TL;DR: Debt financing is when you borrow money to fund your business and pay it back over time, usually with interest. Common types include short-term loans, working capital loans, unsecured loans, SBA loans, merchant cash advances, and equipment financing.
Unlike equity financing, debt financing keeps you in full control of your business.
Table of Contents
What is debt financing?
Debt financing is when you take out a loan to fund your business. You then repay it with interest over time.
You get a lump sum now and pay it back on a schedule. The financing provider doesn’t get a piece of your company in return; they get only the money back plus the cost for borrowing it.
Say Marisol runs Marisol’s Kitchen, an established restaurant-supply distributor. This is an illustrative example, and the numbers below aren’t quoted terms. Marisol’s been in business four years and she averages around $40,000 in monthly deposits. She needs $60,000 to stock up on inventory before her busy season.
Debt financing versus equity financing
The difference comes down to what you give up. With debt, you give up additional money later to satisfy the amount that you borrowed plus borrowing costs. With equity, you give up a share of your business.
Unlike equity financing, debt financing doesn’t involve taking on any extra business partners. It also doesn’t involve giving up any amount of control of your business operations.
If Marisol raises her $60,000 by selling equity, an investor now owns part of the company and has a say in decisions. If she borrows the $60,000 instead, she keeps full ownership and just owes the money back.
Debt has to be paid back on a schedule whether sales are strong or slow. Equity doesn’t require payments, but the ownership you give up is usually permanent.
How does debt financing work?
With debt financing, you apply with a financing provider, share your financials, and get a decision.
If approved, you receive the funds and pay them back over an agreed term. The exact documents and speed depend on the product and provider.
Step | What happens | Typical documents or timing |
|---|---|---|
1. Apply | You submit an application and basic business details | Business info, owner details |
2. Share financials | The provider reviews your revenue and cash flow | Bank statements, sometimes tax returns |
3. Decision | The provider approves, declines, or presents an offer with specific terms | Ranges from hours to weeks by product |
4. Funding | Approved funds are sent to your account | Direct wire or ACH deposit into your business bank account |
5. Repayment | You pay back on the agreed schedule | Daily, weekly, or monthly |
Speed varies a lot by lender type. Banks tend to be slower but cheaper, while online financing providers move faster.
What types of debt financing can a small business use?
Small businesses, whether you’re a brand-new sole proprietor or an established company, have several types of debt financing to choose from. What you qualify for mostly depends on your time in business and monthly revenue.
Traditional bank and SBA loans usually require 2+ years of history and strong credit, while online options like working capital loans or cash advances can find newer businesses based on steady cash flow.
The main options include short-term loans, working capital loans, unsecured loans, SBA loans, equipment financing, and merchant cash advances.
For a fuller product-by-product walkthrough, see our types of business loans blog.
Type | Typical funding size | Typical term | Funding speed | Payment or remittance structure | Best use case |
|---|---|---|---|---|---|
Short-term loan | Smaller amounts | Under 18 months | Fast | Daily or weekly | Quick, temporary gaps |
Working capital loan | Mid to large | 6-24 months | Fast | Fixed daily or weekly payment | Planned expense with a set payoff |
Unsecured loan | Varies | Varies | Fast | Scheduled payment | No collateral to pledge |
SBA loan | Up to $5 million | Up to 25 years | Weeks | Monthly payment | Large, long-term investment |
Small-dollar loan | Up to $50,000 | Short to medium | Varies | Scheduled payment | Newer or thinner-file businesses |
Merchant cash advance | $5K-$600K | 3-24 months | Fast | Fixed daily or weekly remittance | Seasonal or uneven revenue |
Equipment financing | Varies | Matches equipment life | Varies | Monthly payment | Buying machinery or vehicles |
Remittance and payments both involve the transfer of money, but they serve different purposes. Payment refers to any transfer of money for buying goods or services. Remittance is a specific type of payment used to describe money sent to fulfill a particular need or obligation.
Short-term business loans
Short-term loans give you a smaller amount of money for a shorter window, often under 18 months. They fund quickly and suit temporary needs like covering a slow month or a one-time repair. The tradeoff is that faster money usually costs more.
You may have heard that some businesses get turned down for asking for too little. Some banks may be less interested in very small loan requests because the cost of underwriting and servicing them can be high relative to the loan amount. It’s more of an observation than a hard rule, and plenty of providers fund smaller amounts without issue.
Working capital loans
A working capital loan gives you a lump sum for day-to-day needs and a fixed payoff schedule. Credibly’s Working Capital Loan runs from $25,100 to $600,000, with terms of 6 to 24 months. It comes with a fixed daily or weekly payment.
To qualify, we require a 550 or higher FICO score and 6 or more months in business. We also require at least $20,000 in average monthly deposits.
This is a good fit when you know the amount you need and want predictable payments. For Marisol’s $60,000 inventory buy, a working capital loan would give her the full sum upfront with a clear end date.
Unsecured business loans
An unsecured business loan means the lender doesn’t require you to pledge specific physical assets, like real estate, machinery, or vehicles, to get approved. Instead of seizing an asset if payments stop, the lender bases your approval on your business revenue and cash flow.
Not all business financing requires collateral. While equipment financing and traditional bank loans are usually secured by specific property, many financing options, including working capital loans, lines of credit, and merchant cash advances, are unsecured.
For Marisol, an unsecured option lets her borrow the $60,000 she needs for inventory without risking her warehouse equipment or personal assets.
“Unsecured” doesn’t mean there are no consequences if you don’t pay. We cover what a lender can still do in the collateral section below.
SBA loans
Most SBA-backed loans are issued by participating banks, credit unions, nonprofit intermediaries, Certified Development Companies, and other approved lenders. The SBA generally guarantees part of eligible lender-issued loans, while disaster loans are made directly by the SBA.
An SBA guarantee is a promise from the federal government, through the SBA, to step in and cover part of a bank’s loss if the borrower doesn’t pay.
Because the government absorbs most of the financial risk, banks are much more willing to approve small businesses that might not qualify for standard bank loans. SBA loans offer long terms and competitive rates, but the paperwork means they take much longer to fund than online options.
The maximum loan amount for a standard 7(a) loan is $5 million. For most 7(a) programs, the SBA guarantees up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000, per SBA.gov’s terms and eligibility page.
The SBA raised the combined cumulative limit across 7(a) and 504 loans to a borrower to $10 million, effective July 4, 2026. A qualifying business can now potentially access up to $5 million through each program.
Here’s how the main SBA programs compare.
Program | Purpose | Typical or max amount | Typical term | SBA guarantee or structure |
|---|---|---|---|---|
7(a) | General business needs | Up to $5 million | Up to 25 years | 75-85% guarantee |
CDC/504 | Major fixed assets, including real estate and long-life equipment | Up to $5.5 million for the SBA-backed portion | 10, 20, or 25 years | Commonly structured with a Certified Development Company, a third-party lender, and a borrower contribution |
SBA Microloan | Startup and expansion expenses, working capital, inventory, supplies, furniture, fixtures, machinery, and equipment | Up to $50,000 | Up to seven years | Issued by SBA-funded nonprofit intermediary lenders |
Disaster/ EIDL | Recovery after a declared disaster | Varies by declared disaster | Up to 30 years | Direct SBA lending |
Small-dollar loans for newer businesses
Small-dollar loans are lower-amount financing options built for startups, very young businesses, or owners who don’t need, or can’t yet qualify for, large financing.
The SBA runs a dedicated Microloan program offering up to $50,000 with terms up to seven years through nonprofit intermediary lenders. These microloans offer lower interest rates than standard online loans, making them a practical first step if your credit file is newer.
The main tradeoff is speed: SBA microloans require more paperwork and take several weeks to fund, whereas online working capital loans or cash advances deliver fast funding in a few days.
Merchant cash advances
A merchant cash advance isn’t a loan. It’s the purchase of a portion of your future sales in exchange for money now. Because it’s a purchase of future sales rather than a loan, you don’t make standard loan payments; you satisfy the agreed amount through regular remittances from your daily or weekly revenue.
Unlike equity financing, an MCA is temporary. Once the agreed total amount is satisfied in full, the agreement ends completely, and the funder holds zero ownership or equity in your business.
With Credibly’s Merchant Cash Advance, we review your bank statements and apply a percentage to your real reported revenue at approval. We then set a fixed daily or weekly dollar amount that’s debited via ACH.³
That amount is locked in at approval, it doesn’t rise and fall with your daily sales. A remittance is just the set amount you send back regularly as the advance is satisfied.
If Marisol’s revenue moved in bigger swings from month to month instead of holding steady around $40,000, a merchant cash advance might actually fit her better than a fixed-payment loan, since the remittance is sized to what her revenue actually looks like, not a flat number regardless of how business is going.
Credibly’s MCA runs from $5,000 to $600,000, with terms of 3 to 24 months. It is priced with a fixed factor rate rather than an interest rate. You multiply your advance amount by the factor rate to get the total dollar amount you will remit.
At approval, your regular remittance is set based on a specific percentage of your average sales at approval. If your business experiences a slower month, those fixed remittances might end up taking more than that specified percentage of your actual revenue.
Because reconciliation is retroactive, you can reach out to your funding advisor at the end of the month with your bank statement. Credibly will review your actual sales, calculate what your remittances should have been, and return the difference, known as the overage. Modification is also available proactively on both the MCA and the working capital loan; just be sure to reach out to your funding advisor if you predict a slow season in the near future.
Equipment financing
Equipment financing lets you purchase machinery, vehicles, or specialized tools now while paying for them as they generate revenue.
You choose the equipment you need, and Credibly connects you with a specialized funding partner to cover the cost.1 Because the equipment itself usually serves as collateral, the risk to the lender is lower. This allows you to secure longer terms and lower rates than a standard loan, keeping your regular payments manageable over the life of the asset.
Think of it like a car loan. The lender knows it can repossess the asset if payments stop, so the risk is lower and approval is often faster.
Do unsecured business loans require collateral?
No. An unsecured business loan does not require you to pledge a specific physical asset, like machinery or real estate, to get approved.
However, “unsecured” is not the same as “no consequences” if payments stop. Even without physical collateral, a lender still has legal options if you default:
- Personal Guarantee: A promise that you personally will cover the debt if your business cannot.
- General Lien or Court Judgment: A legal claim placed against general business assets or revenue through a court judgment.
For Marisol, an unsecured option lets her borrow $60,000 for inventory without risking her warehouse equipment upfront. However, signing a personal guarantee means her personal assets could still be on the line if she defaults. To go deeper, see our full guide on secured versus unsecured business loans.
Structured debt financing is a related term you may run across. It’s a general market phrase for financing built in layers, or tranches, usually for larger or more complex deals. Most small businesses won’t encounter it, but it helps to know it describes a structure, not a single product.
What are the advantages and disadvantages of debt financing?
Debt financing lets you keep full ownership and can help you build business credit, but it adds a fixed cost and a payment obligation. The right call depends on whether the return from borrowing outweighs the cost, and whether your cash flow can carry the payments.
Financing type | Main advantages | Main tradeoffs | Funding speed | Relative cost |
|---|---|---|---|---|
SBA loan | Low rates, long terms | Slow, paperwork-heavy | Weeks | Lower |
Bank term loan | Competitive rates | Strict qualification requirements | Weeks | Lower |
Working capital loan | Fast, predictable payments | Shorter terms | Fast | Moderate |
Unsecured loan | No collateral needed | May cost more | Fast | Moderate to high |
Merchant cash advance | Sized to revenue, fast | Higher cost for speed | Fast | Higher |
Where debt financing helps
Paying on time also builds credit. On-time payments can strengthen your business credit profile when the lender or vendor reports payment activity to commercial credit bureaus. This can make future borrowing easier and often cheaper.
The tradeoffs to weigh
The main cost is the payments themselves. You owe them on schedule regardless of how business is going.
Rates vary widely by product and profile. Bankrate reports average small-business bank loan interest rates (APRs) of roughly 7.3% to 7.6%, and business lines of credit around 6.5% to 7.9%, while online financing commonly costs more. Actual rates and APRs vary widely by product, lender, credit profile, revenue, collateral, and term.
Cheaper money usually comes with stricter requirements and slower funding. Bank term loans, for example, typically require strong credit along with steady revenue. Unsecured loans often add a personal guarantee requirement. The lowest rate isn’t always the option you can actually get.
When should you use debt financing to fund your business?
Debt financing makes sense when the money will earn more than it costs. It also makes sense when your cash flow can cover the payments comfortably.
Good uses include buying inventory ahead of demand, covering payroll through a gap, or funding a repair that keeps you running. It’s the wrong call when the payment would strain an already-tight month.
Back to Marisol. She could take the full $60,000 now to stock up before her busy season.
That makes sense if that inventory sells through and covers the payments. If her season is uncertain, a smaller amount with room to come back for more later might protect her cash flow better.
There’s also an honest case for not borrowing. If the numbers don’t support the payments, the right move is to wait or borrow less.
A business line of credit through an external funding partner is another flexible option for variable costs.
Payment calculator
A payment calculator helps you see what a given loan amount and term would cost before you apply. Enter an amount and a term to get an estimate. The sample values you’ll see, like $5,000 and 6 months, are illustrative examples, not recommended loan sizes.
Use the estimate to sanity-check whether a payment fits your monthly cash flow. If it looks tight, try a smaller amount or a longer term and compare.
Credibly financing and your cash flow
We underwrite by reading your bank statements to see how money actually moves through your account. Your credit score is part of the picture, but your deposit history carries real weight. Owners with steady revenue and a thinner credit file can still qualify when the cash flow tells the stronger story.
Frequently asked questions about debt financing
What are examples of debt financing?
Common examples include bank loans, business lines of credit, business credit cards, equipment financing, and business bonds. Short-term loans, working capital loans, unsecured loans, and SBA loans all fall under debt financing too.
All types allow you to borrow a sum and pay it back over time. A merchant cash advance is a related option, though it’s a purchase of future sales rather than a loan.
What documents do you need to apply for debt financing?
The documents and timing depend on the product, see How does debt financing work? above for the full step-by-step process.
Is debt financing a loan?
Usually, yes. Most debt financing takes the form of a loan you repay with interest. Examples include a term loan, SBA loan, or working capital loan.
The main exception worth knowing is a merchant cash advance, which isn’t a loan. It’s the purchase of a portion of your future sales, so you satisfy it through remittances rather than repaying it.
Do you need collateral for debt financing?
Not always. Secured financing requires collateral, an asset the lender can take if you don’t pay. Unsecured financing doesn’t require pledging a specific asset.
See Do unsecured business loans require collateral? above for what a lender can still do if you default.
What is the difference between debt and equity financing?
Debt financing means borrowing money and paying it back over time while keeping full ownership. Equity financing means raising money by selling a share of your business. That brings on partners and gives up some control.
Most owners who want to stay in control lean toward debt.
How do SBA loans fit into debt financing?
SBA loans are traditional bank loans backed by a government guarantee. Think of the SBA as an insurance policy for the bank: if a borrower defaults, the federal government steps in to cover a portion of the bank’s loss.
Because the government absorbs most of the financial risk, banks feel safe offering low interest rates and longer terms for small businesses. They’re among the cheapest options available, but they take longer to fund and involve more paperwork than online alternatives.
See your options
Not sure which type of financing fits your business? Get a clear picture of your options, without the guesswork.
¹ Some products are made available through Credibly’s network of external funding partners. Partner product thresholds are set by the funding partner and apply to those products specifically.
² Factor rates as low as 1.11. For example, a factor rate of 1.28 means multiplying the advance amount by 1.28 to find the total amount owed.
³ Financing terms are based on a good-faith estimate and assume consistent monthly revenue. Actual time to satisfy the MCA may vary.
Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly of Arizona LLC.