Can business owners use payday loans for their business?

Gerri Detweiler's profile

Gerri Detweiler

Education Consultant, Nav

March 1, 2024|8 min read
business owner on phone and computer checking into payday loans

Editorial note: Our top priority is to give you the best financial information for your business. Nav may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations. Our partners cannot pay for favorable reviews. All content is accurate to the best of our knowledge when posted.

Business owners are often risk-takers, and are willing to pursue their dream despite obstacles in their way—even if that hurdle is a lack of money. 

When consumers need money fast and don’t qualify for other types of loans, they often turn to payday lenders. Payday loans offer quick short-term loans advanced against the borrower’s paycheck. But they often have very high rates, and are considered a lender of last resort. 

But what if the borrower is an entrepreneur without a paycheck? What payday loans are there for small business owners?

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What is the best way for a business to borrow money?

There are many different types of small business loans and financing, each with its own set of pros and cons. One of the most important questions to ask when looking for financing is, “What does my business qualify for?” 

When you apply for business funding, business lenders typically consider at least two of the following qualifications:

  • Business revenue or income
  • Credit (business credit scores, personal credit scores, or both)
  • Time in business

If your business is weak in any of these areas, you’ll need to be able to make up for it in other ways. For example, if you have bad credit you’ll likely need to demonstrate good income. 

Let’s review the most popular types of small business loans and financing and then look at which ones may make sense for your business. 

Lines of credit

One of the most popular types of small business financing, a business line of credit can be helpful for short-term working capital needs. Once you’re approved for a LOC, you can use the funds, up to your credit limit, as needed. 

Line of Credit by Fundbox

Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

  • 625 minimum personal credit score
  • No impact to credit score to apply (soft pull only)
  • No draw fees
  • Fast approval and funding, with funds available as soon as the next business day
  • Use as much as you need, only pay interest on what you use
  • Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.

Cons

  • Must have a business checking account with a minimum balance of $500
  • May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.

Funding Amount

$1,000 - $150,000

Cost

As low as 4.99%*

Repayment Terms

12 or 24 weeks

Funding Speed

If approved, funds arrive as soon as the next business day.

Line of Credit by Headway Capital

Headway Capital provides businesses with a true revolving Line of Credit with no pre-payment penalties, one fixed monthly payment, and the ability to access additional capital any time you have funds available. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Headway a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

  • Pre-approval process does not require hard personal credit inquiry
  • Approval within hours of applying
  • Only pay interest on what you use
  • Offers 24-month repayment terms and monthly payments.

Cons

  • Interest rates can be higher than some other line of credit providers
  • Hard personal credit inquiry at the time of funding.

Funding Amount

$5,000 to $100,000

Cost

3.3% - 6.6% monthly interest rate

Repayment Terms

Monthly repayment for 12, 18 or 24 months

Funding Speed

As fast as the next business day.

Term loans

With a term loan you’ll borrow a lump sum and pay it back on a set repayment schedule. Repayment terms are usually 2-5 years, though some loans can be for 20—25 years. This is the type of traditional loan that comes to mind when borrowers think of small business loans, and it can be helpful for financing specific projects. 

Short-Term Loan by Credibly

As quickly as 4 hours

Pros

  • Set payments
  • Pre-qualification, which means you can pre-qualify without hurting your credit
  • With strong cashflow health, low personal credit scores still have great options here

Cons

  • Must have at least $15,000 a month in deposits
  • Repayment terms maybe shorter for some users

Funding Amount

$5,000 - $600,000

Cost

As low as a 1.11 FR

Repayment Terms

Daily & Weekly automatic debits; 6 to 15 month repayment terms

Funding Speed

As quickly as 4 hours

Term Loan by OnDeck

This is a great option for businesses with consistent revenue, seeking competitive pricing working capital products. OD is known in the industry for their transparency and speed to fund. OD is the largest online lending company, which provides confidence to users with finding the right long-term partner to help fuel their company's growth.

Pros

  • One application, two paths to finance your business - applicants are reviewed for both a Term Loan and Line of Credit
  • Minimal paperwork
  • Fast approval time
  • Transparent pricing
  • “White Glove” customer service
  • Access to multiple lending options.

Cons

  • Need a minimum of 1 yr time in business
  • $250,000 maximum loan amount
  • Not available in all states.

Funding Amount

$5,000 - $250,000

Cost

As low as 29.9% APR

Repayment Terms

Daily, weekly up to 24 months

Funding Speed

48 hours

Business credit cards

Another popular type of funding, business credit cards may offer perks like cash back or rewards, but they usually also have a line of credit that can be useful for short-term financing. Most small business credit cards can also help you build good business credit scores if you pay on time. 

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Commercial real estate loans

If your business needs to invest in a physical location (storefront, warehouse, manufacturing facility), commercial real estate loans can make that possible. The underwriting process will be intense, and strong qualifications will be required along with a down payment. 

Crowdfunding 

There are several different types of crowdfunding including rewards-based crowdfunding and investment-based crowdfunding. Most types don’t require good credit or a specific time in business. 

Equipment Financing or Leasing

If your business needs equipment, equipment financing or leasing can help to preserve cash flow.

Invoice Factoring or Financing

Invoice factoring or financing can be useful for businesses that invoice other businesses that pay slowly. The factoring company advances funds against outstanding invoices or accounts receivables (for a fee) and may even take over collecting invoices. 

Business Cash Advance

Businesses with strong sales that can’t access more traditional funding may use merchant cash advances or business cash advances. This type of financing advances funds against future sales, using past sales to determine how much to offer. Weekly or even daily payments may be required. 

Business Cash Advance by Credibly

Credibly offers flexible repayment plans with fixed rates, based on future receivables. Ideal for seasonal businesses and those with high credit card processing volumes.

Pros

  • Fixed payments
  • Offers the ability to pre-qualify without affecting your credit.

Cons

  • Must have at least $25,000 a month in sales, Max repayment term is 15 months

Funding Amount

$5,000 - $600,000

Cost

Factor rates as low as 1.11

Repayment Terms

Daily debits from your bank account for 3 to 18 months

Funding Speed

As quickly as 4 hours

SBA Loans

The U.S. Small Business Administration offers several different types of loans through the SBA loan program. The most popular loans include 7(a) loans, CDC 504 loans, SBA Microloans, SBA Export loans and more. These loans are made by lenders but the SBA backs them up with a guarantee that makes them less risky to the lender. Terms are good but the application process can be quite involved. 

SBA Loan by SmartBiz

For high cost projects with long repayment. No immediate funds needed.

Pros

  • APR as low as 11.25% with monthly repayment plans up to 10 years
  • Ability to be pre-approved and review terms and conditions before needing to provide a full list of financial documents.

Cons

  • Lengthy application process (30-60 days) with lower approval odds
  • Requires more documents than other Bank Loan products.

Funding Amount

$30,000 - $500,000

Cost

11.25% - 13.25% APR

Repayment Terms

Monthly payments for 10 years

Funding Speed

1 month

Vendor Financing

Suppliers may offer short-term financing to their customers. Net-30 terms means the business has 30 days to pay for the items it purchased, and hopefully pay for those purchases out of cash flow. Vendor financing may also help establish business credit

Where do businesses with no credit borrow money from?

A business owner who does not have good personal credit may still be able to get business funding if they have strong revenue and at least 1—2 years time in business. The company offering financing will likely carefully scrutinize the type and source of business revenue to qualify the business. Business checking account statements may be required to verify revenues. 

Types of business financing options that don’t require a good credit history include:

  • Business cash advances
  • Crowdfunding
  • Some microloans
  • Invoice factoring or financing

Can you borrow money to start a business?

Startup financing is some of the toughest financing to secure. As mentioned earlier, lenders prefer to lend to businesses with a proven track record including solid revenues and at least 1—2 years in business (sometimes more). Without those qualifications, you’ll likely need excellent personal credit, and you may even need to provide a personal guarantee to help the lender understand you are serious about repaying the loan. 

Some of the most popular types of startup business loans include:

  • Loans from friends and family
  • Credit cards
  • Microloans
  • Crowdfunding
  • SBA loans
  • Vendor financing

How much money can you borrow to start a business?

There’s no limit overall on the amount of money businesses can borrow to start a business. When there are limits, they are usually tied to the specific lender or the type of loan. For example, investment crowdfunding currently has a limit of $5 million annually, while SBA 7a loans have a total maximum loan amount of $5 million. SBA microloans have a loan limit of $50,000. 

More commonly, the amount of money your business can borrow will be limited by your qualifications or how well you can sell your idea to investors or backers of a crowdfunding campaign, for example. 

What are the benefits of the various loan types when starting a company?

When you’re starting a company, your small business loan options will be more limited than when your business is well established and making money. Here are some of the benefits and drawbacks of various types of financing for startups: 

Type of financing

Pros

Cons

Line of credit

Flexible

May require business revenues/good credit to qualify

Term loan

Predictable payments

May require business revenues/good credit to qualify

Business credit cards

Flexible, available to brand new businesses

Interest rates can be high

Commercial real estate

Predictable payments 

Hard for brand new business to qualify

Crowdfunding

Flexible, good credit or time in business not required

Strong marketing required to attract backers

Equipment financing or leasing

Affordable payments, preserve cash flow

New businesses may need good credit and/or down payment

Invoice factoring

Fast funding, good credit not required

B2B invoices from creditworthy customer required

Business cash advance

Fast funding, good credit not required

Costs may be high, sales needed to qualify

SBA loan

Low rates, favorable terms

Good to excellent credit required

Types of loans for small business | Nav

High interest short term loans for businesses

We began this article talking about payday loans, which are higher-cost, short-term loans to individuals. In the case of small businesses, there are several types of loans that are used for short-term borrowing and may have higher costs:

  • Merchant cash advances
  • Business credit cards
  • Some lines of credit 
  • Invoice factoring

Should they be compared to payday lending? It depends. Some carry higher rates that make it difficult for the business to turn a profit, while others may carry more reasonable interest rates or fees based on borrower qualifications. 

How does a business cash advance work?

With a business cash advance or merchant cash advance, the lender or financing company will review the sales of your business to determine how much to advance against future sales. (A typical advance amount may be anywhere from 50 – 80% of the average amount of past sales.) 

The business will then have weekly or even daily payments taken directly from their business bank account or merchant account until the financing is repaid. Instead of an annual percentage rate (APR), the cost of an MCA is often expressed as a factor rate. 

This type of financing may be very credit flexible and funding is often very fast, within hours or 1—2 business days.

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  • Photo of Gerri Detweiler, blond woman in dark jacket smiling at camera

    Gerri Detweiler

    Education Consultant, Nav

    Gerri Detweiler, a financing and credit expert, has been featured in 4,500+ news stories and answered 10,000+ credit and lending questions online. In addition to Nav, her articles have appeared on Forbes, MarketWatch, and Startup Nation. She is the author or co-author of six books, including Finance Your Own Business, and she has also testified before Congress on consumer credit legislation.