Small Business Loan and Credit FAQs

Funding and Loan

What types of business loans are available to me?

There are more options than most people realize. Term loans give you a lump sum you repay over time and are good for a specific investment. Lines of credit give you access to funds you can draw on as needed and are better for managing cash flow. There are also SBA loans, microloans, equipment financing, and merchant cash advances. Which one fits depends on how long you have been in business, what you need the money for, and your current financials.

What is the difference between a term loan and a line of credit?

A term loan is a set amount that you borrow once and pay back on a fixed schedule. A line of credit works more like a safety net. You have access to a pool of funds and only pay interest on what you actually use. If you are buying equipment or funding a specific project, a term loan usually makes more sense. If you need flexibility to cover gaps or unexpected expenses, a line of credit is the better fit.

What is a merchant cash advance and should I use one?

A merchant cash advance gives you money upfront in exchange for a percentage of your future sales. It is fast and does not require strong credit, but it comes with high costs that are often much higher than a traditional loan. It can make sense in a genuine emergency when you have consistent daily revenue. But it is not a long-term strategy. If you rely on merchant cash advances repeatedly, it can create a cycle that is hard to break out of.

How do I know if I am ready to apply for a loan?

A few things to check: Is your credit score in decent shape? Have you been in business long enough to show consistent revenue? Do you have your financial documents including bank statements and tax returns organized and ready? Lenders want to see that your business is stable and that you have thought through how you will use the money and pay it back. If you are not sure where you stand, our team can walk you through it before you apply.

I was turned down for a loan. Now what?

First, it is not the end of the road. Lenders are required to tell you why you were denied, so start there. Common reasons include a low credit score, not enough time in business, or insufficient revenue. Some of those things take time to fix. Others like organizing your documents or addressing errors on your credit report you can act on right away. We also work with partner lenders, so even if AO Fund cannot help you today, we will try to point you somewhere that can.

Can I get a business loan if my credit is not great?

Yes, and this is something we deal with every day. Traditional banks rely heavily on credit scores, but lenders like Accion Opportunity Fund look at the full picture: your cash flow, how your business is performing, your tax returns, and your story. That said, working on your credit before you apply will almost always get you better terms. Even small improvements in your score can make a real difference in your interest rate.

What is the difference between business credit and personal credit?

Your personal credit is based on your own borrowing history including credit cards, mortgages, and personal loans. Your business credit is a separate profile for your business entity. They are connected at first since most lenders check both, but over time you want to build your business credit on its own. That way your business can borrow based on its own track record, and your personal finances stay protected.

How do I start building better business credit?

Pay everything on time. That is the single biggest factor. Open a dedicated business bank account and a business credit card if you do not already have one. Register your business properly so it has its own identity. And work with vendors or suppliers who report payment history to business credit bureaus. It takes time, but it compounds. Good business credit makes every future financing conversation easier.

How do I read my business credit report?

Your business credit report pulls together your payment history, any outstanding debts, public records, and your overall score from bureaus like Dun and Bradstreet, Experian Business, and Equifax Business. Pull yours and look for anything that does not look right. Errors on credit reports are more common than people think and they can drag your score down for no good reason. You can dispute them and get them corrected.

Can I keep my credit healthy while carrying business debt?

Absolutely. Debt itself is not the problem. It is how you manage it. Pay on time, every time. Keep your credit utilization low, ideally under 30 percent of your available credit. Do not open a bunch of new accounts at once. If you manage debt responsibly, your credit score can actually improve over time. Think of it as building a track record. Each on-time payment adds to the story you are telling future lenders.

What are the first things I should do when starting a business?

Get clear on what you are selling and who you are selling it to. Then handle the basics: choose a legal structure, register your business, open a business bank account, and put together a simple business plan. You do not need everything perfect on day one. Getting the legal and financial foundation right early saves a lot of headaches later, especially when it is time to apply for funding.

What funding options exist for brand new businesses?

Getting your first business loan is harder when you do not have a track record yet, but it is not impossible. Options for new businesses include microloans, CDFI loans like what AO Fund offers, SBA loans, crowdfunding, and in some cases grants. The key is being honest about where you are at and making the strongest possible case for your business. Starting with a smaller loan and repaying it well opens the door to larger amounts down the road.

How do I create financial projections for my business plan?

Start with what you know. Estimate your monthly revenue based on realistic assumptions: how many customers, how often, at what price. Then list your costs, fixed ones like rent and salaries and variable ones that change with sales volume. The result is a rough picture of your income and cash flow over the next 12 months. It will not be perfect, and that is okay. Lenders know projections are estimates. They are looking for whether you have thought it through.

How do I officially register my small business?

Pick a name, choose your legal structure, then register with your state. You will also need to get an EIN (Employer Identification Number) from the IRS. It is free and takes minutes online. Depending on your type of business and location, you may also need local permits or licenses. Getting registered properly matters: without it, you cannot open a business bank account, and lenders will not take your application seriously.

What is a DBA and do I need one?

DBA stands for Doing Business As. If your business operates under a name that is different from your legal registered name, you need one. For example, if your LLC is Johnson Holdings LLC but your customers know you as Johnson’s Bakery, you would file a DBA for the bakery name. It is a simple filing, but it is required in most states and you will usually need it to open a bank account under your business name.

What legal mistakes do small business owners most often make?

The big ones: not choosing the right business structure, running the business without solid contracts, mixing personal and business money, ignoring intellectual property protection, and not having the right insurance. These are not just technicalities. They can expose you personally if something goes wrong. Most of them are cheap to fix early and expensive to fix later.

What is the difference between cash accounting and accrual accounting?

Cash accounting is simple: you record money when it comes in and when it goes out. Accrual accounting records revenue when it is earned and expenses when they are incurred, even if the cash has not moved yet. Most small businesses start with cash accounting because it is easier to manage. As you grow, accrual gives you a more accurate picture of how the business is performing, and some lenders require it.

How do I put together a profit and loss statement?

Start at the top with your total revenue. Subtract what it costs you to produce or deliver what you sell (cost of goods sold) and that gives you your gross profit. Then subtract your operating expenses: rent, salaries, utilities, marketing. What is left is your net income. Most accounting software can generate this automatically. If you are doing it by hand, keep it simple and update it monthly.

Should I keep my business and personal finances separate?

Yes, and this is one of the most important habits to build from day one. Open a business bank account. Get a business credit card. Pay yourself a salary from the business instead of dipping into it whenever you need money. Mixing the two makes your books a mess, creates tax problems, and makes lenders nervous. Clean financial records are one of the best things you can do for your ability to get funded.

What is working capital and how do I calculate it?

Working capital is simply your current assets minus your current liabilities. Assets: cash, money owed to you, inventory. Liabilities: bills due, short-term debt. If the number is positive, you can cover what you owe in the short term. If it is negative, you may be heading toward a cash crunch. Use our working capital calculator to check where you stand. It takes two minutes.

How do I calculate my cost of goods sold?

The formula is: Beginning Inventory plus Purchases made during the period minus Ending Inventory equals Cost of Goods Sold. This gives you the direct cost of everything you sold including materials, labor, and production costs. Knowing your COGS is essential for understanding your gross profit and setting prices that actually make you money. If you do not know this number, your pricing strategy is essentially a guess.