Fractional CFO
Debt vs. Equity Financing for SMBs: SBA, Lines of Credit, Seller Financing, HELOC
A practical map of the financing options actually available to small businesses: SBA 7(a), SBA 504, business lines of credit, seller notes, and personal HELOCs. When each fits and when it does not.
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Frame the Decision
- Most small businesses do not have venture-capital as a realistic option. That is fine; debt and internal cash flow fund most of the enduring businesses in the country.
- The question is not 'debt or equity' in the abstract, but 'which specific instrument fits this specific use, at this specific stage, with this specific collateral?'
- Debt is cheaper than equity if you can service it comfortably. Equity is only 'free' until you sell the business and realize you gave up 25% of the exit to raise 10% of the capital.
- Personal guarantees are the norm for small businesses on almost every debt instrument. Understand what you are pledging before you sign.
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Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.
Frequently asked questions
What is the difference between an SBA 7(a) and an SBA 504 loan?
The 7(a) is the general-purpose program, up to $5M for working capital, equipment, real estate, acquisitions, or refinancing, on 10 to 25 year terms at prime plus a spread. The 504 is specifically for real estate and heavy equipment: a two-loan structure with 50% from a bank, 40% from a CDC at a fixed rate, and 10% down, often the cheapest long-term real estate financing available to an SMB.
How long does an SBA loan take to close?
Plan on 60 to 120 days from application to funding. Underwriting is detailed: three years of tax returns, current interim financials, a personal financial statement, and a business plan or memo. For acquisitions where a purchase contract has a closing deadline, start the SBA process the moment you have a signed letter of intent, not after due diligence wraps.
Should I use a HELOC to fund my business?
A HELOC is cheap and flexible, but you are pledging your house. Treat it exactly like any other secured business loan: model whether the business cash flow can service it, and be honest about what happens in a bad year. It can be a reasonable bridge for a business with predictable cash flow; it is a poor tool for funding losses.
Will I have to personally guarantee a business loan?
Almost certainly. Personal guarantees are the norm for small businesses on nearly every debt instrument: SBA loans, bank lines of credit, and equipment financing. The entity's liability shield does not protect you from debts you guarantee. Read what you are pledging before signing, and understand that spousal guarantees are sometimes requested as well.
When does raising equity make sense for a small business?
Three situations: the business cannot service debt without stressing operations; you need a strategic partner's industry knowledge or relationships more than the capital itself; or growth is genuinely capital-intensive beyond what debt can fund on realistic projections. For most small businesses, the equity events that matter are private equity buyouts, ESOPs, and family recapitalizations, not venture-style priced rounds.
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