for durable things and for buying a business; a revolving line of credit for the gap between paying suppliers and being paid; equipment finance, secured by the machine itself; revenue-based financing and merchant advances, which buy a slice of your future receipts at a fixed multiple; and a seller note, where the person selling you the business waits to be paid. Nearly every real capital stack is a blend of two or three of these, and the blend is chosen more by what each lender will underwrite than by what the owner prefers.

The scale tells you which of these is the anchor. SBA announced it closed fiscal year 2025 having guaranteed 77,600 7(a) loans for $37 billion, an average of about $477,000 a loan. That is the size of the transaction this whole apparatus exists for: not a seed round, not a bond, a mid-six-figure loan to a business with a tax return.

Getting one is not a formality. The Federal Reserve Banks' 2026 Report on Employer Firms, drawn from the 2025 Small Business Credit Survey, found 60% of firms applied for financing in the prior twelve months, and of those applicants 42% received the full amount sought, 36% received some or most, and 22% received nothing. Thirty-eight percent applied specifically for a loan, line of credit or merchant cash advance. Where you apply moves the odds: applicants at small banks were more likely to be fully approved, at 57%, than applicants anywhere else.

The practical consequence is that the sequence matters more than the shopping. Term debt takes weeks and wants three years of returns; a merchant advance takes days and wants a bank feed. An owner who leaves the decision until the money is needed has effectively chosen the fast product, and the fast product is the expensive one. That is not a moral failing. It is a scheduling one.

SBA 7(a): what the cheapest money actually costs

The 7(a) is a bank loan with a federal guarantee behind it. SBA does not lend; it promises the lender it will cover most of the loss, which is why a bank will write a ten-year loan against a business it would otherwise decline. That guarantee is 85% on loans up to $150,000 and 75% above it, with SBA's total exposure to one borrower capped at $3.75 million and the loan itself at $5 million.

What you pay is set in three published places. The rate is capped: on variable-rate loans the ceiling is the base rate plus 6.5% at $50,000 or less, plus 6.0% from $50,001 to $250,000, plus 4.5% from $250,001 to $350,000, and plus 3.0% above $350,000. The fee is scheduled: for FY2026 the upfront guaranty fee, charged on the guaranteed portion of loans maturing beyond twelve months, is 2% up to $150,000, 3% from $150,001 to $700,000, and 3.5% from $700,001 to $5,000,000 on the first $1,000,000 of guaranteed portion plus 3.75% above that. Loans to manufacturers of $950,000 or less carry a 0% upfront fee. And there is a lender's annual service fee of 0.55% of the outstanding guaranteed balance, which lenders are expressly forbidden to pass on to you.

Illustrative only, using those published rules. A $500,000 loan over ten years for equipment and working capital. The guaranteed portion is 75%, or $375,000; the fee band is 3%, so the upfront guaranty fee is $11,250. The rate ceiling above $350,000 is the base rate plus 3.0%; against the 6.75% prime in the Fed's H.15 for 18 August 2026 that is 9.75%. Amortized monthly over 120 months, the payment is $6,539 a month, or about $78,460 a year, and total interest across the full term is about $284,600. Add the guaranty fee and the money costs roughly $295,850 to rent $500,000 for a decade. It is the cheapest line on this page and it is not cheap.

Then the gate. SBA requires the applicant's debt service coverage ratio, meaning operating cash flow divided by all required principal and interest including the new loan, to be at least 1.15, and at least 1:1 on a global basis that includes the owner's personal obligations. On that $78,460 of annual debt service, 1.15 coverage means about $90,230 of operating cash flow. Below that number no amount of enthusiasm produces a loan, which is why the useful first move is arithmetic, not a lender call.

Two details that change decisions. First, prepayment: SBA's penalty applies only to loans with maturities of fifteen years or more, and only when the borrower prepays 25% or more within the first three years: 5% of the prepayment in year one, 3% in year two, 1% in year three. The ten-year loan above can be repaid early for nothing; the 25-year real-estate loan cannot. Second, the personal guarantee is not an unusual outcome. Of firms carrying debt in the 2025 Small Business Credit Survey, 59% had secured it with a personal guarantee and 51% with business assets. The federal guarantee protects the lender. Nothing in the structure protects you.

The line of credit, and the duration mistake underneath it

A line of credit is not a loan you drew slowly. It is a different instrument for a different problem: the gap between paying for something and being paid for it. You draw, you repay, you draw again, and you pay interest only on the balance outstanding.

The problem it solves is arithmetic, not misfortune. A distributor who pays a supplier on day 10, holds stock 45 days, and collects from customers 40 days after invoicing has money outside the business for 75 days on every cycle. Growth makes that worse, not better, because each new order enlarges the gap before it enlarges the bank balance. That is what a revolver is for, and financing it with a five-year term loan means paying interest all year on a problem that exists for 75 days at a time.

The reverse mistake is more expensive. A line drawn to buy a truck, never repaid, and quietly rolled forward is a long-lived asset sitting on short-term money. Lines are reviewed, resized and withdrawn on the lender's schedule, usually annually, and usually when your numbers dip, which is the same quarter you needed it. A term loan cannot be cancelled for having a bad year; a line can. That asymmetry is the whole case for matching duration to the asset.

The base rate matters more here than on a term loan, because a revolver reprices continuously. A borrower at prime plus two is at 8.75% against the 6.75% prime in the Fed's H.15 for 18 August 2026, and will be at prime plus two next year regardless of what prime does. You did not agree to a rate. You agreed to a spread over something that moves.

Use of financing at this end of the market is near-universal and mostly unexamined: 86% of firms in the 2025 Small Business Credit Survey use financing on a regular basis, with credit cards and loans the most common products. A credit card is a line of credit with worse pricing and better rewards, and a great many small businesses are running their working-capital cycle on one without ever having called it that.

Equipment finance: the only debt with a tax rebate attached

Equipment is the one purchase where the financing and the tax code were designed for each other, and where operators most often confuse a deduction with cash.

Start with how normal this is. The Equipment Leasing & Finance Foundation's Horizon Report puts the US equipment finance industry at an estimated $1.34 trillion in 2023, and finds that of $2.3 trillion in nominal equipment and software investment that year, approximately 57.7% was financed, and 64.2% of private-sector investment, with 82% of end-users using some form of financing to acquire equipment and software. Paying cash for a machine is the exception, not the disciplined default.

The tax lever is Section 179 expensing plus bonus depreciation. Per IRS Publication 946, for tax years beginning in 2025 the maximum Section 179 deduction is $2,500,000, reduced dollar for dollar by the cost of Section 179 property placed in service above $4,000,000, and a 100% special depreciation allowance applies to qualifying property acquired after 19 January 2025. For almost any small business, that means a financed machine can be deducted in full the year it goes into service, even though you have paid only a few instalments on it.

Illustrative only, with round numbers and an assumed rate. A $120,000 machine, financed over 60 months at 9%. The payment is $2,491 a month, $29,892 a year, $149,460 over the full term, of which $29,460 is interest. Section 179 lets the whole $120,000 be deducted in year one; at a 24% marginal rate that is $28,800 of tax you do not pay. Now read the two numbers side by side. The $28,800 arrives once, at filing, and never again. The $29,892 arrives every year for five years. The deduction is real and it is roughly one year's payments. It is not a discount on the machine.

The levers are the ones nobody markets. Term length is the big one: stretching a five-year loan to seven lowers the payment and raises total interest, and if the equipment's productive life is five years you have arranged to be paying for a machine you no longer own the use of. Residual and end-of-lease terms are the second: a lease with a fair-market-value buyout can be cheaper monthly and more expensive in total, depending entirely on whether you intend to keep the asset. And the tax benefit is worth nothing in a year with no taxable income, which is exactly the year a struggling business is most tempted to buy equipment for the write-off.

What breaks first is utilization. Equipment finance underwrites the collateral, so it is available for machines a term lender would not touch, including machines the business does not have enough work to keep busy. The payment does not care. A financed asset at 40% utilization is a fixed cost wearing the costume of an investment.

Revenue-based finance: the factor rate is not a rate

Merchant cash advances and revenue-based financing are the fastest money available to a small business and the only category on this menu whose price is quoted in a unit designed not to be comparable. Understanding that unit is most of the work.

The structure: a funder advances a sum and buys the right to a share of your receipts until a fixed total is repaid. The price is a factor, 1.35 say, meaning you repay 1.35 times what you received. There is no interest rate in the contract, because there is no term in the contract; you repay faster in good months and slower in bad ones. That flexibility is genuine and it is what the product is for.

Illustrative only. A $50,000 advance at a 1.35 factor repays $67,500. Collected as a fixed $357 debit every business day, that is 189 business days, about nine months, and $67,473. Now convert it. Repaying $67,500 over nine roughly level months on $50,000 received prices at about 6.5% a month, which is roughly 78% on a simple annualized basis and about 112% compounded. The $17,500 cost looks like 35%. It is 35% of the advance, over three-quarters of a year, on a balance that is shrinking the whole time, and that is what a rate is for.

Regulators reached the same conclusion and made the number mandatory. California Financial Code section 22802 requires a provider to disclose, before the recipient signs, the total funds provided, the total dollar cost, the term or estimated term, the payment method and amounts, the prepayment policy, and the total cost expressed as an annualized rate, on offers of $500,000 or less, with depository institutions and real-property-secured deals exempt. New York went further: 23 NYCRR 600 requires disclosure including annual percentage rate on commercial financing of $2,500,000 or less, and applies to sales-based financing, factoring, closed-end and open-end credit, and lease financing alike. If you are offered this money and cannot get an annualized figure in writing, that is information.

The evidence that the disclosure was needed is in the survey data. Among firms that borrowed from online lenders in the 2025 Small Business Credit Survey, 60% reported that actual borrowing costs came in higher than expected, against 37% at small banks and 32% at large banks, and only 4% found them lower. Over the same five years the share of applicants approaching online fintech lenders rose from 17% in the 2020 survey to 29% in the 2025 one.

And the tail risk is documented, not theoretical. In an FTC case against merchant cash advance operator RCG Advances, a court permanently banned the company and its owner from the industry and ordered more than $2.7 million in refunds. The FTC alleged the operators' websites falsely claimed the advances required no personal guaranty of collateral while their contracts did require it, and that businesses often received thousands of dollars less than promised because of undisclosed fees despite marketing "no upfront fees." It also alleged that borrowers were required to sign confessions of judgment, instruments allowing an uncontested judgment on an alleged default, which were then used to seize personal and business assets. Read the collection clauses before the price clauses. The price is recoverable; a confession of judgment is not.

Seller notes: cheap money with a rule attached

In an acquisition, the least expensive capital in the deal is often sitting across the table. A seller note is deferred purchase price: the seller takes part of their money over time, at a rate you negotiate, with no origination fee, no covenants and no underwriting committee.

It does three jobs at once. It closes the gap between the price and what a lender will fund. It signals something a due diligence file cannot: a seller who insists on all cash at close is answering a question you should have asked. And it keeps the seller economically attached to a clean handover, because a business that stalls after closing stops paying their note.

What trips buyers is that SBA has a specific and unforgiving rule about when a seller note counts as your money. Under SOP 50 10 8, a complete change of ownership requires an equity injection of at least 10% of total project costs, meaning every cost required to complete the change of ownership, whatever the source of funds. Seller debt may be counted toward that injection only if it is on full standby for the life of the SBA loan and does not exceed half of the required injection. Full standby is defined precisely: no payments of principal or interest for the term of the 7(a) loan, documented on SBA Form 155 or the lender's equivalent, with the note attached. The standby debt may accrue interest, and that accrued interest may be added to the standby balance and amortized only after the 7(a) loan is paid in full.

Illustrative only. A $1,000,000 total project cost. The required injection is $100,000. A seller note on full standby can carry at most half of it, $50,000, leaving $50,000 that must be the buyer's own cash, with a $900,000 7(a) loan on top. A buyer who planned to inject "a seller note for the down payment" and discovers this at underwriting is short $50,000 with a signed purchase agreement running.

The standby is a real cost to the seller, not paperwork. Ten years of no payments, with interest accruing to a balance that only starts amortizing after your bank is fully repaid, is a genuinely subordinated position, and sellers price it, usually as a higher headline number or a shorter non-compete. Notes outside the injection calculation can be structured far more normally, with current interest and regular payments, provided the lender permits it and the coverage test still passes with the note's payments inside debt service. That last clause is where deals quietly fail: a seller note is debt, and debt counts against the 1.15.

General education, not financial or tax advice. Fee schedules, rate ceilings and standby rules change on published cycles; the SOP and the annual fee notice are the documents that govern, and defined terms in your own loan agreement govern above both.

Put it to work

Price every offer the same way: total dollars repaid, divided by what actually lands in your account, over the months you hold it. Ask any non-bank funder for the annualized rate in writing. Before applying for a 7(a), compute operating cash flow divided by proposed annual debt service. If it is under 1.15, fix the business first. Match the term to the asset's life.

Sources & references

Linked entries open the named source directly. Entries without a link say exactly what kind of reference they are — and how to check them yourself.

• U.S. Small Business Administration — 7(a) terms, conditions and eligibility (rate ceilings, guaranty percentages, maturities, prepayment penalty)
• SBA Information Notice 5000-872051 — 7(a) Fees Effective October 1, 2025 for Fiscal Year 2026
• SBA SOP 50 10 8 — Lender and Development Company Loan Programs (equity injection, full standby, 1.15 debt service coverage)
• SBA — FY2025 7(a) and 504 loan volumes (77,600 7(a) loans for $37 billion)
• Federal Reserve — H.15 Selected Interest Rates (bank prime loan rate)
• Federal Reserve Banks — 2026 Report on Employer Firms (2025 Small Business Credit Survey)
• Equipment Leasing & Finance Foundation — Horizon Report (industry size and share of equipment and software investment financed)
• IRS Publication 946 — How To Depreciate Property (Section 179 limits, special depreciation allowance)
• California Financial Code sections 22800-22802 — Commercial Financing Disclosures (annualized rate; $500,000 recipient threshold)
• New York State Department of Financial Services — 23 NYCRR 600, disclosure requirements for certain providers of commercial financing transactions
• Federal Trade Commission — RCG Advances merchant cash advance ban and $2.7 million in refunds