The pros and cons of 5 financing options to help improve cash flow

January 31, 2024 | 4 minute read

Small business owners have access to various financing options that can extend the time they have to pay for purchases and help them keep a cash cushion in their bank account. However, they all work a little differently. It’s important to know the pros and cons so you can choose the one that’s best for your situation and the one that will help you optimize your cash flow most.


Here’s a look at the benefits and drawbacks of five of the most popular types of financing options to help smooth cash flow.


Using a business credit card

Business credit cards are often a first choice for handling everyday expenses, giving you a month before you have to pay them down. This flexibility can be attractive to seasonal businesses. However, they do tend to carry higher interest rates than other forms of financing, so it’s important to have a regimented repayment schedule if you plan to go this route.

  • Business credit cards often offer substantial credit limits, with many starting at $10,000 to $25,000. Some business credit cards also allow you to earn rewards that you can use for business expenditures such as airline tickets or redeem for cash back, helping you stretch your budget further.
  • To qualify for a business credit card, you often must provide a personal guarantee, meaning you’re on the hook if your business can’t pay the bill. And the credit limit may be too low for a very large purchase.

Tap a working capital line of credit

For short-term operating expenses, such as a temporary spike in payroll or covering seasonal gaps, a working capital line of credit may make the most sense. Interest rates for a line of credit are typically lower than a business credit card.

  • A line of credit provides access to financing whenever it’s needed, up to a set limit. Compared to traditional loans, lines of credit have more flexible terms when it comes to the ability to draw on the funds and pay them down. You pay back only what you use and owe interest only on the money you borrow.
  • You may need to build up a credit history for your business before you can qualify for a working capital line of credit. Some working capital lines of credit must be secured with collateral.

Alternative short-term funding options include invoice factoring and merchant cash advances (MCA). Invoice factoring is when a business sells its outstanding invoices to a factoring company in exchange for a portion of the invoice amounts upfront. The invoice factoring company—not the original business—is then responsible for collecting payment from customers. With merchant cash advances, a lender gives you a lump sum which is then repaid with your future sales, plus a fee known as a factor rate. MCAs can be flexible but also can come with high annual percentage rates (APRs).


Finance equipment purchases

  • Leases allow you to obtain the equipment you need with lower up-front costs and to stretch out payments. If you’ll need to upgrade the equipment in a few years, you can simply return it when the lease is up.
  • Most equipment leases come with a mandatory warranty service that can add up. If you run a well-established business with sound financial statements, you may want to look into securing a term loan as an alternative.

Take out a commercial real estate loan, rather than paying cash

Some small business owners like to buy real estate with cash, thinking it’s wiser than taking out a mortgage. But that can backfire, because it inevitably means losing access to a cash savings the company might need for short-term expenses. For many, a better option is a commercial real estate (CRE) loan.

  • You may be able to deduct your interest payments on a CRE loan from your taxes. You may also be able to use your equity in the property to purchase equipment or inventory or make property improvements.
  • You need to qualify for financing approval to get a CRE loan, and the process can take time for the self-employed. You will also need to have cash for the down payment.

Apply for a federally guaranteed loan

Federally guaranteed loan programs help many small business owners expand their purchasing power while conserving cash. For example, companies that are looking for reasonable financing terms might consider the U.S. Small Business Administration’s (SBA) 504 program, which guarantees low-interest, fixed-rate loans with low down payments. Another popular offering is the SBA’s 7(a) loan program.

  • Typically, SBA loans can help small business owners get access to capital by providing longer terms and smaller down payments as compared to other business loans.
  • SBA loans sometimes come with higher fees and/or may have a lengthier overall process (due to additional due diligence required) than comparable bank loans.

While knowing the pros and cons of common types of financing will help you make the best decision about which are right for your business, it’s not a cure-all. All financing options charge interest and usually require monthly payments, even if there is a downturn. If your business is consistently running short of cash, you may need to speak with trusted advisors such as your banker, accountant or bookkeeper to find ways to increase revenue, improve collections and keep spending in check.

Important Disclosures and Information

Small Business Administration (SBA) financing is subject to approval through the SBA 504 and SBA 7(a) programs. Loan terms, collateral and documentation requirements apply. Actual amortization, rate and extension of credit are subject to necessary credit approval. Bank of America credit standards and documentation requirements apply. Some restrictions may apply.

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