Business Term Loans, Equipment Financing and Business Credit Cards

Business financing is not one product. A term loan, equipment financing, and a business credit card each solve a different problem, and the right choice depends on what you are buying and how the business earns money. This guide compares the three so you can match the funding to the need.

Business term loans

A term loan gives a business a lump sum that is repaid over a set period with regular payments. It is a good fit for one-time or larger costs such as expansion, a new location, renovation, or a large purchase. Term loan amounts can range from a few thousand dollars to $1 million or more, depending on the business and the lender.

Lenders usually review time in business, revenue, and credit. Some term loan programs qualify on revenue, generally $5,000 or more in monthly business revenue, while others lean more on credit. Terms, rates, and approval vary by lender, and a longer term usually means a lower payment but more total interest.

A term loan may be right if you know exactly how much you need, you can afford a steady payment, and the project will pay for itself over time.

Equipment financing

Equipment financing is a loan or lease used to buy business equipment, such as vehicles, machinery, kitchen equipment, or technology. The equipment itself often secures the loan, which can make approval easier and lower the cost compared with an unsecured loan.

With a loan, you own the equipment and repay it over a set term. With a lease, you pay to use it and may have the option to buy it at the end. The right structure depends on how long you will use the equipment, how quickly it loses value, and the tax treatment, so ask your accountant about the tax side.

Equipment financing may be right if you are buying a specific asset, it will last for years, and you want to keep your cash for operations.

Business credit cards

A business credit card gives a revolving credit line for ongoing purchases, such as supplies, software, travel, and advertising. It can help you manage cash flow and separate business spending from personal spending. It can also help build the business's credit profile when the account is managed well.

Approval usually depends on the business and personal credit profile. Watch for the interest rate on balances you carry, annual fees, and rewards that fit how you spend. Paying the balance on time and in full avoids interest.

A business credit card may be right if your purchases are small and frequent, you want the flexibility of a revolving line, and you will pay the balance regularly.

How to choose

• A one-time larger cost or expansion: a term loan
• Buying or leasing equipment: equipment financing
• Ongoing purchases and supplies: a business credit card
• A short cash-flow gap: working capital (see our guide)

Sometimes a business uses more than one. For example, a restaurant might finance an oven with equipment financing, cover a slow month with working capital, and put weekly supply purchases on a business card.

What lenders generally look at

• Time in business and the type of business
• Revenue and bank statement history
• Personal and business credit. Business funding programs generally require a minimum credit score of about 550, and many loans and working capital programs qualify with a 680 or higher score, or through revenue instead of credit
• Existing debt and obligations
• The purpose of the funds and the plan to repay

What to have ready

1. Several recent months of business bank statements
2. A photo ID and your business registration or EIN documents
3. A short description of what you will use the funds for and how you will repay
4. Recent tax returns or financial statements if requested

Rates, terms, and approval depend on the business and the lender. This guide is educational and is not a commitment to lend.