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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.

Recommended: Business equipment financing

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.

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.

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. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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.

Recommended: Leasing vs. Purchasing Equipment for Businesses

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.

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.

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. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

Wondering how to buy a franchise? For this type of entrepreneurship, you’ll want to research the available options, figure out the specific costs, identify possible lenders, and ensure your business plans and expectations align with the franchisor’s before you sign on the dotted line.

The advantage of franchises is that they often come with built-in branding and name recognition, and even corporate training and support. At the same time, there are usually limitations when it comes to franchisor fees, advertising, and sales territory.

Here’s everything you need to know about buying a franchise, from understanding various contract terms to getting financing in place.

Understanding Franchise Ownership

When you own a franchise, you purchase an existing business model from a company, known as the franchisor. You typically pay to get access to pre-made branding, advertising, and other support from the franchisor

However, there are often rules in place around creating your own marketing, products, or services. And in addition to the initial franchise fee, you typically have ongoing fees you pay to the parent company. Take time to understand these and any other recurrent costs so you can be well informed when you begin looking for a small business loan to get the enterprise started.

Types of Franchises

There are several types of franchise businesses. The most common structures include:

•  Business format: This is usually an all-in-one franchise opportunity that includes everything you need to run a turnkey business. Business franchises are common in retail stores and restaurants, such as McDonald’s.

•  Product distribution: Unlike a turnkey franchise business, a product distribution franchise often gives you access to sell higher priced items, such as vehicles.

•  Investment franchise: An investment franchise involves purchasing the assets behind a brand, such as a real estate brokerage. You may not handle the day-to-day operations but instead play a more strategic role in the managing of your franchise.

•  Home-based franchise: Also called a job franchise, this is usually a one-person opportunity that involves sales or services, such as plumbing, cleaning, or real estate.

•  Service franchise: A service franchise is often similar to a home-based franchise but on a larger scale. Instead of acting as a solo operator, you purchase a service-based business that may employ multiple employees acting as the service providers.

Benefits and Drawbacks

As you learn how to get a franchise, consider both the pros and cons of this business model.

Benefits

•  Pre-existing brand and customer base

•  Corporate expertise and marketing plan available

•  Operating procedures in place

•  Training available from the parent company

Drawbacks

•  Upfront capital required

•  Ongoing franchise fees

•  Less room for creativity

•  No ownership of product or trade name

Evaluating Franchise Opportunities

There are several factors to consider before you decide to buy a franchise.

•  Cost: Think about the upfront and ongoing costs, plus how soon your franchise business is likely to become profitable. A business valuation is a good starting point to understand the financials.

•  Local environment: Gauge the demand for the business in your area, as well as the existing competition.

•  Franchisor support: Look at how long the franchise has been in business and what kind of training and marketing support you’ll receive as a franchisee. Your own experience level may affect how much support you want from the franchisor.

Franchise Disclosure Document (FDD)

The Federal Trade Commission, or FTC, requires franchisors to provide potential buyers with a franchise disclosure document (FDD) at least 14 days before you sign any contracts or make any payments.

The FDD must include 23 pieces of information, including:

•  Franchisor’s background

•  Business background of executives

•  Litigation and bankruptcy history

•  Upfront and ongoing costs of operating the franchise

•  Restriction on suppliers, territory, and customers

•  Advertising and training programs

•  Renewal terms, termination and transfer rules, and dispute resolution process

•  Financial performance representations and financial statements

Financial Requirements

Consider all of the financial implications that come with buying a franchise, including costs that you may need to pay to the franchisor.

•  Initial franchise fee

•  Ongoing royalty payments

•  Advertising fees

Also think about ongoing operating costs, such as rent, inventory, and employee payroll. Finally, depending on the type of financing you select, your lender may require a certain level of collateral, net worth, and/or down payment on the loan.

Territory Rights

The franchisor may limit where your business operates; this may mean a permanent location or travel within a designated sales territory. While this limitation may curb your operation’s growth, it can also potentially protect your location from competition from other franchisees.

Recommended: Guide to Buying Out a Business Partner

Financing Options When Buying a Franchise Business

Depending on what is included with the franchise purchase, startup costs can range anywhere between $10,000 and $5 million. For many prospective buyers, that may mean you need some type of financing in order to close the deal. Here are three different options that allow for a variety of experience levels and existing business operations.

SBA Loans

An SBA 7(a) loan allows qualified applicants to borrow up to $5 million. This loan program is designed for existing businesses, including certain franchises.

For future reference, SBA 7(a) loans can be a good option for small business expansion as well as for a launch.

Another option is the SBA 504 loan, which can be used for specific types of expenses, including financing for business equipment, machinery, real estate, and buildings.

The SBA used to maintain a franchise directory of eligible brands, but as of 2023 it’s no longer kept up to date. Even so, you can still check to see if the franchise you want is in the directory. That’s no guarantee, but it could help improve your odds of success.

Traditional Bank Loans

Another financing option for buying a franchise is a traditional business acquisition loan. In some cases, the application processing time may be faster than an SBA loan and you may enjoy lower fees as well.

However, most traditional lenders want to see some type of financial track record from the business owner. That can make it more difficult for a first-time franchisee to use bank financing as a startup business loan.

Franchisor Financing

If you’re a rookie entrepreneur buying a franchise business, it’s possible your experience level will prevent you from qualifying for SBA or traditional bank loans. In such situations, franchisor financing may be available to help you get the upfront capital you need.

Some franchisors provide financing options, either directly through the parent company or through a third-party lender that’s familiar with the business model. You may need to provide collateral or a down payment, demonstrate a minimum net worth, and meet credit score requirements in order to qualify.

Recommended: Business Lines of Credit

Legal Considerations

When signing a franchise contract, it usually only lasts for a certain number of years (usually up to 20). You can attempt to negotiate renewal terms, but there’s no guarantee that the franchising company will renew your contract. They may also change the terms, including royalty fees or territory boundaries.

Steps to Purchase

So how do you actually navigate the process of buying a franchise? Follow these four steps:

•  Choose a franchise.

•  Explore your financing options.

•  Research the franchise financials and contract. Consider hiring a franchise attorney to make sure you understand your legal responsibility and limitations.

•  Sign the franchise agreement to officially start your entrepreneurial journey.

Once you finalize the paperwork with the franchisor, you may be able to attend a corporate training before you open for business. Next steps should be outlined in your agreement to help create a successful launch.

The Takeaway

Buying a franchise can be an exciting way to become a business owner with a built-in support system. You can choose from a variety of franchise types and decide whether you prefer to sell goods, services, or both. As always, it’s important to do your due diligence when reading the franchise disclosure document and the franchise agreement. It’s also wise to explore your business loan options, whether you’re expanding an existing franchise footprint or looking to launch a business for the first time.

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 buy a franchise?

It depends on the size of the franchise and what is included in the purchase price. Startup sums can range anywhere from $10,000 to $5 million.

What should I look for in a franchise disclosure document?

A franchise disclosure document includes financial and legal information related to the franchisor and its executives. It should also outline ongoing fees, renewal terms, and territory limitations.

How do I finance a franchise purchase?

Experienced business owners may qualify for an SBA loan or a traditional bank business loan. If you don’t have any previous experience, you may be able to get approved for financing from the franchisor or their lending partner, if available.

What legal documents are needed to buy a franchise?

You’re legally required to receive a franchise disclosure document at least two weeks in advance of the purchase. You’ll also need a franchise agreement, which serves as a legally binding contract between you and the franchisor.

How long does it take to buy a franchise?

The purchasing process can take three to six months as you evaluate the franchise and get your financing in place. From there, it typically takes a few more months before you actually launch, depending on the complexity of your franchise business model.

Photo credit: iStock/hsyncoban

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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.


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.

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

SOSMB-Q424-108

When you’re starting a new business or expanding an existing one, you may find that funding is one of the biggest hurdles to overcome. While bootstrapping is an option, it’s not always realistic when cash supplies run short. Small business grants or loans, however, can help close many financial gaps for business owners.

Whether you decide to use a grant or a loan — or a combination of both — may depend on where you are in your business’s life cycle, what your needs are, and what type of funding you’re able to qualify for. To determine the best financing approach for your business, it’s important to understand the differences between loans vs. grants.

Business Loans vs Grants: 7 Important Differences

The biggest difference between a small business loan and a grant is that a loan must be repaid, and a grant does not. But there are some other things that set them apart from one another. As you explore small business financing possibilities, here’s a closer look at grants vs. loans.

1. Grant vs. Loan Eligibility Requirements

Grants

Small business grants can come from nonprofit organizations, for-profit organizations, and government agencies. Note that the federal government doesn’t make grants (or loans) to businesses directly, but does assist with programs that do.

Each organization offering a business grant can establish criteria to determine who qualifies. Only businesses operating in select industries and locations or whose owner meets specific demographic requirements may be eligible for specific grants. For example, some organizations may exclusively offer small business grants for women or small business grants for minorities.

While a lot depends on your business’s industry, focus, and location, it can generally be tougher to qualify for a grant than for a loan.

Loans

With small business loans, lenders are more interested in the fundamentals of the business and the business’s (and business owner’s) financial health. For example, when you’re applying for a small business loan, lenders may review your:

•  Business credit score

•  Personal credit scores

•  Personal income or business income

•  Profit and loss statement

•  Cash flow statement

•  Business or personal assets

Recommended: Typical Small Business Loan Fees

2. How Grant vs. Loan Funding Can Be Used

Another important difference between grant and loan options for small business has to do with how you can put the funds you receive to work.

Grants

Small business grants often come with restrictions for how the funds can be used. For example, you may be able to use a grant only to fund efforts to grow your business. Or, some grants may limit you to expenses related to the cost of starting a brand-new business from the ground up.

Loans

With a small business loan, you generally have a lot of control over what you do with the money. For example, you might use a small business loan to upgrade your computer equipment, purchase business vehicles, or open a second business location.

If you’re looking for more flexibility in how you can spend funding, then a small business loan may be a more useful option than a small business grant.

3. Funding Amounts

When considering grants vs. loans, it’s important to understand how much money you may be able to access.

Organizations that make grants to small businesses can limit how much they offer. So for example, you might be limited to receiving $5,000 or $10,000, though some may offer $25,000 or more. The upside is that you don’t have to pay grant money back. However, that money may not be enough to fully meet your funding needs.

With small business loans, lenders can typically set the borrowing limit much higher. SBA 7(a) loans, for example, have a maximum cap of $5 million.

4. Repayment Requirements

As mentioned, the chief difference between a grant and a loan is that a loan has to be repaid while a grant typically does not. But it’s also important to note that small business loans are not all identical when it comes to their repayment requirements.

Short-term loans, for example, may have repayment periods lasting less than one year. Long-term loans may have repayment periods extending over several years. With SBA 7(a) loans, you can take up to 25 years to repay what you borrow, depending on what you’re using the loan proceeds for.

5. The Application Process

Regardless of whether you decide to pursue a loan or a grant, you’ll have to apply for it. There are some differences to consider when it comes to applying for a small business loan vs. applying for a grant.

For loan funding, you’ll need to meet the lender’s criteria for things like credit score, revenues, and time in business. As you compare small business loan options, it’s wise to take time to check the minimum qualification requirements carefully to weed out loans that you’re less likely to qualify for. Bank and SBA loans typically have stricter qualification requirements than loans from online lenders.

When you’re applying for a small business grant, your business’s financial situation may be less relevant. But it’s key to make sure that you understand the eligibility requirements for the grant and that you meet them before applying. Small business grants meant for women, for instance, generally require businesses to have one or more women owners. Depending on the grant, you will likely be asked to show proof of your eligibility, so bear that in mind.

While some grant applications can be simple, others require writing a grant proposal, which can take weeks to complete.

6. Interest

With a business loan, the interest rate represents the amount you will pay back to the lender on top of principal; it’s usually calculated as a percentage of the total amount borrowed.

Business loan interest rates can vary widely depending on the borrower’s financial history, the lending institution, and what’s happening in the economy.

Annual percentage rate (APR) is the total cost of a loan, including the interest rate and any added fees (such as an origination fee and application fee), and is generally the best measure for understanding and comparing business loan interest rates.

Interest rates on small business loans may be fixed (the interest rate remains the same over the life of the loan) or variable (the rate will change based on current market rates at a predetermined date).

Recommended: APR vs Interest Rate: What’s the Difference?

7. Availability

When debating whether to pursue a loan or grant, you may want to consider how quickly you need the capital. Grantors typically take much longer to approve applications and disburse funds than lenders do. If you need money immediately, a loan may be the only option. Keep in mind, though, that SBA and bank loans can also take a few months to fund. Loans from online lenders, however, often take just a few days to process.

Here’s a side-by side comparison of business grants vs loans.

What Are Business Loans?

A small business loan is a sum of money that a financing institution, such as a bank, credit union, or online lender, extends to a small business with the expectation that it will be paid back over time, plus interest. The proceeds from the loan can be used for nearly any business purpose, and the repayment term typically ranges between five and 10 years.

How Business Loans Work

For a secured small business loan, you need to put up a business asset (such as equipment, a vehicle, or real estate) as collateral for the loan. Should you become unable to repay the loan in full, the lender can seize that collateral to recoup their losses.

Unsecured business loans don’t require the borrower to pledge collateral, and are based only on a borrower’s creditworthiness. In some cases, you may be asked to sign a personal guarantee for a business loan, which states that you are personally responsible for repaying the loan should your business default.

For a standard term business loan from a bank, you will generally pay a fixed amount each month (including principal and interest) for the duration of the loan term.

Pros of Business Loans

There are a number of benefits to taking out a small business loan. Here are a few to consider:

•  Expedite business growth: The funds from a business loan can allow you to put your plans into action sooner, rather than having to wait until your business has generated enough profit to fund expansion yourself.

•  Maintain business ownership: With a loan, you can get an injection of capital without bringing on any investors. This enables you to keep full control of your business and retain all the profits as your company grows.

•  Flexible use of the funding: If you receive funding from an investor or a grant, you may be limited in how you can use the money. When you borrow from a lender, there are typically no restrictions on how you can spend those funds as long as they are being used on your business.

Recommended: Startup Business Loans

Cons of Business Loans

Small business loans also have some downsides. Here are some to keep in mind.

•  Application process can be extensive: For a bank or Small Business Administration (SBA) loan, you’ll not only need to fill out an application, but will also likely need to provide two or three years of tax returns and financial statements, as well as a business plan.

•  You could lose assets if you default on payments: If you put a business asset up for collateral, you could end up losing it should you default on the loan. If you sign a personal guarantee, the lender can potentially come after your personal assets.

•  Interest rates can be high if you don’t have strong credit: Interest rates typically depend on your credit score, both your business’s score as well as your personal score. While banks often offer lower interest rates than other funding options, it’s not always easy to qualify for those favorable rates. If you have a below-average rating, you could end up paying more for the loan than you’d like.

What Are Business Grants?

Small business grants provide funding to businesses without any requirement that the money be paid back. It is essentially free money that’s provided to business owners who meet specific criteria and agree to use the money for a certain purpose. There are grants available for all types of small business owners, including women, minorities, veterans, and disabled Americans.

How Business Grants Work

Typically, a grant becomes available when a government agency, nonprofit organization, or private business chooses to set aside grant money for a particular need or area of concern. For example, a grant might be set up to encourage minority entrepreneurship in a community, foster research and development in a specific industry, or reward innovation.

Whatever the cause, the agency or business will start a grant by setting aside funds and setting up qualifications and an application process. Unlike loans, grants can’t be spent in any way the business sees fit. The funds must be used as specified in the application.

Pros of Business Grants

Grants have many benefits. Here are some to consider:

•  It’s free money: The biggest advantage of a grant is that, unlike a loan, the money does not have to be repaid.

•  Accessible information: There is extensive information available online about where, how, when, and who to get grants from. This is important, because you generally need to do a lot of searching to find the right grant for your business.

•  Gain credibility: Receiving a grant increases your business’s visibility. It helps promote your business and idea and lets others know that your work is important. And, once you’ve been awarded one grant, you are generally more likely to receive others, since other organizations will see you as a reliable candidate.

Cons of Business Grants

Grants do have some downsides, however. Here are a few to keep in mind:

•  Applications can be time-consuming: Grant applications usually require a lot of paperwork. In addition to the application, you and your small business will also have to provide additional documentation, such as demographics of your market, your specific reasons for applying for the grant, and exactly how you will use the grant funds.

•  Difficult to receive: Because grants are free money, there are a large number of small businesses like yours trying to get them. As a result, competition for grant approvals can be stiff.

•  Strings attached: Grant money typically comes with specific restrictions and conditions about how the money should be used. In addition, you may be asked to do monthly or quarterly check-ins to provide proof of things such as marketing efforts, publicity, and other steps toward goals outlined in the grant.

Choosing Between Business Loans vs Grants

What makes the most sense for your small business depends on a lot of variables that are unique to your situation. As you’re making your decision, some questions you may want to ask yourself might include:

•  Can I earmark these funds for a specific purpose?

•  How much money do I need?

•  Are there any grants for which my small business is eligible?

•  Will my business be able to pay back these funds?

•  Do I have the time to search out and apply for grants?

•  Do I have a personal or business credit score that will allow me to get good terms on loans?

Finding the right option for your small business can take some time. Just remember, you may be able to combine options if that makes the most sense for you — taking out a loan to ramp up inventory, for example, while applying for a grant to help you launch a new product.

Different Types of Grants and Loans

There are myriad different type of grants, including:

•  Federal business grants

•  State business grants

•  Local business grants

•  Small business relief grants

•  Corporate business grants

•  Specialty business grants

There are also many different types of business loans. These include:

•  Term loans

•  SBA loans

•  Business line of credit

•  Equipment loan

•  Invoice factoring

•  Merchant cash advance

•  Microloan

EIDL Grants vs Loans

While the SBA’s COVID EIDL (Economic Injury Disaster Loan) is no longer available, the SBA continues to offer EIDLs to small businesses located in a declared disaster area. These loans are designed to help small businesses that have suffered economic losses due to a disaster such as a severe storm, flooding, or wildfire get back on their feet.

You can apply for a non-COVID EIDL relief loan through the SBA. The loan amount will be based on your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.

The Takeaway

Choosing between grants and loans ultimately comes down to knowing what your business needs are and what type of funding fits best in your overall financial strategy. Remember that you can combine more than one option — and that your needs may change over time.

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 grants better than loans for businesses?

It depends. Grants are better than loans in that they do not need to be paid back. However, grants can be difficult to get, may require an extensive application process, and typically come with restrictions on how you can use the money that’s awarded.

Is it harder to apply for business grants or loans?

It can be more difficult to apply for business grants than loans. While the application process varies considerably from grant to grant, in some cases, you will be required to submit a formal grant proposal which could take weeks to prepare.

Are you supposed to repay business grant money?

No, business grant money does not need to be paid back.

Do grants hurt your credit?

Grants do not hurt your credit because they are not loans and do not need to be repaid. Since grants are not reported to credit bureaus, they do not appear on your credit report or affect your credit score, making them a helpful, debt-free financial resource.

Is grant money reported to the IRS?

Grant money may be reported to the IRS depending on its purpose. Grants used for educational expenses, like tuition, are typically tax-free if they meet specific requirements. However, grants for general use or business purposes are often considered taxable income and must be reported on your tax return.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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.


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.

SOSMB-Q125-008

To get approved for a small business loan from a bank, businesses typically need to submit a long list of documents — including resumes, personal and business tax returns going back several years, and a business plan. The approval process can take months, and the sheer amount of paperwork involved can be daunting.

Fortunately, there are a growing number of alternative lenders that offer no- or low-document business loans. These products can work well for small business owners who don’t yet have consistent income to report or who need cash quickly to cover operating expenses. However, no-doc (also referred to as stated income) loans tend to come with higher interest rates and fees and less flexible terms.

Here’s what you need to know about no-doc business loans, the pros and cons of getting a stated income loan, and the different types of no-doc and low-doc loans available on the market.

What Is a Stated Income Business Loan?

Stated income business loans are loans that don’t require you to submit extensive paperwork (such as several years of personal and business tax returns) as proof of income during the application process. This is why they are also called low-doc or no-doc business loans.

Are there truly zero doc loans available? Not typically. Any business loan from a lender (rather than a family member or friend) will usually require at least some paperwork, such as an application, proof of identity, time in business, and/or proof of sales. However, with a no- or low-doc loan, the paperwork involved will be minimal and the application will be much shorter than with a conventional business loan.

Is Stated Income the Same as No Doc?

Stated income and no-doc loans are similar but not identical. Stated income loans require borrowers to declare their income without providing detailed documentation, relying instead on creditworthiness or other criteria.

No-doc loans, however, do not require income verification, focusing entirely on factors like credit scores, collateral, or down payments. While both offer flexibility, no-doc loans typically involve higher interest rates and stricter conditions due to increased lender risk.

How Do No Doc Business Loans Work?

Applying for and getting a small business loan can be a time-consuming process. For many borrowers, this is because of the paperwork involved.

Typical documentation for a standard loan includes:

•  Bank statements

•  Employer identification number (EIN)

•  Tax returns

◦  Personal and business

•  Business license

•  Business permits

•  Business registration

•  Proof of collateral

•  Financial statements

◦  Balance sheet

◦  Profit and loss statement

◦  Cash flow statement

•  Accounts receivable

•  Accounts payable

•  Debts

•  Business plan

No-doc or low-doc small business loans require a fraction of what is listed above. Since there’s less paperwork demands, the process moves much faster than with other types of small business loans. In many cases, you can fill out the application completely online. The lender will then connect to your accounting software and bank account, making it possible to get approved within minutes — and funded as soon as the next business day.

Other than the expedited application process, however, no-doc business loans typically work the same as any other type of business loan. You generally receive the principal amount up front and then pay back the loan (principal plus interest) over time. Like a standard loan, everything is clearly outlined in the loan terms.

Uses of Stated Income Business Loans

No-doc loans are typically used to help with short-term funding needs. For example, they can help with:

•  Cash flow shortages: If you have a few invoices that are overdue, a no-doc loan can tide you over until you receive funds.

•  Taxes and payroll: A no-doc loan can help you meet immediate needs, such as making a tax deadline and paying your employees on time.

•  Inventory: If your business is seasonal, a no-doc loan can help you prepare for upcoming sales. It can also be useful if you experience a sudden increase in purchase orders but don’t have enough inventory to complete them.

•  Equipment: Whether you need a new computer, a company car, or heavy machinery, you can use no- or low-doc financing, such as an equipment loan, to get the tools you need for day-to-day operations.

•  Emergency expenses: Sometimes your available cash is simply not enough to handle a sudden emergency or short-term opportunity. When this happens, credit cards often can’t handle the size of the expense and a loan is often your only option.

Pros and Cons of Stated Income Business Loans

No-doc and low-doc loans can give your business access to cash quickly, sometimes within 24 to 48 hours. They are quick and easy to apply for, and generally have lower credit score requirements than traditional loans.

But there are also some drawbacks to stated income and low-doc loans. Due to the higher risk these loans represent to lenders, the loan amounts, repayment terms, and interest rates are typically not as favorable as what you would find with a traditional business loan. If you’re looking for a large, long-term loan — or cost is your top priority in choosing a lending product — you may be better off with a traditional bank or SBA term business loan.

Qualifying for a No-Doc Loan

No-doc business loan requirements vary depending on the lender and the type of loan. In some cases, a lender may require that you’ve been in business at least six months, have a credit score of 600 or higher, and an annual revenue of $200,000 or more.

Other lenders, however, may simply need to see that your business does a certain amount of credit card transactions per day or has a certain number of invoices out to clients. Unlike traditional business loans, proof of collateral is typically not needed.

Recommended: Is a Business Loan Considered Income?

Finding Stated Income Business Loans

Your best bet for finding small business loans that require little documentation is through alternative online lenders. These lenders offer a wide range of financing options, including short-term loans, lines of credit, invoice financing, and merchant cash advances.

However, because they don’t face the same regulations as banks and typically use technology to analyze underwriting criteria, applicants don’t need to provide as much documentation about income and may also be able to qualify with less-than-excellent credit.

Recommended: Online Business Loans

Typical Requirements for No Doc Business Loans

With a no-doc or low-doc loan, you don’t need to submit much paperwork or a lengthy paper application to apply. The process is often done entirely online and often the only criteria you need to provide is:

•  One-page loan application

•  Age of the business

•  Business’s credit score

•  Business bank statements

•  Invoice or merchant processing statements (if applicable)

Stated Income Business Loans vs Conventional Business Loans

Low-Doc Business Loans

Below are some small business financing options that require very little paperwork in order to get approved.

Short-Term Business Loan

Short-term business loans are usually unsecured, which means they don’t require any proof of collateral. And, when you work with an online lender, you may not need to provide much more than your bank account information and proof of revenue. As with other term loans, you receive the entire loan amount in one lump sum; you then pay it back (plus interest) in regular installments, which could be monthly, semimonthly, or weekly.

Keep in mind that short-term also means lower total loan amounts and quick repayment. You’ll usually have anywhere from 18 to 36 months to pay back your loan.

Merchant Cash Advance

Business owners with mostly credit card sales can turn to a low-doc merchant cash advance (MCA) to fill in cash flow gaps. With this type of financing, you receive a lump sum of money from an MCA company, called an “advance.” In return, you give that company a small percentage of each credit card sale you make until the advance is paid off (plus fees).

You can usually apply for a merchant cash advance entirely online with very little paperwork (sometimes just a few months of your business’s credit card statements). Approved borrowers typically receive funds shortly after applying.

Invoice Financing

Invoice financing requires very little paperwork because the proof of your creditworthiness rests with your unpaid invoices. With invoice financing, you get quick access to cash by selling unpaid customer invoices to a third-party company at a discount. Typically, you’ll get around 85% to 90% of your money upfront, with the rest (minus fees) coming after the invoice is paid.

Business Line of Credit

A no-doc business line of credit gives your business access to cash when you need it, rather than getting it all at once. You can draw funds up to an agreed-upon credit limit and only pay interest on what you draw. Once you’ve paid back the loan, you can draw from it again. While you may need to provide some minimal documentation up front — similar to a short-term loan — you won’t need to give your lender any documents when you need to make a draw.

Equipment Financing

Equipment financing can be a good, low-doc loan option if your business needs cash to finance a piece of equipment. Typically, you get a quote for the equipment you’d like to buy, and a lender then fronts you all, or a large portion, of the cost. Since the equipment you’re purchasing secures the loan, you don’t need to provide any proof of collateral. And, some lenders don’t require documentation like tax returns or financial statements for borrowers financing equipment of $250,000 or less.

Alternative Loan Options

If you’re not looking for a large amount of capital, here are some alternative funding options that can help grow your business.

Business Credit Card

While you typically do need to provide documentation to get approved for a business credit card, it’s usually less than getting approved for a traditional small business loan. And if you can qualify for a 0% intro APR business credit card, you can spend for a predetermined period without interest. If you are able to pay off your balance before the end of the introductory period (which may be a year-plus), you don’t have to pay any interest at all. At the same time, you’ll be building valuable business credit along the way, which can help you get more financing later.

Crowdfunding

Starting a crowdfunding campaign for your business does take some time and effort, but it can be a good funding option for new ventures that don’t yet have the annual revenues needed to qualify for a traditional business loan. In some cases, the only thing you have to give people who invest in your business is a small reward.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending, also known as “crowdlending,” allows you to get loans directly from other individuals via an online P2P platform. Most P2P sites have a wide range of interest rates based on the creditworthiness of the applicant.

The Takeaway

If you’re interested in fast business financing with little hassle, then you might want to consider no-doc or low-doc business loans. These lending products are generally quick and easy to apply for, and you may be able to receive the funds within a day or two. However, it’s important to know that this type of financing tends to come with higher interest rates, lower loan amounts, and short payback periods.

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 no-doc business loans difficult to obtain?

No-doc business loans can be difficult to obtain due to their higher risk for lenders. These loans often require strong personal credit, significant collateral, or high-interest rates to offset the lack of financial documentation. Approval may also depend on the lender’s specific requirements and the loan amount requested.

Can I get a business loan with no revenue?

Yes, you can get a business loan with no revenue, but options may be limited. Startups often rely on personal loans, business credit cards, or investor funding. Some lenders offer loans based on personal credit scores, collateral, or business potential rather than current revenue. Terms may be stricter or more expensive.

Can stated income loans be long-term loans?

Yes, stated income loans can be long-term loans, depending on the lender and loan type. While commonly used for short-term financing, some lenders offer extended repayment terms, especially for real estate or business purposes. Borrowers should review terms carefully, as interest rates and requirements may vary with long-term stated income loans.

Are no doc and stated income loans the same?

No-doc and stated income loans are not the same, though they are similar. No-doc loans require minimal documentation, focusing on creditworthiness rather than income proof. Stated income loans require borrowers to declare their income without providing extensive documentation, though some verification may occur. Both cater to those with non-traditional financial situations.

Can start-ups get no doc loans?

Start-ups may qualify for no-doc loans, but it can be challenging due to limited financial history. Lenders typically evaluate credit scores, collateral, or personal guarantees instead of traditional income verification. Start-ups with strong credit or valuable assets are more likely to secure such loans, albeit often at higher interest rates.

Photo credit: iStock/Kerkez

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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.

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.

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