Small Business: Loan and Debt Options

Published: April 9, 2023
By the Pachyy Editorial Team
The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.

Small businesses often require financing to cover various expenses, such as operational costs, expansion plans, or unforeseen emergencies. Fortunately, there are several types of loans and debt options available for small businesses to choose from, depending on their specific needs and financial situation. In this article, we will explore some of the most common types of loans and debt options for small businesses.

  • Small Business Administration Loans (SBA)
  • Lines of Credit
  • Term Loans
  • Invoice Financing / Factoring
  • Personal Loans 
  • Merchant Cash Advance (MCA)
  • Credit Cards

Small Business Administration (SBA) Loans

SBA loans are a popular option for small businesses as they are backed by the U.S. Small Business Administration, which makes them more accessible to businesses that may not qualify for traditional bank loans. SBA loans come in various types, including 7(a) loans, CDC/504 loans, and microloans, each with its own terms and requirements. According to the SBA, in fiscal year 2020, the agency approved 96,000 loans totalling over $28 billion to small businesses. 

Lines of Credit

A business line of credit is a flexible form of financing that allows small businesses to borrow up to a predetermined credit limit and repay only the amount used. This type of loan provides businesses with quick access to funds, which can be used for various purposes, such as managing cash flow, purchasing inventory, or covering unexpected expenses. According to a survey conducted by the Federal Reserve Banks, 52% of small businesses applied for a business line of credit in 2020.

Term Loans

Term loans are a common form of debt financing that provides businesses with a lump sum amount that is repaid over a set term with regular installment payments. These loans can be used for various purposes, such as purchasing equipment, renovating a facility, or expanding operations. Term loans can be secured (borrower pledges collateral) or unsecured, and the interest rates and terms vary depending on the lender and the borrower’s creditworthiness. According to a report by the Federal Reserve Banks, in 2020, 36% of small businesses applied for a term loan.

Invoice Financing / Factoring

Invoice financing, also known as accounts receivable financing or invoice factoring, allows businesses to access funds by selling their outstanding invoices to a 3rd party at a discounted rate. This can help businesses improve cash flow by receiving immediate payment for their outstanding invoices instead of waiting for customers to pay. The lender then collects payment directly from the customers. 

Invoice financing can be a helpful option for businesses with slow-paying customers or seasonal cash flow fluctuations. According to a report by the Federal Reserve Banks, 19% of small businesses used invoice financing in 2020.

Personal Loans

In some cases, small business owners may resort to personal loans as a financing option for their businesses. Personal loans are typically unsecured loans that are based on the creditworthiness of the borrower and can be used for business purposes. However, it’s important to note that personal loans may put the personal assets of the business owner at risk in case of default.

Merchant Cash Advance

A merchant cash advance (MCA) is a type of financing option available to small businesses that accept credit card payments. It is not a loan, but rather an advance against future credit card sales. With a merchant cash advance, a lender provides a lump sum payment to a business in exchange for a percentage of its future credit card sales. 

The repayment is typically made through a portion of the business’s daily credit card sales, which is automatically deducted by the lender until the advance, along with any fees and interest, is fully repaid.


Merchant cash advances are known for their speed and accessibility, as they typically have a quick application process and funding can be obtained within a few days. They are often used by small businesses that may have limited access to traditional financing options, such as banks or other lenders, due to poor credit or lack of collateral.


However, the repayment structure based on a percentage of daily credit card sales means that the effective interest rate can be significantly higher than traditional loans.

Business Credit Cards

Business credit cards function similarly to personal credit cards, providing access to capital, improving cash flow, and aiding in building credit for future loans. However, the key difference is that business credit cards are issued to the business rather than an individual. 

Business credit cards can be used to borrow money and manage cash flow for short-term needs such as business purchases or staff expenses. Unlike loans, business credit cards are relatively easy to apply for and can help track business expenditures effectively. 

It’s important to note that if the balance is not paid off in full each month, the high interest rates on business credit cards can make it an expensive borrowing option. Additionally, there are often limits on borrowing amounts with business credit cards.