How business financing works

The main types

• Term financing. A lump sum repaid in regular installments over a set period. Good for a defined, one-time need.
• Line of credit. A limit you draw from as needed. You pay for what you use. Good for uneven cash flow.
• Equipment financing. Funds for a specific asset, which usually serves as security.
• Invoice financing. Cash against unpaid customer invoices, so you don't wait for clients to pay.
• Sales-based financing. Repayment tied to your incoming revenue, so payments rise and fall with sales.

Each type suits a different need. The right question isn't "which is cheapest" alone, but "which matches how my business earns and spends."

What you actually pay

Offers can express cost in different ways, which makes them hard to compare side by side. The simplest fix: ask every provider for the same three numbers, in dollars.

Also ask whether there are separate fees: origination, underwriting, late payment or early repayment. A clear offer lists all of them before you sign.

How repayment is collected

• Fixed installments. The same amount on a set schedule: weekly, every two weeks or monthly. Easy to plan around.
• Sales-linked payments. An amount that follows your revenue. Lighter in slow periods, heavier in busy ones.
• Automatic debits. Most providers collect directly from your business bank account. Make sure the timing fits when your money comes in.

Ask what happens if revenue drops: can the schedule be adjusted, and how fast?

Contract terms to read closely

• Personal guarantee. Whether you, as the owner, are personally responsible — and for what exactly.
• Security and liens. Many providers file a UCC-1 statement that records a claim on business assets.
• Early repayment. Whether paying early reduces the total, or the total stays the same.
• Additional financing. Whether you may take other financing while this one is outstanding.
• Events of default. What counts as default and what happens next.

Your disclosure rights by state

Several states require commercial financing providers to give a standardized summary of costs and terms before you sign. Rules differ by deal size, what must be shown and whether the provider must register.

Laws change. Check current rules with the state regulator or counsel.

Questions to ask before you sign

1. How much will I receive, and how much will I repay in total?
2. What is every fee, and when is it charged?
3. How often are payments collected, and from which account?
4. What happens if my revenue drops?
5. Does repaying early change the total?
6. Is there a personal guarantee or a lien?
7. Which state disclosure applies to me, and can I see it before signing?

Glossary

Amount financed

The money you receive.

Total repayment

The sum of all payments you make.

Total cost

Total repayment minus the amount financed, plus any separate fees.

Term

The time from funding to the last payment.

Origination fee

A one-time fee for setting up the financing.

Personal guarantee

An owner's personal commitment tied to the business's obligations.

UCC-1

A public filing that records a provider's claim on business assets.

Default

Failing to meet the contract's terms, with consequences the contract defines.

Sources

• NerdWallet — Small business financing explainers
• Venable — State commercial financing disclosure laws (2026)
• Utah DFI — Commercial financing
• Texas Legislature — HB 700 analysis