Business Line of Credit
A business line of credit gives access to a pool of funds to draw from when you need capital.
12 Mins
Small business owners can choose from among several different types of business loans to meet their financing needs. Each loan product has unique qualification requirements, interest rates, and terms. Whether you’re looking to buy equipment, real estate, inventory, or just need working capital, there’s a type of small business loan that will suit your needs and preferences.
Here are the nine most common types of business loans available to entrepreneurs:
In this guide, we’ll explain all of the different types of business loans in greater detail, so you can learn more about all the funding options that are available to your business and find out which is best for your needs.
At some point, nearly every small business will require some extra capital—whether to boost existing cash flow, to bring on new employees, or simply to grow the business to the next level. Luckily, there are several business financing options to choose from, each as unique as the business they’re funding.
Below, we’ll dive into the details explaining the different types of business loans.
Good for:
Skip If:
With a traditional term loan, you borrow a set amount of money upfront, and pay back the money, with interest, on a specific repayment schedule. A variety of lenders offer term loans, including banks and online lenders.
If you have strong credit and can afford to wait for financing, you should apply for a bank loan, as bank loans will have the most desirable rates, terms, and amounts. On the other hand, if your credit isn’t as strong, you might try applying with a short-term lender.
Reasons why you might use a term loan include:
Good for:
Skip If:
One of the other most well-known types of business loans is a business line of credit. With a business line of credit, the lender gives you access to a specific amount of money that you can draw from at any time as needed. There are both fixed and revolving lines of credit. With the latter type, the credit line resets after you pay your balance in full (similar to a credit card).
Lines of credit are available from different types of lenders, but banks offer the best interest rates and the longest time between renewals. Online lenders offer shorter-term lines of credit for younger businesses and business owners with lower credit scores. Small businesses can benefit from lines of credit for any of the following:
Business lines of credit can create a cushion in case of a cash flow emergency, and come in handy when you need money quickly. Banks usually offer both secured and unsecured credit lines. For secured lines, you have to put down some assets as collateral.
Good for:
Skip If:
The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they eliminate some risk and encourage lenders to make loans to small business owners.
SBA loans are a great product for small businesses, and outside of a traditional bank loan, the most affordable sources of capital. New and established businesses can apply for SBA loans, but there are different SBA loan programs for different business needs.
The standard SBA 7(a) loan is a good option for business owners who need working capital or want to expand or acquire a business. The SBA 504/CDC loan is ideal for business owners who want to finance the purchase of equipment or real estate or make upgrades to existing property.
It’s also important to note that even though SBA loans are designed to help small business owners who can’t qualify for traditional bank loans, they still require that you meet high qualifications, including strong business financials, solid credit history, and a few years in business.
This being said, although the rates, terms, and amounts for SBA loans will largely depend on the specific program and lender, you can typically expect interest rates ranging from 5% to 13%, loan amounts up to $5 million, and terms as long as 25 years.
Good for:
Skip If:
One of the most popular asset-based loans is equipment loans, also called equipment financing. This type of small business loan is a potential fit if you’re looking for money to acquire a piece of new or used equipment. Instead of paying for expensive equipment outright, you can take an equipment lease or loan to fund the purchase.
Equipment financing is available to established and new businesses, and even business owners with lower credit scores are typically able to qualify. Unlike some other types of business loans, business owners with less-than-ideal credit can often qualify for equipment financing because the equipment itself secures the loan. In this way, you don’t need to put up any other collateral—the equipment itself serves as collateral.
Equipment loans have pretty affordable interest rates, ranging from 8% to 30%, depending on your business’s age, credit, and finances. You can use equipment financing to buy or lease a range of equipment types, which can include computers, appliances, and vehicles that you use in the course of business.
Good for:
Skip If:
Another popular type of asset-based loan for businesses is invoice financing. With this type of business loan, you use your outstanding invoices to get a cash advance from a lender. The unpaid invoices act as collateral for the advance.
With invoice financing, a lender advances you a percentage of your total invoice amount, usually around 85% to 90%, and holds onto the remaining percent. You can use the advance to cover business expenses while you’re both waiting for your customers to pay. During that time, the lender will typically charge a weekly fee. Once your customer pays, the lender will return the remaining 10% to 15% minus the fee.
Overall, invoice financing is a great option if you have cash flow problems as a result of billing several customers, all of whom pay at different times. You can use the advance to cover payroll, rent, and other operating expenses.
Good for:
Skip If:
If your business wants to acquire commercial property—such as a retail shop, office building, or manufacturing facility—you’ll likely want to opt for a commercial real estate loan. Similar to equipment financing, the underlying property acts as collateral for this type of business loan.
Commercial real estate loans can take on different structures depending on the lender you work with and the amount of financing you need. Banks provide commercial real estate loans with longer repayment terms and lower interest rates.
Hard money lenders, on the other hand, are private lenders who work with a wider pool of borrowers to offer commercial real estate loans. These lenders are more likely to offer hard money business loans or balloon loans for commercial real estate purchases. With a balloon loan, you make smaller payments for several years based on a longer amortization period, followed by a large balloon payment at the end of the loan. If you can’t afford the balloon payment, you might have to renegotiate terms with the lender or refinance the debt.
Ultimately, the size of your commercial real estate loan will depend on a factor called loan-to-value (LTV). LTV is a comparison of the size of the loan versus the value of your commercial property. A typical LTV for commercial real estate loans is 75% or 80%. For example, if your building is valued at $100,000, you might get a maximum amount of $80,000 and have to provide the rest as a business loan down payment from your own funds.
Good for:
Skip If:
In some cases, your small business might need just a little bit of money to reach that next goal. Microloans are a type of small business loan with amounts of $50,000 or less. These loans can be used for working capital, expansion, or startup costs, and the qualification requirements generally aren’t too stringent.
Most microloans come from nonprofit lenders, such as Accion and Kiva. These lenders provide capital to early-stage businesses because they want to help underserved entrepreneur communities and aid the local economy where the business is located. Although any business owner can apply for these loans, they are especially well-suited for female business owners and minority business owners.
Additionally, there is also an SBA microloan program that’s meant for businesses looking for loans up to $50,000. The SBA partners with community-based nonprofit lenders to make these loans.
A microloan can be a good option for those who are looking to launch a startup and for entrepreneurs with micro-businesses (e.g. food trucks, vendors, and freelance businesses). The maximum term on SBA microloans is six years. The interest rates are typically the highest among SBA loans but still relatively low. You can expect interest rates of around 9% to 16%.
Good for:
Skip If:
One popular option for startup funding is using a personal loan for business purposes. Both banks and online lenders offer personal loans. These are based solely on your personal finances and credit, so your personal credit score is extremely important. Ideally, your credit score should be above 650 to qualify.
Although these loans are called personal loans, you can use them for business purposes. One thing to note, however, is that these loans are for smaller amounts of capital (up to $35,000). If you need a large amount of money, this can help you get there, but you’ll need to combine this loan with other sources of funding.
Interest rates on personal loans range from around 7% to 36%, depending on the lender and your qualifications, and the repayment term is usually under five years. In addition to personal loans, there are other ways to tap into personal finances for business purposes. For instance, if you’re a homeowner, you might be able to use a home equity loan for business purposes.
Good for:
Skip If:
With a merchant cash advance, a lender basically grants you an advance of capital and purchases a portion of your daily credit and debit card sales. You pay back the advance with a percent of your daily card sales.
The benefit of this type of small business loan is that when business is slow, you pay back less, and when business is booming, you pay back more. The downside, however, is that a merchant cash advance is the most expensive type of business financing on the market. The APRs can approach 100% or even higher.
Therefore, if you’re considering a merchant cash advance, you should be certain that your cash flow can handle it and that there aren’t any other types of business loans you might qualify for.
As we’ve discussed, there are many different types of business loans—and the right one for your business ultimately comes down to a number of factors.
At the end of the day, each type of small business loan is designed for a different business need. Therefore, you’ll need to consider your credit, your business’s finances, the length of time you’ve been operating, and your reason for the loan before narrowing down your options.
Once you do that, you’ll likely have a few—or several—options for which you’re eligible. This being said, rather than applying separately for a handful of loan products, you can use an online marketplace and fill out a single application to find out which financing options you qualify for—plus, receive assistance throughout the entirety of your business funding process.
