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5 Surprisingly Cheap Forms of Small Business Financing

Marc Prosser
Marc Prosser

Are you looking for an inexpensive way to finance your business?

Maybe you’ve even considered asking a family member for a loan.

While that’s certainly an option, there are easier alternatives that won’t result in an awkward Thanksgiving dinner a year from now.

Let’s take a look at five surprisingly cheap ways to finance your small business.

Credit Cards

Financing your business with credit cards may get a bad rap, but it’s actually one of the smartest strategies you can use.

A 16 percent APR might sound high for a personal loan, but new businesses often face APRs of 40 percent or higher from alternative lenders.

In that context, credit card financing is surprisingly inexpensive. SBA loans and traditional bank loans are among the few financing options with a lower APR, but these have much higher requirements and only offer loans of $30k or more.

Credit cards offer greater flexibility than traditional loans. You can pay back what you’ve borrowed at the bare minimum or you can make double payments to reduce your debt sooner.

Making regular monthly payments is the smartest move when it comes to avoiding astronomical fees and a possible ding to your credit score.

Business Line of Credit

A business line of credit gives you access to a set amount of money which you can draw upon as needed.

Different lenders, from traditional banks to online lenders, offer lines of credit in addition to business loans. Terms and requirements vary quite a bit, lines of credit are harder to qualify for than loans from the same lender.

The good news is that because the interest rate only applies to the funds you’re using at a given time, you’ll often accumulate less interest than you would otherwise.

With a line of credit loan, you only pay interest on the amount you withdraw. Make at least the minimum payment each month and keep in mind that interest will accrue on the remaining balance until paid in full. This type of loan has a variable interest rate.

The interest rate will fluctuate depending on market changes.

A line of credit is a safety net you can use to protect your business when you encounter unexpected expenses. It can also tide you over during slow or lean times in your business, such as seasonal slow periods.

PayPal Working Capital

Have you considered PayPal as a viable means of financing your small business? This wildly popular online payment service also provides affordable business loans on a unique model.

With PayPal Working Capital, there’s no credit check required. Instead, this lender looks at your business’ sales history on PayPal and loans up to 15 percent of your annual PayPal sales.

You pay the loan back each time you get paid. It works by assessing a fixed percentage from your daily PayPal sales.

While the loan amount may be meager in comparison to other financing options, you have several benefits including:

  • No waiting - You’ll get funding within minutes
  • No monthly payments to make - Payments are taken from your daily sales.
  • No periodic interest rate - You can choose the percentage taken out of your daily sales

While PayPal Working Capital is only available to businesses that take payments via PayPal, it can be an ideal short-term loan option for E-commerce businesses.

That said, PayPal isn’t limited to E-commerce. In-person retailers can use PayPal Here, which also provides access to PayPal Working Capital.

Square Capital

While PayPal Working Capital is perfect for E-commerce businesses, Square Capital is for retail businesses. This lender offers up to $50,000 in financing.

Because eligibility is based on your Square history, you must already be a customer to apply for a loan. Eligibility is also be invite-only.

You’ll know that you’re eligible if you’ve received an email to that effect, and can see a “View Your Options” link on your Square dashboard.

Payback terms are simple. Much like PayPal, a percentage of your daily card sales goes towards paying down your balance. Another benefit is that the amount you owe will never fluctuate.

It remains the same as your initial terms. With an APR of 35 percent, Square Capital is much cheaper than other merchant cash advance providers (who can assess an APR of up to 80 percent).

While PayPal is best known for E-commerce and Square is best known for handling retail sales, both can be used for online and in-person sales, and both companies will consider both kinds of sales for financing purposes.

Equipment Leasing

Do you need equipment for your small business? There are two ways to go about it: buying it (generally with the help of a loan), or by leasing it.

When it comes to leasing, there’s actually three main types: fair market value, $1 buyout, and 10 percent option lease.

Let’s break down each:

In a fair market value lease, you’ll make monthly payments in order to use the equipment. At the end of your lease, you have the option to buy the equipment at its fair market value, or return the equipment.

You can also opt for an upgrade. This type of loan is hardest to qualify for because your monthly payments are considerably lower. You’ll need a good credit score. This loan is mostly for equipment leases over $150,000.

In a $1 buyout lease, you’ll make higher monthly payments because at the end of the lease, you can then purchase the equipment for only $1.

A 10 percent option lease is similar except you can purchase the equipment for 10 percent of its fair market value at the end of the lease.

You’ll pay less monthly, but more if you choose to purchase the equipment at the end of your lease.

The great news about equipment leasing is that the equipment serves as collateral, making equipment leasing far less expensive than most financing options that don’t involve collateral.

Lease rates vary, but most fall around five to 16 percent APR. You can estimate your approximate monthly payment using this equipment leasing calculator.

Final Thoughts

There are better ways than asking mom and dad or aunt Gertrude for a loan.

If you need to secure business financing, take a serious look at these relatively inexpensive ways to finance your small business.

Image Credit: Utah778 / Getty Images
Marc Prosser
Marc Prosser Member
Marc Prosser is the publisher of small business “how to” website, Fit Small Business. Previously, Marc was the first employee and Chief Marketing Officer of a company that went public on the NYSE.