5 Low-Cost Financing Options For Small Businesses

If you’re searching for an affordable source of funding as a small business owner, you may have discovered that your options are sometimes limited.

The unique laws that surround business lending aren’t nearly as stringent as those that regulate the interest rates on consumer lending.

Because of this, some business loan interest rates are remarkably high. So what’s a business to do if they need to find low-cost funding?

Plus, you need to understand just what “low-cost financing” means in the first place. Here’s your guide to the ins and outs of affordable business financing:

What Does “Low-cost Financing” Mean Exactly?

The descriptor “low-cost” tends to be applied to financing pretty imprecisely. To clarify this often muddy concept, let’s first break down the two different ways that the affordability of business financing can be measured:

• Annual percentage rate

Annual percentage rate, which is better-known as APR, is a time-based measure of the interest a financing option carries.

Simply put, APR measures the yearly cost of borrowing, which includes both interest and additional, miscellaneous fees. 

If you want an idea of how much and how frequent your scheduled payments will be, APR is a good measure of cost for you. 

• Total cost of capital

Most financing options with low APRs will have longer repayment terms.

This is ideal for those who want to stretch out repayment and pay lower scheduled payments each time.

But keep in mind that the longer you have to repay the money you borrow, the longer you will accrue interest on it and the more it will cost in the long run. 

For this very reason, options with shorter repayment terms will have higher APRs and lower total costs of capital.

If you want to pay as little total interest as possible—even if it means paying that interest off quickly—then total cost of capital is a good measure for you. 

Business Financing Options with Low APR

For those who want to access financing with low APRs, there are two pretty stellar business financing options.

Here are the details on low-cost financing options for small businesses that typically have low APRs:

• SBA loans

SBA loans are small business loans that are partially guaranteed by the Small Business Administration.

This partial guarantee removes much of the risk that SBA lenders take on, which means that SBA loans offer stellar terms. 

Borrowers can obtain anywhere from $5,000 to $5 million in funding through an SBA loan program.

Repayment term lengths start at five years and can stretch as long as 25 years. SBA loan interest rates currently range from below 4.39% to no higher than 13%.

Because of the low interest and the lengthy repayment terms, SBA loans offer some of the lowest APRs in the lending space. 

• Equipment loans

Another low-APR business financing option is an equipment loan. Equipment loans offer financing specifically for the purchase of equipment.

The equipment purchased with the proceeds of the loan acts as collateral for the loan itself. 

Because of this built-in security, equipment loans are easy to access and affordable.

Loan amounts can fund up 100% of the equipment cost, terms typically last as long as the projected life of the equipment, and interest rates start in the single digits. 

Business Financing Options with Low Cost of Capital

Alternatively, if you prefer to pay as little total interest and fees as possible, you should consider shorter-term business financing options.

These options will be a bit trickier to pay off because payments will be more frequent—think weekly or daily—and the cost will be condensed into a much shorter repayment term.

However, since borrowers pay down their debt quickly, they usually incur less total interest with these financing options:

• Invoice financing

Invoice financing allows business owners to access advances for their unfulfilled invoices.

Much like equipment loans, invoice financing is a form of self-secured funding, as the invoice itself secures the financing, acting as collateral in case of default. 

Invoice financing, though, is a short-term solution—the repayment term is simply how long it takes your customers to fulfill an invoice, which typically ends up being about a few weeks based on lender requirements.

The cost of this type of financing comes in the form of a factor fee charged for every week that your customer takes to pay up. Borrowers typically end up paying around 8—30% interest on invoice financing. 

• Short-term business loans

Another financing option that offers low cost of capital is a short-term business loan. Short-term loans are like traditional loans—they offer a lump sum of capital that’s paid back, plus interest, over time.

However, short-term loans always have repayment terms of 18 months or less. 

And as a result, they offer smaller loan amounts, higher APRs, and more frequent scheduled payments.

But they also offer lower cost of capital because of these shorter repayment terms. Plus, short-term loans can fund faster as well.

If you’re looking for a quick, low-cost financing solution, then this could be your best bet. 

Best of Both Worlds: 0% Intro APR Business Credit Cards

Finally, if you want to access both a low APR and a low total cost of capital, then you do have one option that offers the best of worlds.

Business owners with good personal credit can access a 0% intro APR business credit card.

These cards offer interest-free balances for your first months with the card, so both the APR and the cost of capital for these months will be exactly zero. 

The best 0% intro APR cards offer 12-15 months of no-interest spending, which is essentially a free loan.

But after the intro period, your spending will accumulate interest at a rate based on the market and your creditworthiness.

And if you miss a monthly minimum payment during your intro period, you could forfeit your remaining months of 0% APR.

That said, pretty much nothing can beat 0% APR, even if it does come with a few rules. 

The Bottom Line on Low-cost Financing for Business

Now that you’ve made it through this resource, you’re familiar with the ins and outs of finding the best low-cost financing for you.

Whether you want affordable monthly payments, you want to pay as little interest as possible, or you want both, there’s an ideal low-cost financing option for your business. 

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Eric Goldschein

Staff Writer at Fundera

Eric Goldschein is a staff writer at Fundera, a marketplace for small business financial solutions such as business loans. He covers entrepreneurship, small business trends, finance, and marketing.

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