Small business funding beyond grants: what each option is actually allowed to pay for

Updated 30 August 2026. Figures quoted from the SBA and the Federal Reserve, linked at the end.

Start with what the money is for, not what it costs

The usual way to approach this is to rank the options: cheapest first, fastest first, easiest first. That ordering breaks immediately, because most of these instruments are not substitutes for one another. They are answers to different questions, and several of them are restricted by regulation rather than by lender preference.

The clearest example is the pair most often confused. The SBA's 504 programme lends up to $5.5 million, at long-term fixed rates, and the SBA states plainly that the funds may be used for the purchase, construction or renovation of buildings and land, and for long-term machinery and equipment with at least ten years of useful life remaining. It also states what they cannot be used for: working capital or inventory, and speculation or investment in rental real estate.

So a founder who needs to cover payroll through a slow quarter, or to buy stock ahead of a season, cannot use a 504 loan for it. Not at a worse rate; not at all. That decision is made before anyone looks at the business.

The 7(a) programme is the one that stretches. It caps at $5 million and the SBA lists short- and long-term working capital among its permitted uses, alongside real estate, refinancing existing business debt, machinery and equipment, furniture and fixtures, and changes of ownership. If the need is working capital, 7(a) is the SBA door; 504 is not.

Below both sits the microloan programme, for amounts of $50,000 or less. It is easy to dismiss at that size and it is frequently the right instrument for a first piece of equipment or a small inventory position, particularly for a business with a thin borrowing history.

The eligibility rule almost nobody expects

Buried in the SBA's eligibility requirements is a condition that reverses how most people think about qualifying. To be eligible, a business must be "not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources".

Read that again, because it is the opposite of the usual assumption. The stronger your conventional borrowing position, the less eligible you may be. The programme exists to fill a gap in commercial lending, not to undercut it. A business that a bank would happily fund on ordinary terms is, by the rule's own logic, being asked to take those terms.

In practice this is assessed by the lender rather than by an applicant declaring it, and it is one reason the process routes through banks in the first place. But it changes the framing: an SBA loan is not a prize for being creditworthy. It is a mechanism for lending to businesses that are creditworthy enough to repay and not creditworthy enough to be funded conventionally.

The guaranty is what makes that possible. The SBA guarantees 85% of a 7(a) loan at or below $150,000 and 75% above it, which is the reason a lender will write a loan it would otherwise decline. Worth being clear about who that protects: it protects the lender. A default is still a default for the borrower, and the personal guarantees that usually accompany these loans are unaffected by it.

Where you apply changes the answer

Founders spend a great deal of effort on what to apply for and very little on where. The Federal Reserve's Small Business Credit Survey suggests that is the wrong split of attention.

Applicants to small banks were fully approved at 57%, a higher rate than applicants to large banks, online lenders or finance companies. That is full approval, meaning they received the entire amount sought, which is a harder test than approval in principle.

Meanwhile the channel growing fastest is the one where borrowers are least happy. The share of applicants seeking financing from online fintech lenders rose from 17% in 2020 to 29% in 2025. Over a shorter window, net satisfaction among applicants to online lenders fell from 15% to 2% between 2023 and 2024, the sharpest decline of any lender type.

Neither number says online lenders are a mistake. They say that speed is being bought with something, and that the something shows up after the application rather than during it. If the alternative is a small bank willing to look at the business properly, the survey suggests that is where full approval is most likely to be found.

Lines of credit and term loans solve different problems

A term loan delivers a lump sum repaid on a schedule. A line of credit is a facility you draw on and repay repeatedly, paying interest on what is drawn. The distinction matters more than the rate comparison that usually dominates the decision.

Working capital needs are rarely a single event. They are a gap that opens and closes with the season, the payment terms of a large customer, or a supplier who wants paying before your customer pays you. Financing a recurring gap with a term loan means borrowing the peak amount and paying interest on it continuously, including through the months when the gap is closed.

A term loan is the right shape when the spend is a discrete event with a life of its own: a machine, a vehicle, a building, an acquisition. The repayment schedule should look like the useful life of the thing it bought, which is the logic behind the 504 programme's ten-year minimum for equipment.

The alternatives, and what each one actually costs you

Beyond banks and the SBA sit several instruments that trade cost or control for speed and accessibility. They are legitimate; they are also where the most expensive mistakes are made, because the pricing is frequently not expressed as an interest rate.

Revenue-based financing takes a percentage of monthly revenue until a fixed multiple is repaid. There is no fixed term, so the effective rate depends entirely on how fast you grow: grow quickly and you repay quickly at a high effective cost, grow slowly and the same multiple is cheaper in annualised terms. It suits businesses with predictable recurring revenue and punishes seasonality.

Invoice factoring sells your receivables at a discount. It is not really borrowing, which is why it is available to businesses that cannot borrow: the underwriting looks at your customers' creditworthiness rather than yours. The cost is the discount plus, often, the relationship, because your customers are now being chased by someone else.

Equipment financing is secured by the equipment, which usually makes it cheaper and easier to obtain than an unsecured loan of the same size. If the need is a specific asset, this is often available where general borrowing is not.

A merchant cash advance buys a share of future card receipts. It is the fastest money available and reliably the most expensive, and its cost is quoted as a factor rate rather than an APR, which makes it look cheaper than it is. Converting the factor rate to an annualised cost before signing is the single most useful thing a founder can do here.

When a grant genuinely is the answer

Most readers arrive at this page from a grant listing, having concluded that grants alone will not cover it. That conclusion is usually right, and it is worth stating precisely why, because it also identifies when the opposite is true.

A grant is not cheap money. It is a transfer with conditions, awarded because a funder wants a particular thing to happen. The application cost is real and largely front-loaded, the timelines are long, and the reporting obligations continue after the money arrives. Pursuing grants for general operating needs usually fails, not because the applications are weak but because general operating need is not what most programmes fund.

Where the fit is genuine, nothing else competes. If your plan already involves hiring in a targeted area, developing a specific technology, serving a defined population, or operating in a designated region, there may be a programme whose purpose your plan already advances. In that case you are not bending the business to chase money; the money exists to do what you were going to do.

The practical sequence is to check whether a funded purpose matches your actual plan before assuming it does not, and to move to financing the moment it is clear it does not. GrantProbe maintains the programme-by-programme detail, including the SBA 7(a) guarantee programme and its small business category, with eligibility and deadlines per programme.

A short decision order that avoids the common dead ends

First, name what the money buys, in one sentence. Working capital, a specific asset, a building, an acquisition, or a runway extension. Almost every wrong application traces back to skipping this.

Second, eliminate on rules rather than on preference. If it is working capital, 504 is out. If it is a building, a line of credit is the wrong shape. This step is free and it is where most of the wasted months are recovered.

Third, check whether a grant programme already funds the purpose, and give that a deadline. If nothing fits within a defined window, stop looking.

Fourth, choose where to apply as deliberately as what to apply for. The Federal Reserve's figures put small banks at the top for full approval, and the gap between lender types is wide enough to be worth a conversation before an application.

Finally, for anything quoted as a factor rate or a revenue share rather than an interest rate, convert it to an annualised cost before comparing it with anything else. That single conversion makes the expensive options look like what they are.

Common questions

What is the maximum SBA 7(a) loan amount?

The SBA states the maximum 7(a) loan amount is $5 million. The SBA guarantees 85% of loans at or below $150,000 and 75% of loans above that, which is what allows a lender to approve a borrower it would otherwise decline. The guaranty protects the lender, not the borrower: a default is still a default.

Can an SBA 504 loan be used for working capital?

No. The SBA states 504 funds cannot be used for working capital or inventory. A 504 loan is for the purchase, construction or renovation of buildings and land, and for long-term machinery and equipment with at least ten years of useful life remaining. This is the single most common reason a 504 application is the wrong application.

Do I have to be turned down by a bank before applying for an SBA loan?

Effectively yes, and it surprises most founders. SBA eligibility requires that the business be unable to obtain the desired credit on reasonable terms from non-government sources. The programme exists to fill a gap in conventional lending rather than to compete with it, so being fundable on ordinary commercial terms can make you ineligible.

Which lenders approve the most small business applications?

According to the Federal Reserve Small Business Credit Survey, applicants to small banks were fully approved at 57%, a higher rate than large banks, online lenders or finance companies. Where you apply changes the outcome as much as what you apply for.

Are online lenders worth using?

They are the fastest-growing channel and the one where borrower satisfaction has fallen furthest. The online fintech share of applicants rose from 17% in 2020 to 29% in 2025, while net satisfaction among applicants to online lenders fell from 15% to 2% between 2023 and 2024. Speed is real; the trade shows up in the terms.

Sources

Every figure above is quoted from a published primary source, linked here so it can be checked rather than taken on trust. Programme parameters change, and the retrieval date is given for that reason.

• SBA 7(a) loan programme, U.S. Small Business Administration. Source of the $5 million maximum, the 85% and 75% guaranty percentages, the permitted uses and the credit-elsewhere eligibility requirement. Retrieved 30 August 2026.
• SBA 504 loan programme, U.S. Small Business Administration. Source of the $5.5 million maximum, the permitted uses, and the explicit exclusion of working capital and inventory. Retrieved 30 August 2026.
• SBA loan programmes overview, U.S. Small Business Administration. Source of the $50,000 microloan ceiling. Retrieved 30 August 2026.
• Small Business Credit Survey, Federal Reserve Banks. Source of the 57% full approval rate at small banks, the rise in online fintech applicant share from 17% to 29%, and the fall in net satisfaction with online lenders from 15% to 2%. Retrieved 30 August 2026.

This page describes how funding instruments are structured and what published data says about approval. It is not financial advice, and it does not know your circumstances. Loan terms, programme ceilings and eligibility rules change; check the linked source before relying on any figure here.