Starting or scaling a business often requires outside capital. For many small business owners, borrowing money feels like a leap of faith — one that can fuel growth or backfire with long-term consequences. Whether you're seeking a loan to cover startup costs, inventory, staffing, or expansion, it’s critical to go in with both eyes open.

Understanding your options, key loan terms, and common pitfalls can help you avoid costly missteps and choose funding that supports your success.

Quick Takeaways for Busy Founders

• Financing options range widely — from traditional bank loans to online lenders, SBA programs, lines of credit, and even revenue-based financing.
   

• Loan agreements spell out your financial obligations — including repayment terms, interest, fees, and what happens if you default.
   

• Debt can help or hurt — careful planning and realistic cash flow projections make the difference.
   

• Red flags to watch for include variable interest rates, balloon payments, personal guarantees, and prepayment penalties.

Common Small Business Financing Options

What’s Inside a Loan Agreement

Before signing any agreement, business owners should know exactly what they’re committing to. Loan agreements are legal documents that outline the terms and expectations for both lender and borrower. These may include:

• Repayment schedule and frequency
   

• Interest rate (fixed or variable)
   

• Fees and penalties (late fees, prepayment penalties)
   

• Collateral requirements (property, equipment, personal guarantee)
   

• Default triggers and what actions the lender can take if you fall behind

Understanding each of these items in advance helps avoid future surprises. If you're unsure about any term, consult a financial advisor or legal counsel.

Reviewing your loan agreement carefully isn’t optional — it’s essential. This could be valuable in making more confident borrowing decisions and ensuring your business’s financial stability.

Avoiding the Most Common Borrowing Mistakes

Many small businesses fall into the same traps when borrowing.

Learn from others’ missteps:

Common Errors That Sink Small Borrowers

• Borrowing more than you can afford based on hope, not cash flow.
   

• Ignoring hidden fees that make loans more expensive than they appear.
   

• Using short-term loans for long-term investments, leading to payment stress.
   

• Not understanding variable interest rates, which can spike over time.
   

• Signing personal guarantees without fully grasping the risk to your assets.

Checklist: How to Prepare Before Applying for a Loan

Use this pre-application readiness guide to boost approval odds and secure better terms.

Know your numbers. Prepare up-to-date financials, including profit/loss, cash flow, and projections.
Build your credit profile. Review both business and personal credit reports. Address any errors.
Clarify your funding need. Define how much you need, what it’s for, and the expected ROI.
Compare multiple lenders. Don’t go with the first offer — shop rates, fees, and terms.
Understand collateral requirements. Know what you’re willing to pledge (if anything).
Review the full agreement. Use tools and expert reviews to check for traps or vague language.

FAQ: Borrowing Questions Business Owners Ask

Will applying for multiple loans hurt my credit?
It can, depending on the timing. Too many hard inquiries in a short period may lower your score. Use prequalification tools when available.

Can I get funding with bad credit?
Possibly. Some lenders offer options to lower-credit borrowers, but rates are higher and terms stricter. Consider building credit first.

Is it better to get a line of credit or a term loan?
It depends on your use case. Lines of credit are best for ongoing needs or gaps; term loans suit specific, one-time investments.

What’s a balloon payment?
A large, one-time payment due at the end of the loan term. These can be dangerous if your cash flow isn’t prepared.

A Free Tool to Compare Loan Terms

If you're overwhelmed by lender jargon, interest types, and amortization schedules, check out the Loan Comparison Calculator by NerdWallet.

This tool helps you understand your monthly costs and total loan impact before signing.

Borrowing Smart Is Business Survival

Taking on business debt isn’t inherently risky — but doing so without clarity is. By understanding your financing options, reading agreements carefully, and avoiding high-risk borrowing habits, you’ll not only fund your business — you’ll protect it. Good funding doesn’t just fuel growth. It builds confidence, credibility, and long-term resilience.