Can the business service it?
The first question is not the rate; it is whether the cash flow supports the payment. Lenders test this with a debt service coverage ratio — operating income divided by total debt payments — and generally want 1.25 or better. Run the same test yourself before applying, using conservative revenue assumptions rather than the forecast you would like to be true.
Revenue required, not profit required
A $2,500 monthly payment at a 12% net margin requires roughly $250,000 of additional annual revenue to service comfortably from new business. Framing the loan that way — in revenue terms — makes the commitment concrete in a way that a payment figure does not.
Types of business finance, roughly by cost
- SBA loans — the lowest rates for qualifying businesses, but paperwork-heavy and slow.
- Bank term loans — competitive for established businesses with collateral and history.
- Equipment financing — secured by the asset, so rates are usually reasonable.
- Business lines of credit — interest only on what you draw; ideal for working capital swings.
- Invoice factoring — expensive but fast, and useful when the problem is timing rather than solvency.
- Merchant cash advances — the most expensive by a wide margin; treat as a last resort.
Match the term to the purpose
Finance long-lived assets over long terms and short-term needs over short terms. Funding inventory with a seven-year loan means paying interest for years after the stock has been sold. Funding a building with a two-year loan creates a repayment cliff. Mismatch is one of the more common causes of avoidable business distress.
The fine print that matters
Check for prepayment penalties, personal guarantee scope, financial covenants (minimum ratios that can trigger default), blanket liens on business assets, and whether the rate is fixed or floating. On a floating rate, model the payment two or three points higher and confirm the business still works.