The free guide Chapter 6 of 10 ~8 min read
The Financing Menu: Loan Types, Lenders, and How Pricing Works
Lines of credit, term loans, SBA 7(a) and 504, equipment and AR financing, the lender landscape, merchant cash advance warnings, and how loan pricing really works.
Years before Daniel built his banking relationships, he nearly made the most expensive borrowing decision of his career. A large project had stretched his cash, and an online lender was offering $500,000 — approved in 48 hours, no financial statements required. The offer sheet quoted a “factor rate of 1.30.” It sounded like 30% total cost, which felt steep but survivable. His CPA ran the real math: with daily payments over eight months, the effective annual rate was north of 80%. Daniel passed — barely. Many owners don’t, because nobody ever showed them the menu.
That’s what this chapter is: the menu. Every financing product exists to solve a specific problem. Used for the right purpose, each one is a good tool. Used for the wrong purpose, even a cheap loan becomes expensive. Before you can negotiate terms, you have to know what you’re ordering — and who’s serving it.
First Principle: Match the Money to the Purpose
Lenders structure credit around one rule: the life of the loan should match the life of the need. Short-term needs — payroll timing, inventory builds, a slow-paying customer — belong on revolving credit that gets repaid within the business cycle. Long-term needs — equipment, vehicles, buildings, acquisitions — belong on term debt that pays down as the asset produces revenue. Most financing mistakes are mismatches: funding a permanent need with a credit card, or dragging out a short-term gap over a seven-year loan.
The Core Products
Business Line of Credit
A revolving facility you draw and repay as needed, usually with a 12-month maturity and a variable rate tied to Prime or SOFR. This is the workhorse for timing gaps — covering payroll while receivables come in, or stocking up ahead of a busy season. The discipline test: a healthy line “rests” (pays down to zero or near it) at least once a year. A line that stays maxed out for months is really a term loan in disguise — and your banker will eventually say so.
Term Loan
A fixed amount, borrowed once, repaid on a schedule — typically three to seven years. Use it for equipment, expansion, buyouts, or converting a chronically drawn line into structured debt. Rates can be fixed or variable, and the loan is usually secured by the asset it funded or a blanket lien.
Equipment Financing and Leasing
Equipment lenders will often finance 80–100% of the purchase price, with the equipment itself as collateral. The lease-versus-loan decision comes down to ownership and taxes: a loan (or capital lease) builds equity in the asset; an operating lease keeps payments lower and the equipment refresh cycle faster. For smaller amounts — often up to $250,000–$500,000 — many equipment finance companies approve on an application alone, without full financial statements.
Commercial Real Estate Loans
As the next chapter explains in detail, owner-occupied real estate is among the most bankable assets you can finance. Expect a 20–25 year amortization with a 5–10 year maturity — which means a balloon or a refinance event you should plan for years in advance. Owner-occupied deals (your business occupies 51% or more) get meaningfully better terms than investment property.
SBA 7(a) Loans
The SBA doesn’t lend directly — it guarantees a portion of a bank’s loan, which lets the bank say yes to deals it couldn’t approve conventionally: lighter collateral, smaller down payments, longer terms (up to 10 years for working capital and equipment, 25 for real estate). Individual 7(a) loans go up to $5 million. The trade-offs are a guaranty fee, more paperwork, and a longer process. If your business is profitable but your file is thin on collateral or equity, the 7(a) is often the bridge.
SBA 504 Loans
Built specifically for fixed assets — buildings and heavy equipment. The classic structure: a bank funds 50%, a Certified Development Company (CDC) funds 40% with an SBA-backed debenture at a long-term fixed rate, and you put down as little as 10%. For owners buying their building, the 504 often beats conventional financing on both down payment and rate stability. And as of mid-2026, the SBA doubled the combined cap: qualified borrowers can now access up to $10 million total across the 7(a) and 504 programs — the highest in the agency’s history.
Accounts Receivable Financing and Factoring
When growth outruns your balance sheet, your receivables can fund you. AR financing advances against invoices under a borrowing base (you keep collecting); factoring sells the invoices outright (the factor collects). Both cost more than bank debt, and factoring puts a third party between you and your customers. They’re legitimate tools for fast-growing companies that haven’t yet built bank-level financials — and they should be a stage, not a destination.
Business Credit Cards
The smallest tool on the menu — useful for float, expense tracking, vendor payments, and rewards. The rule is simple: cards are for spending you’ll pay off within the cycle. The moment a card carries a permanent balance at 20%+, you’re using the most expensive term loan on the menu.
The Lender Landscape
The same loan can look very different depending on who’s across the table. Knowing each lender’s appetite saves you months of applying in the wrong places.
- Large national banks — lowest rates, deepest products, most rigid credit boxes. Great when your file is clean and conventional; slow when it isn’t.
- Regional and community banks — relationship-driven, flexible on structure, and staffed by people who know your industry and market. For most $1–25M businesses, this is home base.
- Credit unions — often sharp pricing on real estate and vehicles; smaller appetites for complex commercial credit.
- CDFIs (Community Development Financial Institutions) — nonprofit lenders designed for businesses that don’t yet qualify at a bank. Smaller dollars, more coaching, a real path to bankability.
- Equipment finance companies — speed and simplicity for asset purchases; app-only approvals at smaller amounts.
- Online lenders — fastest money available, at a price. Reasonable for small, short-term needs when you’ve done the APR math; dangerous as a habit.
- Brokers — access and packaging, especially for unusual deals. Ask exactly how they’re compensated before you engage one.
A Word of Caution: Merchant Cash Advances
A merchant cash advance isn’t legally a loan — it’s a sale of your future revenue at a discount, repaid through daily or weekly withdrawals from your bank account. The pricing is quoted as a factor rate, and that’s where owners get hurt: a 1.35 factor on $100,000 means repaying $135,000. Over six months of daily debits, that’s not 35% — the effective annual rate typically lands well above 100%.
The structural danger is worse than the price. Daily debits attack the very cash flow you borrowed to protect, which pushes many owners into a second advance to cover the first — a pattern called stacking. I’ve watched profitable companies debit themselves to death in under a year. If you’re already in one, talk to your banker and CPA about consolidating or terming it out — the earlier the conversation, the more options exist.
How Pricing Actually Works
Commercial loan pricing is a formula, not a mystery: an index plus a spread. Variable-rate loans float over Prime or SOFR; fixed rates are set off Treasury or swap curves at closing. The index is the market — nobody negotiates it. The spread is you: your ratios, collateral, credit depth, industry, and the deposits and treasury business you bring the bank. That’s why everything in the earlier chapters — DSCR, liquidity, clean statements, credit depth — literally translates into basis points.
Then look past the rate to the all-in cost: origination fees, unused line fees, appraisal and legal costs, SBA guaranty fees, and prepayment penalties. A loan at 7.25% with no points can beat a 6.90% loan with 2% up front — run the math over the expected life, not the term sheet’s headline.
What’s negotiable? More than most owners think: the spread, the fees, covenant levels, reporting frequency, prepayment terms, and the scope of your personal guarantee. Banks price relationships, not transactions — operating accounts and a multi-product relationship buy real basis points.
The Banker’s Perspective
When two borrowers ask me for $500,000, they rarely need the same thing. One needs a line of credit because his receivables run 60 days; the other needs a term loan because she’s buying a packaging machine. If I gave each one the other’s loan, both would struggle — same dollars, wrong tools. The most productive first meeting isn’t a rate negotiation; it’s you explaining the business problem and letting the structure follow from it. Owners who know the menu walk in asking sharper questions, and sharper questions get better terms.
Key Takeaways
- Match the life of the loan to the life of the need — revolving credit for timing gaps, term debt for assets.
- SBA programs (7(a) and 504) exist to bridge good businesses with thin collateral or equity — now up to $10 million combined.
- Choose the lender type before you shop the rate; every lender has a different appetite.
- Merchant cash advances carry effective rates well above 100% — treat them as a last resort, not a bridge.
- The index is the market; the spread is you. Strong financials and a full relationship are worth real basis points.
Questions to Ask Yourself
- Is each piece of my current debt matched to the purpose it funds — or is my line of credit quietly acting as a term loan?
- Which products on this menu am I using out of habit rather than fit?
- If I needed $1 million next quarter, which lender type would say yes fastest — and which would say yes cheapest?
- Do I know the all-in cost, not just the rate, of every facility I have today?
- What would my banker change about my current debt structure if I asked?