11 Types of Business Loans: Compare Your Options
If you’re looking for funds for your business, there are several types of business loans you can choose between. Ultimately, the type of business loan you pick 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.
11 types of small business loans
|Type of Small Business Loans
|Established businesses with a strong financial profile
|Businesses looking to cover large expenses
|Business lines of credit
|Businesses that need flexible funding
|Businesses that need to buy equipment
|Commercial real estate loans
|Business owners who want to buy real estate
|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
|Business owners who have strong personal credit scores
|Business credit cards
|Businesses that need to cover ongoing working capital expenses
|Businesses that only need a small amount of funding
1. Term loans: Best for funding established businesses
Business term loans are one of the most traditional forms of business financing. Funds are typically 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 can last up to ten years or more. 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.
Widely available from a variety of lenders.
Funds can be used to cover various types of business expenses.
Predictable repayment schedule.
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.
2. SBA loans: Best for covering large expenses
The 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 $5,500,000 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. For one, applying for funding is an intensive process. For another, the SBA’s funding time is longer than many other lenders. It can take up to 60 days or longer for the funds to hit your account once you’ve been approved for a loan.
Comparatively lower interest rate, capped by the SBA
Higher borrowing limits with long repayment timelines
Lengthy application process
Longer funding times
3. Business lines of credit: Best for accessing flexible funding
As you might guess, a business line of credit typically works similarly to a credit card. You can access funds as needed, up to a predetermined limit. Then, you’ll make payments on the amount that you’ve borrowed.
However, 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.
Borrow money as needed
Only pay interest on the amount borrowed, not the full credit limit
May come with additional fees, such as maintenance fees or draw fees
May require collateral
4. Equipment loans: Best for purchasing equipment
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.
Typically offer fast funding, usually within two business days
Offer competitive interest rates, since the equipment usually serves as collateral
Usually require down payments of up to 20%
Have stricter credit score requirements
5. Commercial real estate loans: Best for business owners who want to own property
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 customers of mortgages. For example, the Truth in Lending Act 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.
Provides the funds necessary to buy land or real property
Comes with a longer loan term
Missing some of the protections commonly found with residential mortgages
The property usually serves as collateral for the loan
6. Invoice factoring: Best for providing emergency funding
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.
Easier qualification than other types of financing
Cash advances give you access to fast funding
Added fees can make this a more costly financing option
Must give over control of collection to the factoring company
7. Accounts receivable financing: Best for offering short-term financing
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.
Fast funding option
Flexible qualifying requirements, especially since your invoices act as collateral
Must have quality invoices and credit-worthy 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
8. Merchant cash advances: Best for leveraging consistent card sales
Meanwhile, merchant cash advances 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.
Financing option for businesses with bad credit
Fast funding option
Usually charge a factor rate, rather than an interest rate, which can make understanding the true borrowing costs confusing and may mean higher fees.
Merchant cash advance companies aren’t held to the same transparency standards as traditional lenders
9. Personal loans: Best for utilizing a personal credit score
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.
Because personal loans are commonly unsecured debt, and often don’t require collateral, 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.
Access to fast funding
Easier qualification process than traditional business financing
Interest on a personal loan isn’t a tax-deductible business expense.
Failure to repay can damage your personal credit score
10. Business credit cards: Best for covering ongoing expenses
Business credit cards are another type of revolving credit. 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 in order 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 gaining 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.
Option to earn rewards on purchases
No collateral required
Higher, variable interest rates
Extra fees, such as annual fees, may apply
11. Microloans: Best for financing small purchases
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.
More lenient eligibility requirements
May come with other benefits, such as coaching or classes
Relatively small loan amounts
Only available to certain types of businesses
How to qualify for a business loan
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 business loan interest rate you can get.
- Annual revenue: Lenders look at your annual revenue to try and determine whether you make enough income to pay back the loan without issue.
- 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 startup business loans may be a better option.
- 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.
- 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.
- Business plan: Lenders usually require you to provide a comprehensive business plan. This helps provide them with a better idea of how you intend to grow your business in the future and the steps you’ll take to get there.
- Financial statements: Your lender will likely want to know how your business is doing financially. Expect to include with your loan application common financial statements, like bank statements, balance sheets and cash flow statements.
- Accounts receivable and accounts payable: These documents will also help give your lender a clear picture of your business’s current financial standing. If you’re looking for invoice factoring or accounts receivable financing, they’ll be necessary for securing funding.
- Legal documents: Lenders also like to ensure that the businesses they finance are legally sound. Your lender might also ask to see proof of legal documents, such as any licenses and permits or your articles of incorporation.