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For many small business owners, the process of accessing capital for starting or supporting a newer business can be daunting. Many banks don’t lend to newer businesses because they see it as risky or perhaps there’s limited profit to be gained. This can leave potential borrowers with limited options for funding, which might be required for working capital and other startup costs.

Thankfully, with the growing trend toward microlending, small business owners can obtain loans, typically up to $50,000, to help them with small business financing. While microloans are small, they are often exactly what small business owners need to cover essential costs associated with launching their business.

There are a number of ways for business owners to apply for microloans, including through Small Business Association (SBA) loans, nonprofits, and alternative lenders. It’s important to understand the different types and how they work to help ensure that you choose the one that best aligns with your business needs.

What Is a Microloan?

There’s no precise microloan definition, but a microloan is typically financing of up to $50,000 that is targeted to small businesses with fewer than five employees.

Community-based microlenders may offer SBA loans or non-SBA loans to small business owners, entrepreneurs, and nonprofit child care centers. Such microlending may provide financing to the smallest companies, including new firms that may not qualify for startup business loans from banks.

The average SBA microloan is about $13,000, according to the SBA. Microloans for small businesses are typically offered by nonprofits, government agencies, or individual lenders to be used for a variety of business expenses. Microloan programs can differ with focus on specific types of businesses, such as female entrepreneurs, underserved communities, or veterans. Some microloans specify that funds be used for specific purposes.

Microloan uses may include:

•  Working capital

•  Inventory or supplies

•  Furniture or fixtures

•  Machinery or equipment

•  Initial startup expenses

In addition to lending money, some microloan programs offer assistance with things like marketing, financial counseling, training, and technical assistance to support budding entrepreneurs. For new business owners, this support can be valuable to help them responsibly use capital and plan for the future of their business.

Common Microloan Rates and Terms

Microloan interest rates and terms vary from lender to lender and depend on the type of loan program and the individual borrower’s qualifications. However, they are generally offered as monthly installment loans with fixed interest rates. Terms can vary from a few months to six or seven years. Some lenders may offer longer terms.

Factors that may contribute to loan repayment terms include:

•  Loan amount

•  How funds will be used

•  Specific lender requirements

•  Needs of the borrower

While there are other loan products that small business owners may be able to access, microloans may be a more predictable and sustainable lending option compared to merchant cash advances, which typically have high borrowing costs and less regulatory oversight.

Recommended: Guide to Vendor Financing

4 Types of Microloans

To find the right microloan for your business, it helps to understand the different types of microlenders. What is microlending? It’s when community-based organizations offer financing to small businesses and startups with fewer than five employees. Many lenders offer microloans of up to $50K in addition to other loan programs, while some lenders specialize in microlending to specific communities.

Below, you’ll find information on different kinds of microlenders and generally how a microloan works for each type.

1. SBA Microloans

The SBA’s microloan program provides direct, government-backed loans to intermediary microlenders who can then offer borrowers necessary funding and training to start and run a small business. Loans can be up to $50K with some programs specific to women, veterans, and other underserved communities.

Terms and conditions are negotiated directly with the intermediary lender, not the SBA, but in general, SBA microloan interest rates and terms are:

For more information on where to find a local SBA intermediary lender or get more information about microloans, contact your local SBA district office.

2. Peer-to-Peer (P2P) Microlenders

Peer-to-peer (P2P) business lending allows borrowers to access capital directly from other individuals (investors), without a financial institution acting as a middleman. Using online platforms to connect, borrowers can often find funding quickly from lenders who want to invest.

For small business owners with little or bad credit, P2P lending may be a useful resource for accessing microloans. Many investors don’t require the same level of qualifications that a bank or credit union does (like collateral or good credit), but it’s still important to research P2P lenders and their terms and conditions to ensure they meet your business needs and financial outlook.

Recommended: Guide to Peer-to-Peer Lending for Business

3. Mission-Driven Microlenders

Many microloans are offered by mission-driven lenders who desire to support specific communities and people groups with economic and entrepreneurial opportunities. These microlenders can be nonprofits or community development financial institutions, also known as CDFIs. Examples of CDFIs include:

•  Community development banks

•  Community development credit unions

•  Community development loan funds

•  Community development venture capital funds

Some microlenders actually maintain CDFI certification, which tells borrowers that an institution is committed to the principles of CDFI. The U.S. Department of the Treasury offers a complete list of CDFIs for borrowers who prefer to apply to microlenders who have CDFI certification.

Recommended: Online Business Loans: Compare and Apply

4. Online and Alternative Lenders

Alternative small business loans are those offered by individuals or lenders that aren’t a traditional bank. Alternative microlenders may include:

•  Crowdfunding sites

•  Online small business lenders

•  Angel investors

•  Venture capitalists

•  Friends and family

If you’ve been in business for several years and need working capital, small business loans may be right for you. Such financing can come from online lenders and major banks.

💡 Recommended: Microloans for Women

Pros and Cons of Microlending

For small business owners, microloans may be a vital part of their business success. Yet, even with the advantages, there are some potential risks to be aware of before applying for microloans.

Pros of Microloans

Here are some of the pros of microlending:

•  More flexible borrower qualifications

•  Additional services (training, marketing, counseling)

•  Fast turnaround time on application and access to funding

Cons of Microloans

Here are some of the cons of microlending:

•  Smaller loan amounts

•  Some microloans have limits on how funds can be spent

•  Potentially higher interest rates than a traditional bank

How to Get a Microloan in 4 Steps

Before you apply for a microloan, it’s important to research microlenders and have a thorough understanding of your business financials and goals. The following basic steps may help you prepare to apply for a microloan:

1. Creating a Business Plan

A business plan is helpful when planning for your future and may even be required by some microlenders. Taking time to write a formal business plan may help you assess your needs as you seek out funding. A traditional business plan can include an executive summary of your business goals and mission statement as a small business owner.

2. Determining Eligibility

Microlenders may have their own eligibility requirements depending on the loan program and lender, but in general, small businesses should meet the following criteria:

•  Be the sole business owner or co-owner of a for-profit small business

•  Have no recent bankruptcies, late payments, outstanding tax liens, or foreclosures

•  Have the ability to repay the loan with current income/revenue

•  Proof of good payment history with creditors

•  Have a clear, strong business plan for the future

•  Meet any special demographic requirements (e.g. veteran, minority, low-income), when applicable

There may be startup business loans for business owners with bad credit, but lenders may charge higher rates to compensate for the higher credit risk.

3. Choosing a Microlender

After conducting research based on your business plan and needs, it’s time to choose a microlender. Narrow your search to find a microlender that’s right for you. This may be a nonprofit, community-based organization that offers SBA microloans or a private lender that offers non-SBA microloans.

4. Gathering Documents and Information

Lenders may have different document requirements, so have the following ready to provide with your application or upon request:

•  Government-issued ID

•  Proof of income

•  Business and personal financial statements

•  How you’ll use the microloan

•  A detailed business plan

•  Proof of collateral, if applicable

•  A list of references who can vouch for you personally and professionally

Gathering the above documents and information can streamline the application process when applying for small business loans. You may not qualify for a microloan if you lack proof of identity or proof you’re a small business owner.

Lenders Who Offer Microloans

As mentioned earlier, nonprofits, government agencies, and individual lenders may offer microloans to small business owners.

The SBA provides funding to community-based nonprofits that offer microloans to eligible businesses. States may offer microloans under the State Small Business Credit Initiative (SSBCI), and the U.S. Department of Agriculture has a microloan program for small or nontraditional farm operations.

Private lenders may offer top small business loans for startups, including microloans to entrepreneurs.

Alternatives to Microloans

Here are other financing options you may want to consider:

Working Capital Loan

A working capital loan is any loan product that covers everyday expenses like payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage cash flow fluctuations.

Business Line of Credit

A business line of credit is a short-term loan option that gives borrowers access to cash up to a set credit limit determined by the lender. Interest is paid on the money withdrawn from the credit line. Some lines of credit are revolving, while others end once you use and pay off the full loan amount.

Equipment Financing

An equipment loan is used to purchase business equipment. The length of the loan is typically equal to the expected life span of the equipment. The equipment acts as collateral for the loan. Rates may vary depending on the type of equipment, industry, and qualifications.

Top Small Business Loans

Entrepreneurs may be eligible for microloan funding. In some cases, a microloan may not be sufficient. For instance, a microloan may not be right for you if you need more than $50K.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How does a microloan work?

A microloan typically works like any other small business loan that has to be repaid over a set term. A microloan can provide small business owners with up to $50,000 in funding.

Who is eligible for a microloan?

Small business owners with fewer than five employees may be eligible for a microloan. Entrepreneurs may also be eligible for a microloan.

What is the benefit of a microloan?

The benefit of a microloan is it may provide small business owners with up to $50,000 to meet critical business needs. Community-based nonprofits may offer microloans to entrepreneurs and new small business owners who may be ineligible for traditional financing.

How hard is it to get a microloan?

There are many sources of microloans, including banks and nonprofits, which should improve your chances of finding a lender that’s right for you. Each lender will have its own eligibility requirements; these may include your business plan, current cash flow, credit history, and demographic details, among other specifics.

How much is a typical microloan?

A microloan typically involves financing of up to $50,000. The SBA reports that the average microloan amount is about $13,000.

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-011

To stay relevant and competitive, your business has to grow. But planning for the future and putting business growth strategies into action can be challenging.

Following the uncertainty of the past couple of years (thanks to inflation and interest rate adjustments aimed at controlling it), many business owners are looking for ways to stay flexible while also seizing new opportunities for expansion. To stay ahead of the pack, consider these strategies to set yourself up for business growth in 2025.

Develop a Clear Business Strategy

Developing a clear business strategy helps you grow a small business because it provides a roadmap for achieving your goals. A well-defined strategy helps you identify your target market, understand customer needs, and allocate resources effectively.

With a solid strategy, you can set measurable milestones, track progress, and adjust as necessary to stay competitive in your industry. To develop a business strategy:

•  Define your vision and goals: Start by outlining your long-term vision and setting specific, measurable, achievable, relevant, and time-bound (SMART) goals to guide your business decisions.

•  Understand your market: Conduct thorough market research to identify your target audience, competitors, and industry trends, helping you position your business effectively.

•  Analyze strengths and weaknesses: Perform a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to understand your business’s internal and external factors.

•  Create an action plan: Break down your goals into actionable steps, assign responsibilities, and establish timelines to ensure accountability and progress.

•  Monitor and adjust: Regularly review your strategy’s performance, track key metrics, and be prepared to adapt to changing market conditions or unforeseen challenges.

Recommended: How Much Does It Cost to Start a Business?

Research Your Market

Researching your market is crucial for small business growth because it provides valuable insights into your target audience and their needs. By understanding customer preferences, buying behaviors, and pain points, you can tailor your products or services to meet demand more effectively.

Whether you’re a startup business or you’ve been in the industry for decades, market research minimizes risks by equipping you with data to make informed decisions. It helps you determine optimal pricing, choose effective marketing channels, and anticipate challenges in the competitive landscape.

💡 Recommended: Stages of Business Growth

Financial Management and Funding

Effective financial management and securing adequate funding are cornerstones for growing a successful business. Sound financial management ensures that resources are allocated efficiently, helping you track income, manage expenses, and maintain profitability. It allows you to create detailed budgets, forecast future financial performance, and allocate funds strategically toward areas with the highest potential for growth.

Securing proper funding is equally vital for scaling operations, investing in new technologies, or launching marketing initiatives. Whether through small business loans, venture capital, or grants, access to funding provides the capital needed to seize growth opportunities and expand your business.

Small Business Loans

Different types of small business loans allow businesses to hire more employees, increase inventory, and enhance marketing efforts. Loans can also enable businesses to address cash flow challenges or take advantage of time-sensitive opportunities, such as acquiring another company or launching a new product.

Grants

Small business grants can help small businesses grow by providing funding that doesn’t need to be repaid, allowing businesses to invest in expansion, equipment, or marketing. Grants can also support research, innovation, or community-focused projects, helping businesses achieve growth goals without increasing debt.

Recommended: 20 Small Business Grants, Programs, and Checklists

Acquiring Customers

One of the best ways to grow your business is by getting more customers. Getting more customers increases revenue, allowing your business to expand, invest in new products or services, and improve operations. You can acquire more customers through digital marketing and traditional marketing, and also by retaining the customers you currently have.

Digital Marketing

In today’s digital age, businesses must establish a strong online presence to attract customers. Digital marketing strategies like search engine optimization (SEO), social media marketing, and paid advertising can significantly expand a business’s reach.

Traditional Marketing

While digital strategies are essential, traditional marketing methods still play a valuable role in customer acquisition. Print advertisements, direct mail campaigns, networking events, and sponsorships can help businesses connect with local communities and establish credibility.

Retention

Acquiring customers is only the first step; keeping them engaged ensures long-term business success. Customer retention strategies include personalized communication, loyalty programs, and excellent customer service.

Recommended: What Are the 5 Stages of Business Growth?

Sales Techniques and Strategies

A well-structured approach to sales can improve conversion rates, enhance customer relationships, and maximize revenue. Tailoring your sales pitch to address customer pain points and offering solutions makes your product or service more appealing. Below are some key strategies to improve your sales approach:

•  Build rapport: Establish trust with customers by actively listening to their concerns and showing genuine interest in their needs.

•  Value-based selling: Focus on the benefits your product or service offers rather than just its features. Explain how it solves problems or improves their life.

•  Upselling and cross-selling: Encourage customers to buy complementary or upgraded products to increase the value of each sale.

•  Follow-up: Stay engaged with potential and existing customers through consistent communication to nurture relationships and secure repeat business.

Combining these techniques with a clear understanding of your sales process ensures better alignment with customer expectations, ultimately boosting growth and profitability.

Recommended: Business Line of Credit

Operational Efficiency and Scaling

Optimizing operations — including streamlining processes, reducing waste, and improving productivity — can lower costs and increase profitability. Implementing automation tools, such as customer relationship management (CRM) systems and inventory management software, helps businesses scale efficiently.

As demand grows, businesses should focus on hiring and training employees to maintain quality while expanding. Outsourcing non-core tasks can also free up resources for strategic growth.

Recommended: How to Pay Employees When Starting a Business

Innovation and Adaptation

Innovation and adaptation are key to staying competitive and driving business growth. Businesses must continuously evolve by introducing new products, improving services, and adopting emerging technologies. Keeping up with industry trends and customer preferences ensures long-term success.

Recommended: How to Write a Business Plan

Legal and Compliance Considerations

It’s important that your business operates within legal and regulatory guidelines. Compliance with local, state, and federal laws helps prevent fines, lawsuits, and reputational damage. Business owners should stay informed about industry-specific regulations, tax obligations, and employment laws to avoid potential legal issues.

Properly structuring your business — whether as an LLC, corporation, or sole proprietorship — affects liability and taxation. Securing necessary licenses and permits ensures your operations remain legitimate.

Regular legal audits and professional guidance from an attorney can help maintain compliance.

💡 Recommended: Business Fundamentals

Performance Measurement and Growth

Measuring performance and growth can help you understand how well your business is progressing and help identify areas that need improvement. Tracking revenue, customer retention, and conversion rates helps you make data-driven decisions. Without measurement, it’s difficult to know what strategies are working and where adjustments are needed.

Recommended: Small Business Working Capital Loans

The Takeaway

There’s no one universal approach to finding success and business growth. Good strategies for how to grow a small business will likely differ from those that work for a mid-size or large company. It’s important to determine which strategies align with your resources, target audience, type of business, and goals.

As your business evolves, keep in mind that what worked to get it off the ground may not work as well for your next stage of growth. Referring back to your business plan can help you track progress and make changes as needed.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How much money do I need to start growing my small business?

Some businesses can grow with a few thousand dollars, while others may require significant investment. Creating a detailed budget and exploring funding options can help determine your specific financial needs.

What are the most effective marketing strategies for small businesses with limited budgets?

Small businesses with limited budgets can use cost-effective marketing strategies like social media marketing, content marketing, email campaigns, and local SEO. Networking, word-of-mouth referrals, and partnerships also help.

How can I secure funding if I have a limited credit history?

If you have limited credit history, you can secure funding through microloans, crowdfunding, grants, or business credit cards. Consider alternative lenders, peer-to-peer lending, or seeking investors. Building business credit, offering collateral, or getting a cosigner can also improve approval chances for loans from banks or credit unions.

When is the right time to hire my first employee?

The right time to hire your first employee is when your workload becomes overwhelming, demand exceeds your capacity, or growth opportunities are being missed. Ensure you have stable revenue, a clear job role, and the financial ability to cover wages, taxes, and benefits before making the commitment.

How do I know if my business is ready to scale?

Your business is ready to scale if you have consistent revenue growth, strong customer demand, efficient operations, and the infrastructure to handle expansion. A proven business model, reliable cash flow, and the ability to hire and manage more employees are also key indicators that scaling is a viable option.

Photo credit: iStock/SeventyFour

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-010

Vendor financing occurs when a company procures goods or services from a vendor without making immediate payment. Instead, the vendor agrees to extend that company debt or equity financing, or it’s willing to make a trade swap.

Vendor financing can be a good solution if a small business is having temporary cash flow issues and doesn’t want to apply for third-party financing. It might also be useful if the company were having trouble qualifying for a traditional business loan.

Whether this is a good idea for your business depends on the terms of the vendor financing agreement. Read on for a closer look at how vendor financing works, its pros and cons, and alternative funding options to consider when cash flow is tight.

What Is Vendor Financing?

Vendor financing, also sometimes referred to as trade credit, is when one company loans another company the money it needs to purchase its goods or services.

How the borrowing company will repay the loan to the vendor will depend on the agreement, but vendor financing typically takes one of three forms. The vendor gives you the goods or services in exchange for:

•  A promise of repayment (typically with interest)

•  Equity in your company

•  Goods or services you provide to them

Depending on the arrangement, the vendor financing may not cover the full cost of the purchase. In that case, you may need to make a down payment.

How Vendor Financing Works

While vendor financing allows borrowing companies to avoid applying for a small business loan with a traditional financing institution, there still needs to be some sort of loan agreement between both parties if debt is being created.

With debt financing, it can be a good idea to establish the following details before you sign off on the deal.

•  Loan term: When is payment expected in full?

•  Down payment: Does the borrowing company need to put down a minimum payment to receive the goods or services?

•  Interest: Will there be a financing fee and what will the rate be?

•  Collateral: Are the purchased goods to be used as collateral?

•  Payment: Is the borrowing company expected to make regular monthly payments or one balloon payment?

•  Fees: Are there to be any additional fees for the loan? What happens if a payment is missed?

If equity financing or a service swap is used instead of debt financing, then an alternative agreement would need to be drawn up.

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Vendor Financing Example

Here’s an example of vendor financing: A small flooring company needs to purchase $20,000 worth of materials to complete the floors of a new school. Normally, it would be able to make the purchase without any issues, but four of its past ten clients have yet to pay their invoices. As a result, the company is currently having temporary liquidity issues.

Because the flooring company has been working with its supplier for a number of years, the supplier is willing to provide the $20,000 worth of flooring materials if the borrowing company agrees to pay back the full amount within six months with 10% interest. They need to make an initial deposit of $2,000, followed by monthly installment payments. Because the flooring company’s contract with the school district is so large, the company readily agrees to the terms and conditions from the vendor.

💡 Recommended: How to Choose a Business Vendor

Pros and Cons of Vendor Financing

The chart below captures the pros and cons of vendor financing:

Types of Vendor Financing

As mentioned above, there are three main types of vendor financing. Here’s a closer look at each type.

Debt Financing

With debt financing, the borrower receives the products or services but must pay back the vendor in regular installments with interest. If the vendor will only finance a percentage of the cost, the borrower will likely need to make a down payment. Should the borrower default on payments, the vendor writes the debt off as a bad debt. Further business between the two companies is unlikely, and the defaulting company’s reputation with other vendors is likely to be damaged as well since they didn’t practice good business money management.

Equity Financing

With equity financing, the vendor provides the borrower with the requested amount of products or services in exchange for equity in the borrower’s company. This means the vendor becomes a shareholder and will receive dividends and also weigh in on business decisions. Equity vendor financing tends to be more common with new companies that may have difficulty getting startup business loans from banks or other lenders.

Service Swap

A service swap is an agreement between two companies where no debt or equity is exchanged. Instead, both businesses agree that the services or products one offers are of the same value to the services or products offered by the other. In other words, it is an equal trade. This type of vendor financing tends to be more informal and only occurs between companies that already have a strong working relationship.

Recommended: Business line of credit

Alternatives to Vendor Financing

With so many different types of business loans on the market, there are a number of alternatives to vendor financing. Here are some other ways you may be able to get short- or long-term capital funding.

Merchant Cash Advance

A merchant cash advance (MCA) is a unique type of financial product that doesn’t involve traditional monthly payments. Instead, an MCA company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. MCAs can be handy for small businesses that need cash quickly, but tend to cost significantly more than other types of financing.

Invoice Financing

With invoice financing, you receive a cash advance on your outstanding customer invoices. When your customers pay you, you pay the lender back, plus fees. Since your invoices serve as collateral for the loan, invoice financing can be easier to qualify for than a traditional small business loan. However, costs tend to be higher.

Small Business Loan

There are a variety of small business loans on the market. Traditional bank and Small Business Administration (SBA) loans typically have the lowest interest rates, but can be difficult (and time-consuming) to qualify for. Online lenders often offer faster funding, but may charge higher rates. You may also consider short-term business loans vs. long-term ones.

💡 Recommended: EBITDA vs Net Income

The Takeaway

Vendor financing is a way to fund the purchase of goods or services from a vendor when cash is tight. However, it’s not your only option — and may not be your best one, since vendor financing often comes with higher interest rates than those charged by traditional lending institutions.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How does vendor financing work in retail and in financial services?

Vendor financing works in a similar way no matter what the industry. With this type of financing, the vendor selling you a product or service also finances it. Vendors can take many different forms, including business-to-business suppliers, payroll management firms, and security companies.

What are some risks of vendor financing?

There are risks on both sides of the deal. If a borrower is unable to make their payments on time, they risk ruining the working relationship they have with the vendor, which could jeopardize future business dealings with that company. For vendors, there is a risk that they will never get paid for their goods/services and have to write the loan off as a bad debt.

Are vendor financing and seller financing the same thing?

No. They are similar, but not the same thing. Seller financing refers to a form of real estate lending in which a property owner also serves as a mortgage lender. Vendor financing, on the other hand, is a business-to-business arrangement in which a vendor that is selling a product or service to a business also finances it.

What is the difference between a vendor and a lender?

A vendor is a seller who may offer credit to help the buyer purchase its products. The vendor is directly involved in the transaction. By contrast, a lender is a third party — such as a bank, credit union, or other financial institution — that provides money for a variety of business purposes. Such loans are not tied to a specific vendor or purchase. Typically both vendors and lenders are repaid with interest.

Is vendor financing secured?

Most vendor financing deals tend to be secured, meaning the buyer provides collateral — which may or may not be the purchased item itself (such as equipment or property). This reduces the vendor’s risk. If the buyer fails to make payments, the vendor can recover the debt by seizing the collateral.

Photo credit: iStock/Ridofranz

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-009

Obtaining equipment financing with bad credit isn’t impossible. But just as with any other type of financing, when you have poor credit, you may have to alter your expectations and do some extra legwork in order to get approved.

Keep reading to learn more on how you can increase your chances of getting equipment financing with bad credit.

How to Get Equipment Financing with Bad Credit

If you have bad credit, the following options may help you secure equipment financing:

1. Start with Existing Bank Relationships

Established businesses may begin the search for equipment financing with a bank or lender they already work with. Even when looking for equipment loans for bad credit, potential borrowers may consider starting their search for any kind of small business loan at the institution they already have a relationship with.

Depending on the financial institution, there may be certain programs that offer rate discounts or other perks to existing customers, even if you have bad credit. When shopping for equipment financing with bad credit, it’s worth it to start your search with your current bank.

2. Consider Equipment Leasing

Another option for getting the equipment you need for your business is to lease it rather than purchase it. While an equipment loan may require a sizable down payment, it may be possible to finance the entire cost with a lease.

Be aware of the interest and other requirements when leasing equipment. Some leases may require a maintenance package or have a high interest rate. These fees and added costs can sometimes make leasing equipment more expensive than purchasing it.

3. Offer Additional Collateral

When applying for bad-credit equipment financing, consider offering additional collateral. Even with good credit, lenders may require a downpayment of 20% in addition to the equipment serving as collateral. But equipment financing for bad credit may come with stricter requirements. Some lenders may accept additional collateral — such as other hard assets like real estate — to help secure the loan.

Just remember that any collateral used could be seized and liquidated by the lender if you default on the loan, even if it’s personal property like your home or savings account. Carefully review your business financials to make sure you’re comfortable with your ability to repay the loan, otherwise you may put more at risk than just the equipment you’re financing.

4. Increase Your Down Payment

Another way to make your application more attractive to lenders is to make a larger down payment. This may only work for businesses with large cash reserves, but it could be a work around to get equipment financing with bad credit.

Also, a larger down payment results in a lower loan balance, which could mean a smaller monthly payment and less interest paid over the course of the loan. Review the loan terms, fees, and interest rates closely to evaluate how a larger down payment could impact the overall cost of your loan. While not every business will be able to pull this off, it does offer benefits for those who can.

Recommended: How to Dispute a Business Credit Report

5. Update Your Business Plan

Depending on the lender you apply with, you may need to submit a business plan as part of your application. A strong business plan can highlight your business acumen and could help you demonstrate how the equipment purchase will help grow the company.

A business plan contains several elements, including an overview of the company and structure, market analysis, operations, and financial projections. Provide in-depth data to show the lender that there’s a market need for your product or services and that you’re successfully managing both operations and business cash flow. You could also include a section outlining your funding request, especially if you’re applying with a traditional bank or lender.

💡 Recommended: Restaurant Equipment Financing

6. Get Your Company Financials in Order

No matter what type of lender you apply with, you’ll most likely need to submit your company financials. You may also need to provide some documentation on your personal finances, as well. Consider pulling together the company’s recent tax returns, plus bank statements from the last several months.

Your application for business equipment financing with bad credit may be strengthened if you are able to demonstrate a strong cash flow. It can help show lenders that your company has the money to make the required monthly payments, even if your credit history either isn’t established or has some blemishes from the past.

7. Use a Cosigner

Adding a cosigner to your bad credit equipment financing application may also help you qualify for a loan. Generally, a cosigner is someone who has a strong credit score and stable income. Applicants with lower credit scores may have a better chance of being approved for equipment financing when applying with a cosigner and may even qualify for more competitive loan terms, such as a lower interest rate.

The downside, of course, is that the cosigner has equal responsibility for the equipment loan as you do. If you are late on payments or end up defaulting, that negative activity will impact your cosigner as well.

8. Apply with Online Lenders

It can be difficult to meet the equipment financing standards of a traditional bank when you have bad credit. Online lenders, on the other hand, may have more flexible lending requirements. Some may offer microloans that are easier to qualify for.

Because these lenders may have less strict requirements, such as a lower minimum credit score, they may offer less competitive rates and terms than traditional lenders. You can usually apply online and get a quote (and potentially approval) within minutes.

As you are shopping around for quotes, double check how a preapproval impacts your credit score. Many online lenders only perform a soft pull in the early stages, allowing you to shop around and compare offers before committing to one lender. But if they do a hard credit pull, it could impact your credit score.

Recommended: What Can a Business Loan Be Used for?

Common Equipment Financing Mistakes to Avoid

When estimating how much of a loan to seek, it’s important to determine how much you can afford. What is the amount of money you can devote to making this new monthly payment? It’s a mistake to not give this question careful consideration.

Another area where people make a mistake is setting the loan payment period as a very short one in order to get it over with. However, by selecting a shorter term, the monthly payments will go up and can impact your cash flow.

Recommended: Heavy Equipment Financing

Improving Your Chances of Approval

You can up your chances of getting an equipment loan by preparing yourself for applying and by building up your credit.

Documentation Requirements

These are the documents commonly requested:

•  A business plan

•  Financial statements

•  Franchise or purchase agreement

•  Accounts receivable and accounts payable

•  Appraisal of equipment value

•  Legal documents showing compliance

Credit Score Improvement Strategies

One step everyone should take is to request your personal credit report. Once it’s in hand, study it and look for mistakes or missing information and send the necessary email or letter to clean up your credit.

When asked why they decline an application for equipment financing, lenders often say they saw excessive outstanding loan balances and credit utilization, poor payment history, an unfortunate credit utilization formula, or liens or bankruptcies on file. These are the areas to work on.

Overall, two of the most common strategies to improve your credit rating are making more frequent payments and paying down debt.

Recommended: No Credit Check Business Loans

The Takeaway

It’s possible to get an equipment loan for bad credit, but you will have to do your homework and be realistic with expectations.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Can you get equipment financing with bad credit?

Yes, it is possible to qualify for regular equipment or heavy equipment financing with bad credit. You may need to spend more time finding lenders who are willing to work with businesses that have lower credit scores. Expect higher interest rates and stricter collateral requirements. Some business lenders may require a lien on the business and a personal guarantee on top of making a significant down payment and using the equipment as collateral.

What equipment loans can I get with a 500 credit score?

It is possible to find a lender who specializes in working with business owners who have credit defined as “fair” or “poor.” Give yourself time to explore options so you don’t take an offer with bad terms simply because you’re in a time crunch.

What is no credit check equipment financing?

In theory, no credit check financing refers to a lender that doesn’t look at your credit report when making a decision on your application. In reality, however, a reputable lender will have to pull your credit report, either for your business, your personal history, or both. So-called no credit check financing may come with very high interest rates or large penalties, so review the loan terms carefully.

Should I lease or finance equipment with bad credit?

This depends on whether you are willing to have less favorable terms for your equipment loan because of your credit challenges.

How much down payment is typically required with bad credit?

Many lenders require a down payment of up to 20% for equipment financing. More may be expected if you have challenged credit.

Photo credit: iStock/PixelsEffect

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOSMB-Q125-004

Whether you’re looking for a $1 million business loan or a $5 million business loan, the good news is that there are million dollar business loans available for small business owners who want to invest in a new stage of growth.

Maybe your business has been thriving for years and you’re ready to up your game. Or, perhaps you have the opportunity to acquire another business or want to expand your current business by purchasing a warehouse. Whatever your plans, they’re going to require capital. And, potentially, a lot of it.

Let’s look at how to get a million dollar business loan so that you can get those plans on track.

Large vs Small Business Loans

Before we dive into how to get a $1 million business loan, $2 million business loan, or more, let’s look at how large and small business loans compare, besides the amount you’re borrowing.

With large business loans, repayment periods are typically longer, ranging from 10 to 25 years. Small business loans, on the other hand, have shorter repayment periods, often maxing out at five years.

Also, because there is inherently more risk in lending millions to a borrower, banks may require larger-value collateral or a substantial down payment on a million dollar loan, whereas smaller loans may or may not require either collateral or a down payment.

Larger loans for small businesses can also be more difficult to qualify for than smaller loans. Generally, the more you want to borrow, the more assurance lenders want that you will pay back the loan. To that end, they may have higher criteria regarding credit score, time in business, and annual revenues.

Recommended: Loaning Money to Your LLC

Criteria for Million Dollar Business Loans

As far as how to qualify for a million dollar loan, requirements will depend on the lender and the type of business loan. Here are some of the key factors that lenders look at.

1. Credit Score

When you’re applying for a million dollar loan, a lender may look at both your personal and your business credit score.

Business Credit Score

Credit scoring firms calculate business credit scores based on a company’s credit obligations and repayment histories with lenders and suppliers, as well as any legal filings (such as tax liens or bankruptcies). Instead of ranging from 300 to 850, business credit scores typically range from 1 to 100, as follows:

•  Good: 80-100

•  Fair: 50-79

•  Bad: 0-49

For million dollar loans, your business will most likely need a “good” credit score.

If you don’t yet have business credit scores, you can work on building them by opening a business bank account, taking out business credit cards, and getting smaller business loans and repaying them on time. This may help you qualify for larger loans later.

Personal Credit Score

If you don’t have a business credit history, lenders will likely look closely at your personal credit scores. For a $1 million business loan or more, you generally need a personal FICO credit score of 650 or higher.

If you run a sole proprietorship or partnership, or if you personally guarantee a business loan, you may want to keep in mind that taking out a business loan can affect your personal credit. It could, for example, increase your debt-to-income ratio, which could make it more challenging for you to take out a mortgage or personal loan.

Recommended: Free Credit Score Monitoring

2. Time in Business

Business loans under $1 million dollars typically require you to have been in business for at least two years (sometimes less in the case of some online lenders). However, for $1 million dollar business loans or more, that requirement can increase to at least three years.

The longer your business history, the better you can demonstrate to lenders how financially responsible you are, which makes you less of a risk as a borrower.

3. Collateral

Another way lenders mitigate risk in giving you a $1 or $2 million business loan is to require business collateral against the loan.

For example, the Small Business Administration (SBA) requires collateral for its 7(a) program for loans between $350,000 and $5 million. The fixed assets (e.g., buildings, equipment, land) put up as collateral need to meet the full value of the loan, otherwise the lender may include trading assets (at 10% of current book value) and available equity in personal real estate as additional collateral.

Recommended: 7a Small Business Loans: What They Are and How to Get One

4. Loan Purpose

When a lender is giving you a $1 million-plus loan amount, they will generally want a sense of how you will spend that money. As a result, you will likely need to present a detailed business plan outlining how you’ll spend the loan proceeds and how the investment will lead to increased profits, along with a detailed budget for your plan.

Creating a plan and budget doesn’t only benefit the lender; it can be helpful to you, too. This is a good exercise to go through even before you start applying for a loan, since it will help you think through why you want the loan and exactly how much you will need to borrow.

Recommended: Business Cash Management: Tips for Managing Cash

5. Financial Documentation

Lenders may ask for financial statements, such as bank statements going back four months, balance sheets, profit and loss statements, and tax returns going back several years. All of these give them a better sense of how financially stable your company is.

If you’re not accustomed to reviewing these statements, you may want to spend some time getting to know them before applying for a loan. How will a potential lender view your company’s financial well-being? Do you meet the qualifications for the loan you’re looking at?

For example, an SBA CDC/504 loan requires a borrower’s net worth not exceed $15 million and their average net income not exceed $5 million after taxes for the past two years. You may want to ask an accountant to review your financial documents and provide input, too.

6. Business Documentation

You may also be asked for certain business documents, such as your articles of incorporation if you run a corporation, or your articles of organization if your business is an LLC. In addition, you may need to submit business licenses and permits, disclosure of other debt, and any other legal contracts and agreements.

Recommended: 3 Year Business Plan

Pros and Cons of Million Dollar Business Loans

Before we dive into how to get a million dollar business loan, let’s first weigh the benefits and drawbacks to borrowing such a large amount of money.

Pros

With a million dollars or more, there’s a lot you can do in your business. You might be able to acquire another company, purchase real estate, buy high-dollar equipment, or expand your company significantly faster than you could on your own.

Often, the larger the loan (and the longer the repayment period), the lower the interest rate you can get, assuming your credit is outstanding.

Cons

While having access to a large amount of capital can help you do more, that money has to be repaid. And, if your investment isn’t yet reaping financial reward, paying back that loan may be a challenge. If you should run into difficulty making monthly payments, you could default on the loan and risk losing your collateral.

Even with a low interest rate, you’re still paying a percent of what you borrowed. The more you borrow and the longer you take to repay the loan, the more you’ll spend in total interest.

Lending Options for a Million Dollar Loan

There are a few resources where you can find large loans of a million or more for small businesses, including the SBA, banks, and credit unions. Online lenders are also an option, assuming they offer loans backed by the SBA.

Each lender may have slightly different criteria as to who can qualify for a business loan of $1 million or more.

SBA

The U.S. Small Business Administration (SBA) guarantees SBA loans, which are offered by banks and online lenders it partners with to help serve small businesses. SBA loans go as high as $5 million and have capped interest rates, which keeps them more affordable for small businesses. Repayment terms are up to 25 years, helping keep payments low. Fees, which include the SBA Guaranty Fee (up to 3.75% of your loan’s guaranteed amount), also tend to be lower than other lenders.

However, the application and approval process for an SBA loan can take several months, and businesses must meet strict eligibility requirements from both the lender and the SBA. To qualify for an SBA loan, you typically need to have been in business for at least 12 months, have an annual revenue over $50,000, and a credit score of at least 660. However, keep in mind that for larger loan amounts, these qualifications may be higher.

Banks

Many banks offer loan amounts up to $5 million, though they typically have strict requirements to qualify. A bank loan is typically best for a business that has been in operation for many years with a track record of positive financials. Banks will also require a good business credit score, as well as a strong personal credit score from the individual who’s representing the business. Businesses also typically need to have low debt-to-net-worth ratios to qualify for a large bank loan.

Credit Unions

If you are a member of a credit union that offers business financing services, you may want to reach out and see if they can meet your larger loan needs. Like banks, credit unions typically offer larger loans at attractive interest rates for qualified borrowers.

Applying for Million Dollar Business Loans

Getting approved for a million dollar loan generally requires jumping through a few more hoops than getting a smaller loan. The process of applying for business loans varies slightly from one lender to another. Generally, however, you will need to gather a fair amount of documentation in order to complete the application. This may include:

•  Business bank account statements

•  Tax returns and supporting IRS documents for both your business and personal tax accounts

•  Accounts receivable and balance sheets

•  Proof of collateral

•  Copy of your commercial lease, if applicable

•  Any applicable licenses and registrations for doing business in your state

•  Disclosure of other debt

•  Any legal contracts (such as franchise, incorporation, leasing)

•  Updated business plan with details on your growth and marketing strategies

•  Plan for how you will use the loan

Once you’ve gathered all the paperwork you will need, the next step is to fill out the application. Depending on the lender, you may be able to do all or some of this online, or you may be required to visit a local branch. Filling out the application will likely take some time, but having all your documents at the ready can help simplify the process.

When will you get an answer? Million dollar-plus loan applications tend to take longer to process than applications for smaller loans, so it may be weeks before you get a response from the lender and even months before you get an approval.

Once you are approved, you’ll need to review the loan agreement. This will outline details on how much you were approved to borrow, your interest rate, and what your monthly payment will be. The final step is to sign the document and wait for the funds to be disbursed.

Alternative Funding Options

If you’re looking for a large infusion of capital but your business or startup doesn’t qualify for million dollar loans, you’re not necessarily out of luck. There are other ways you may be able to get access to a large amount of capital. Here are two options to consider.

Outside Investors

An investor, such as a venture capitalist or an angel investor, may be able to provide the high-dollar capital you need for growth. These investors may also be able to connect you with industry contacts and helpful resources that can help you expand or launch your venture.

However, an investor may want a slice of the pie in exchange, typically in the form of equity in your business. And because they’re invested in your success, they may want to have a say in decisions you make about the business. You’ll have to consider whether giving up a portion of ownership and control of your business is worth getting access to a large amount of capital.

Crowdfunding

Crowdfunding can be a viable way to get capital that doesn’t necessarily need to be repaid. There are crowdfunding platforms where you can list a project, such as the launch of a new product line. Anyone who’s interested can contribute to the project. Some types of crowdfunding do need to be repaid, while others just require you to provide a token of appreciation to investors/donors.

Crowdfunding might be a good stop-gap between where you are and the millions you need. You can also get feedback on a new product from the market before investing in developing it.

The Takeaway

Banks and SBA lenders offer $1 million to $5 million loans to small businesses, but they can be tough to get. There are typically pre-set criteria regarding your credit score, annual revenue, and years in business. In addition, you will likely have to put up collateral, provide a detailed plan for how you will use the funds, and supply documentation that supports that your business can operate successfully with an additional large debt.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Are there unsecured $1 million business loans?

Unsecured $1 million business loans are rare but possible for established businesses with excellent credit, strong revenue, and proven financial stability. Lenders may require personal guarantees or higher interest rates to offset the risk. Alternative financing options like venture capital or private lenders might also offer unsecured funding of this size.

Can startups get million dollar business loans?

It may be challenging for businesses that have been in operation for less than two years to qualify for a loan of a million or more. There are lenders that will work with startups, but they may charge higher interest rates and require collateral.

Can you get $1 million business loans with bad credit?

Loans of $1 million or more tend to have stringent qualification requirements, including good credit. There are some alternative lenders who may offer loans of lesser amounts to businesses with bad credit, albeit with high interest.

How much will it cost to pay back a $1 million business loan?

It will depend on the loan’s interest rate and the fees, but you can quickly figure out the total cost of a million dollar loan with an online loan calculator. You just need to input the loan’s annual interest rate, fees, loan amount, and loan term.

What’s the monthly payment on a $1 million dollar business loan?

Many factors determine what your monthly payment will be, including the total loan amount, the interest rate, and the length of the loan. As an example, if your interest rate was 6% and your term was 25 years, your payment on a $1 million loan (not including fees) would be just over $6,400 a month.

Photo credit: iStock/VioletaStoimenova

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-018