Knowledge Center

Navigating Small Business Capital

Understanding the nuances of bank loans can lead to financing solutions that enhance your business’s growth and sustainability.

Capital is essential for small businesses, driving everything from daily operations to ambitious long-term growth initiatives. Small businesses often need capital to expand their physical or online presence to meet customer demand, smooth out cash flow during seasonal peaks and valleys, and upgrade technology to improve productivity and competitiveness.

Although some businesses prefer to grow organically, free of debt, achieving next-level growth often requires outside funding. There are myriad external sources of funding for small businesses, and they are categorized into two broad buckets: debt financing (money provided by a lender that must be repaid with interest) and equity financing (selling ownership shares of your business to investors in exchange for capital). Bank loans are a form of debt financing.

Let’s explore the various types of small business bank loans available and how to leverage them to benefit your business.

Four Types of Small Business Capital

1. Traditional Term Loans

Term loans provide businesses with a lump sum of money with a fixed interest rate and a repayment schedule. They are often used to fund significant one-time investments that require more than a one-year repayment period. Whether you're planning to open a new storefront, expand your existing operations, or introduce a new product line, term loans can provide the necessary capital to fuel major growth.

For instance, the owner of a local retailer may apply for a commercial real estate loan to purchase a larger, more central location, potentially transforming the customer experience and increasing foot traffic. Similarly, a small manufacturer might opt for a business expansion loan to scale up production or break into new markets.

Obtaining a term loan involves demonstrating your business’s capacity for repayment and strategic growth potential. Successful applicants usually have a strong credit history, substantial business experience and demonstrated profitability. Required documentation often includes detailed financial statements, a comprehensive business plan and personal guarantees.

2. Lines of Credit

Revolving lines of credit are used for short-term cash-flow needs. Businesses can borrow against them when needed, up to an established limit, and pay interest only on the amount borrowed. This makes them useful for managing cash flow fluctuations caused by inventory purchases, increases in revenue and unexpected increases in expenses that must be covered.

Revolving credit lines are similar to a credit card but tailored to meet the short-term cash-flow needs of the business. Short-term cash-flow needs could be caused by seasonal business conditions, supply chain disruption, new business mobilization or ramp-up expense, increased periods of sales or volume or delayed customer payments, among others. This type of credit facility allows businesses to have access to funds, repaying the borrowed money and reborrowing against the line again all for short-term cash flow needs.

Consider a landscaping business that experiences peak seasons during the spring and fall. A line of credit allows them to hire additional staff and purchase materials in advance, preparing for the busy months before revenue is collected.

Lines of credit require a good credit history, management systems, and financial stability. Proof of ongoing business operations is also crucial. Documentation could include historical financial statements, current accounts receivable and account payable aging reports, revenue concentration reports and cash flow forecasts

3. SBA Loans

SBA loans are guaranteed by the U.S. Small Business Administration (SBA) to assist businesses that may not meet collateral requirements for traditional bank loans. They generally offer more flexible terms than most conventional loans and often have lower down payments too.

Two of the more popular SBA loan programs are the 7(a) loan program and the 504 loan program. The 7(a) loan program offers up to $5 million for various business purposes ranging from working capital to debt refinancing. The 504 loan program provides long-term, fixed-rate financing for major assets such as buildings and equipment.

A local restaurant might consider a 7(a) loan to finance an expansion that covers everything from leasing additional space to buying equipment and furniture. A small tech firm could use a 504 loan to invest in costly, state-of-the-art servers and hardware.

To qualify for an SBA loan, businesses must meet SBA size standards, demonstrate an ability to repay and show they are an ongoing for-profit business. The application process can be stringent, often requiring detailed financial records, business plans and personal financial details.

4. Equipment Financing

Equipment loans are tailored for the purchase of new or used equipment, with the equipment often used as collateral for the loan. This type of financing is advantageous because it allows businesses to acquire essential equipment without tying up working capital.

There are two main types of equipment financing: leasing programs and direct equipment loans. In a leasing situation, a third party owns the equipment that the bank finances and the business leases the equipment from that third party. In a direct loan scenario, the loan finances the purchase of office technology, machinery or vehicles directly with the user.

A dental office may take advantage of equipment financing to purchase the latest dental technology, enhancing patient care and operational efficiency. A leasing program might be the right solution for a transportation company looking to free up capital while retaining the use of its fleet.

Eligibility for these loans generally requires a quote for the equipment, a down payment and a good business case for how the equipment will improve operations. Like other loans, financial statements, credit history and the health of the business are considered.

The Community Bank Advantage

As Kansas City’s premier community bank, Country Club Bank is more than just a lender. Yes, we are committed to serving as a trusted financier, but we also desire to be a reliable partner in the economic development of local businesses like yours.

First and foremost, we are invested in your success. We pride ourselves on fostering personal relationships that provide us with a deep understanding of you, your business and your industry. Because we know that finding the right type of capital can redefine your business trajectory, our team is committed to providing guidance and financing solutions that align with your unique needs at each stage of your business’s development.

As a family-owned Kansas City financial institution, Country Club Bank understands the local economic landscape, enabling us to offer personalized service and insights that larger national banks simply cannot match. When you work with Country Club Bank for your lending needs, you work with commercial lenders based in Kansas City—and all lending decisions are made locally. Our success is reflected in the thriving local businesses we support across Kansas City.

If you would like to discuss the financing solutions that can help take your business to the next level, give us a call.