11 Types of Business Loans: Compare Funding Options

Written by Tara Mastroeni

Updated on:

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If you’re looking for funds for your business, there are several types of business loans you can choose from. Ultimately, your perfect match will likely depend on how much you need to borrow and how fast you need the money. But no matter your situation, there is likely a flavor of business financing to meet your needs.

Key takeaways

Business owners can use different types of business loans to meet their specific financing needs.
The most common types of business loans are term loans, SBA loans and lines of credit
Rates and terms on small business financing will vary by lender and loan type.

Types of Small Business Loans

Loan type	Best For
Term loans	Established businesses with a strong financial profile
SBA loans	Businesses looking to cover large expenses
Business lines of credit	Businesses that need flexible funding
Microloans	Businesses that only need a small amount of funding
Equipment loans	Businesses that need to buy equipment
Commercial real estate loans	Business owners who want to buy real estate
Invoice factoring	Businesses in need of emergency funding
Accounts receivable financing	Businesses that need short-term financing
Merchant cash advances	Business with consistent credit and debit card sales
Personal loans	Business owners who have strong personal credit scores
Business credit cards	Businesses that need to cover ongoing working capital expenses

1. Term loans

Best for: Established businesses that need to make a large purchase
Not ideal for: Businesses that need ongoing funding

Term loans are one of the most common forms of business financing. Funds are distributed in a lump sum upfront. Then you repay that amount — plus interest — in fixed, regular installments over a set period of time.

Short-term business loans tend to have loan terms ranging from three to 24 months, with repayment in weekly or even daily installments. They are often used as working capital loans or emergency business loans.
Long-term business loans usually have terms of five years or longer. Repayment is usually monthly. You can commonly find long-term business loans through traditional brick-and-mortar banks and credit unions.

Term loans can be unsecured or secured by collateral. Creditworthiness is often a key requirement with these loans, which is why they’re a particularly good fit for funding established businesses with strong financial profiles.

Pros

Widely available from a variety of lenders, including banks and alternative lenders.
Funds are disbursed upfront and can be used to cover various types of business expenses.
Predictable repayment schedule.

Cons

Requirements may vary depending on the lender. Long-term business loans may have stricter eligibility requirements than short-term business loans or other types of financing.
May require collateral or a personal guarantee.
Costs can vary by lender

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2. SBA loans

Best for: Businesses that may not qualify for more traditional forms of funding
Not ideal for: Businesses that need fast funding

The U.S. Small Business Administration (SBA) partners with financial institutions across the United States to provide funding for businesses. SBA loans come with a guarantee that protects lenders from loss when borrowers default on their loans, which allows lenders the freedom to offer more flexible qualifying requirements.

Small business owners can typically borrow anywhere from $500 to $5.5 million from the SBA with repayment terms up to 25 years. However, the SBA offers a few different loan programs, each with its own borrowing limits and qualifying requirements.

Here’s a look at your options:

7(a) loans: As the SBA’s primary offering, these loans can cover general business expenses, such as working capital costs or inventory and supplies.
504 loans: For its 504 loans, the SBA partners with certified development companies to cover the cost of fixed assets, such as commercial real estate purchases or machinery.
Microloans: Offering small-scale funding to businesses, SBA microloans are meant to cover working capital costs.

While SBA funding may seem like the perfect solution, there are a few drawbacks to consider. First, applying for funding is an intensive process. Also, the SBA’s funding time is longer than many other lenders. It can take up to 60 days or longer to get funds for an SBA loan, depending on the loan type and lender.

Pros

Comparatively lower interest rate, capped by the SBA
Higher borrowing limits
Long repayment timelines

Cons

Lengthy application process
Longer funding times
Must pay an SBA guaranty fee on 7(a) loans

TIP

If the wait times for SBA loans are too long, consider startup business loans instead. These loans usually have easier qualifying requirements than other forms of funding, but you may also have to deal with shorter repayment terms and higher interest rates.

3. Business lines of credit

Best for: Businesses that need ongoing access to funding
Not ideal for: Businesses looking to make a large, one-time purchase

With a business line of credit, you can access funds as needed, up to a predetermined limit. Then, you’ll make payments on the amount that you’ve borrowed.

Once you pay down your balance, you’ll be able to borrow against it again, making business lines of credit a good choice for those who need ongoing access to flexible funding. That said, requirements to qualify vary widely, depending on the specific lender. Some may be quite strict to be approved, especially around annual revenue.

Pros

Borrow money as needed
Only pay interest on the amount borrowed, not the full credit limit
Usually has lower interest rates and higher borrowing limits than a business credit card

Cons

May come with additional fees, such as maintenance fees or draw fees
May require collateral
Interest may add up if used for large purchases or long-term expenses

4. Microloans

Best for: Startups or businesses that only need to finance a small amount
Not ideal for: Businesses that need a large cash infusion (over $50,000)

As the name suggests, microloans are small loans. They are usually available in amounts of $50,000 or less and are offered by nonprofits or government agencies to businesses that may otherwise have trouble qualifying for financing, such as startups or members of disadvantaged communities.

These loans typically come with lower interest rates and more flexible loan terms than other types of financing.

Pros

More lenient eligibility requirements
Often prioritize minority entrepreneurs
May come with other benefits, such as coaching or classes

Cons

Relatively small loan amounts
Only available to certain types of businesses
Microloans may be less widely available than other types of funding

5. Equipment loans

Best for: Businesses purchasing equipment
Not ideal for: Businesses that want unsecured funding

For their part, equipment loans help business owners purchase the equipment needed to run their companies. These loans can purchase everything from computers to machinery.

They are a type of asset-based funding, so the equipment you purchase will often be used as collateral to secure the loan.

Pros

Typically offer fast funding, usually within two business days
Offer competitive interest rates, since the equipment usually serves as collateral
Fixed payment schedules allow you to spread the cost of the equipment over time

Cons

May require down payments of up to 20% or more
Depending on the repayment term on your loan, your equipment could become outdated before you’ve finished paying it off
A lien or personal guarantee may be required in addition to collateral

6. Commercial real estate loans

Best for: Businesses purchasing real estate
Not ideal for: Businesses that need to make other types of purchases

If you want to buy a physical, brick-and-mortar location for your business, you’re likely going to have to look into getting a commercial real estate loan. At its core, this type of loan works a lot like a home mortgage. It’s a type of installment loan that you’ll pay back in regular monthly payments over the course of a set period of time.

That said, commercial real estate transactions don’t have the same level of protections provided to home mortgage borrowers. For example, the Truth in Lending Act, which provides consumer protections, doesn’t apply to businesses. With that in mind, you’re going to want to be sure that you’ve read and understand the fine print before signing on the dotted line.

Pros

Provides the funds necessary to buy land or real property
Comes with a longer loan term of up to 25 years
Particularly well suited to fund the purchase of commercial-use buildings, such as office space, restaurants or storefronts

Cons

Missing some of the protections commonly found with residential mortgages
The property usually serves as collateral for the loan
May come with higher interest rates and larger down payments than residential mortgages

7. Invoice factoring

Best for: Businesses with unpaid invoices that are trying to cover cash-flow gaps
Not ideal for: Businesses that don’t use an invoicing model

Invoice factoring works a little differently than the other types of financing we’ve described so far. It’s an advance on an unpaid invoice and it works like this:

You submit unpaid invoices to a factoring company and they pay you an advance on a portion of those invoices, usually 70% to 90%. Then, once the invoices are paid, you’ll receive a payment for the remainder, minus any fees associated with collection.

Pros

Easier qualification than other types of financing
Cash advances give you access to fast funding
The factoring company will take care of collecting payment on your unpaid invoices

Cons

Added fees can make this a more costly financing option
Must give over control of the collection to the factoring company
Only a fit for businesses that use an invoicing model

8. Accounts receivable financing

Best for: Businesses that have unpaid invoices and want to retain control of collection
Not ideal for: Businesses with customers who take a long time to pay

Like invoice factoring, accounts receivable financing allows you to leverage your unpaid invoices in exchange for cash. However, this time, your invoices act as collateral to back a term loan or line of credit. As the business owner, you are responsible for collecting payment on the invoice and using the funds to repay the money you’ve borrowed.

Pros

Fast funding option
Flexible qualifying requirements, especially since your invoices act as collateral
You retain control over the collection of your invoices (unlike with invoice factoring)

Cons

Must have quality invoices and creditworthy customers to qualify for this type of financing
If your customers fail to pay your invoices, you could have trouble paying back the accounts receivable financing loan
May provide revolving funding, but that can lead to a debt cycle

9. Merchant cash advances

Best for: Businesses with consistent credit card sales that need to cover cash flow gaps
Not ideal for: Businesses that will struggle with frequent repayments

Merchant cash advances (MCAs) give you the opportunity to exchange a portion of your business’s credit card sales for a cash advance.

The funds are provided upfront in a lump sum. However, rather than making monthly payments until the borrowed amount is repaid in full, the merchant cash advance company will take a predetermined portion of your business’s daily or weekly credit card sales until your account has been settled.

Pros

Financing option for businesses with bad credit
Fast funding option
Offer advanced funding, which makes them a good choice for covering cash flow gaps

Cons

Usually charge a factor rate, rather than an interest rate, which can make understanding the true borrowing costs confusing and may mean higher fees.
Often have high costs
Require daily or weekly repayments

10. Personal loans for business purposes

Best for: Business owners with a strong personal credit history who may not qualify for other loans
Not ideal for: Business owners who don’t want to be personally on the hook for repayment

Since banks and other traditional financial institutions may hesitate when lending funds to businesses with limited operating histories, startups and newer businesses may want to consider using a personal loan for business as an alternative to a traditional business loan.

Because personal loans are commonly unsecured debt, you may need a good credit score to qualify. However, if you do qualify, they can offer you access to fast funding with few restrictions on use.
Still, it’s a consideration because, if you’re unable to repay, the health of your personal credit score is on the line. Plus, using a personal loan instead of a business loan also means that your loan doesn’t help you build business credit.

Pros

Access to fast funding
Easier qualification process than traditional business financing
Available from a wide variety of lenders

Cons

Interest rates may be higher than with a business loan
You’ll likely need a strong FICO Score to qualify
Failure to repay can damage your personal credit score

TIP

If you don’t have a strong FICO Score, research bad credit business loans. As the name suggests, these loans are geared toward business owners with lower credit scores. However, they often come with higher interest rates and lower borrowing amounts.

11. Business credit cards

Best for: Business owners seeking to cover ongoing expenses
Not ideal for: Business owners who need longer repayment timeframes

Business credit cards are another type of revolving credit that might work as an alternative to a traditional small business loan. Just like a personal credit card, you can borrow money up to your credit limit, then borrow against the limit again once you repay your balance.

The way this type of financing functions makes it particularly well suited for business owners who need help financing ongoing expenses, such as supplies, travel costs or utility payments. But it’s best to pay off your statement balance in full each month to avoid interest charges.

Depending on which type of card you choose, you may be able to access certain perks in exchange for using the card, like a 0% APR introductory period or accruing rewards points. That said, it’s important to note that business credit cards are closely tied to your personal credit score, so failure to repay may damage your credit.

Pros

Offers ongoing access to funds
Option to earn rewards on purchases
No collateral required

Cons

Higher, variable interest rates
Extra fees, such as annual fees, may apply

Qualifying requirements for different loan types

Once you know what type of financing is right for your business, the next step is to learn what you need to do to qualify for a business loan. In this case, there are several business loan requirements to consider.

Here’s an overview of each one to get you started thinking about how you’ll do during the application process.

Credit scores: Lenders will likely look at your business and personal credit scores as an indicator of how likely you are to repay the loan. As a rule of thumb, the higher your credit scores are, the better interest rate you can get. However, some forms of financing, like invoice factoring, accounts receivable financing and merchant cash advances, don’t have this requirement. They often consider your customers’ creditworthiness instead of your own.
Annual revenue: Lenders look at your annual revenue to try to determine whether you make enough income to pay back the loan without issue. This metric will vary by lender. In fact, the SBA sets maximum revenue limits instead, which vary by industry. Typically, invoice factoring, accounts receivable financing and MCA companies won’t consider this metric.
Time in business: Some lenders, especially brick-and-mortar institutions, require businesses to have a long history before lending to them. If you haven’t been in business long enough to qualify, looking into online lenders or startup business loans may be a better option. Although again, you may not have to worry about it if you choose accounts receivable financing, invoice factoring or MCAs.
Business industry and size: Other lenders, like the SBA, for example, set business size requirements. These requirements will vary by the type of industry and where the business is located. Other lenders may not lend to certain industries, such as the cannabis industry or adult entertainment. Be sure to read the fine print for any lender you’re considering.
Collateral or personal guarantee: In some cases, lenders may require collateral or a personal guarantee to secure the loan. Often, these can be in the form of physical assets, such as equipment or machinery. With equipment financing, the asset being purchased usually acts as collateral.
Additional paperwork: In some cases, you may be asked to provide additional paperwork, such as a business plan, financial statements or legal documents, like your articles of incorporation.

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On this page

Types of Small Business Loans
1. Term loans
2. SBA loans
3. Business lines of credit
4. Microloans
5. Equipment loans
6. Commercial real estate loans
7. Invoice factoring
8. Accounts receivable financing
9. Merchant cash advances
10. Personal loans for business purposes
11. Business credit cards
Qualifying requirements for different loan types