According to Entrepreneurs HQ, 65.3% of small businesses are profitable, and 78% rely on personal savings rather than investors or business credit. You may not be as fortunate, so you need to find funding outside of your own bank account.
Small business financing comes with some costs, though, so you’ll want to minimize them before committing. Here are 10 tactics you can use to do so.
1. Clean Up Your Credit File Before Applying
Your credit profile is the first thing that lenders look at, so pull business and personal reports, go over them, and dispute errors. Standardize your business information across bureaus and vendors, too, as mismatches can trigger higher risk flags. You should also pay down revolving balances to improve utilization.
The good news is that even a small credit score increase can move you into a lower pricing tier; this can shave several percentage points off the annual percentage rate (APR), and you’ll get better business loan rates.
2. Use Collateral to Reduce Risk Premiums
Secured financing usually costs less since it lowers lender risk. Pledging the following assets can convert a high-cost unsecured offer into a cheaper secured one:
- Equipment
- Inventory
- Receivables
- Real estate
For example, equipment-backed loans often land in the mid-single to low-teens APR, while unsecured term loans have high-teens or higher APRs.
Be strategic, though; only pledge assets you can afford to risk, and understand lien positions, too. If you already have a blanket lien, negotiate carve-outs or subordination to unlock better pricing.
3. Choose Shorter Terms
Longer terms reduce monthly payments, but they can increase total interest, as well as the APR. If your cash flow can support it, then opt for a shorter amortization period, as this can significantly cut financing costs. For instance, moving from a 5-year to a 2-3-year term can drop rates by several points and reduce the total interest paid.
This strategy is particularly effective for durable purchases with quick payback. To avoid over-tightening your term and risking liquidity strain, you should stress-test your cash flow with conservative revenue assumptions.
4. Explore SBA-Backed Options
There are government-backed programs that provide some of the lowest rates available to small businesses. It depends on structure and market rates, but SBA loans are often cheaper than conventional alternatives.
The drawback is that they involve more documentation and longer timelines. However, you’ll benefit from substantial savings over the life of the loan.
Those who need funding fast should consider pairing an SBA application with a short-term bridge. You can then refinance once approved.
5. Time Your Application Strategically
You should try to apply when your financials look the strongest, as lenders heavily weigh recent performance. This means that submitting after the following can lead to better offers:
- A strong quarter
- Improved margins
- Reduced debt
On the other hand, you should avoid applying immediately after large one-time expenses or seasonal dips.
In addition, consider broader rate environments; if benchmark rates are falling, wait a few weeks, as pricing could improve. But if rates are rising, locking sooner can save you money.
6. Shop Rates and Create Competitive Pressure
You should never accept the first offer. Instead, collect multiple quotes from banks, credit unions, online lenders, and brokers. You should compare:
- APRs
- Fees
- Covenants
- Prepayment terms
Even a 2-3% APR difference can be meaningful, especially in the long term.
Also, don’t be afraid to use competing offers as leverage; it’s common for lenders to improve pricing to secure the deal. But be mindful of hard credit pulls. To minimize impact, cluster your applications within a short window.
7. Reduce or Negotiate Fees
APR isn’t the only cost you have to worry about. These things could add several percentage points to the effective cost:
- Origination fees
- Underwriting
- Servicing
- Closing costs
You should also watch for add-ons, like broker fees or mandatory products.
If you have strong credit or competing offers, it can be worth asking for fee waivers or reductions. Plus, some lenders will trade a slightly higher rate for lower upfront fees (or vice versa), so model the total cost over your expected holding period.
If you tighten fees, it can bring the all-in cost down from 18% to 14-15%, for example.
8. Plan Prepayment Strategically
Are you planning on repaying early? Then choose structures that don’t penalize you.
Loans with simple interest and no prepayment penalties (or short step-down penalties) let you cut interest expenses by a lot. For example, if you pay off a 3-year loan in 18 months, this can halve the interest paid if the penalties are minimal.
You should avoid products with heavy front-loaded interest (like some factor-style financing) when early payoff is likely.
9. Match the Right Product to the Use Case
It may seem obvious, but misaligned products drive up costs. In general, use long-term loans for long-lived assets and short-term facilities for short cycles. Funding inventory with a 5-year loan or buying equipment with a 6-month product both inflate costs.
The typical ranges are:
- Equipment loans: mid-single to low-teens
- Bank term loans: high single to mid-teens
- Online term loans: teens to 30%+
- Merchant cash advances: 30-80%+ equivalent
As you can see, picking the right tool for the job will keep you in the lowest feasible band.
10. Use a Line of Credit for Seasonality Instead of Term Debt
If you have recurring, seasonal needs (such as inventory build or payroll gaps), then a revolving line of credit (LOC) is usually cheaper than repeatedly taking term loans. What’s great is that you only pay interest on what you draw, and you can repay as cash comes in. This can reduce the total interest paid.
Well-qualified borrowers may see LOC rates in the high single digits to mid-teens vs. higher fixed-cost term products. With this flexibility, it prevents over-borrowing and keeps the effective APR lower across cycles, especially when usage fluctuates month to month.
Secure Financing With Minimal Costs
It’s not easy running a small business, especially if your revenue isn’t very high and there’s noticeable overhead. But with our tips, you’ll be able to secure financing with minimal costs, which can help you save even more.
Read our other pages to find more helpful financial tips for your business.
