12 Popular Types Of Loans & Funding Options For Small Businesses
Need to know how to fund your small business? Here are the top funding categories to choose from. Find out which is right for you.
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WRITTEN & RESEARCHED BY
Erica Seppala Erica began writing on small business topics in 2008. She joined Merchant Maverick in 2018 and focuses on loans, accounting, and POS. She is a Certified ProAdvisor for QuickBooks Online and QuickBooks Payroll. She has been cited in MSN, Reader's Digest, Vox, U.S. News & World Report, and Real Simple. She is a graduate of Limestone University and resides in Greenville, South Carolina.Editor & Senior Staff Writer
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Business owners can choose from many types of business loans, from traditional installment loans and lines of credit to microloans and crowdfunding.
Just as every business is unique, so are the needs for capital. Learn about the most common types of business loans available and find out which type is the best option for your small business.
Table of Contents
The 12 Types Of Business Loans
Running a small business can be expensive, and seasonal increases, unforeseen emergencies, unpaid invoices, or the need for expansion can all lead a business owner to pursue financing options.
While there are many affordable loans available, it’s important to fully evaluate all lending options, the total cost of the loan, and the return on investment from taking a commercial loan. Start your research with an understanding of the 12 types of business loans.
Business Term Loans
Pros
- High borrowing limits
- Provides a lump sum of cash for larger purchases
- Long-term repayment options are available
Cons
- May require collateral, a personal guarantee, or a blanket lien
- Traditional lenders like banks have strict borrowing requirements
A term loan, or an installment loan, is a traditional type of business loan in which the borrower receives a specific amount of money that is paid back on a set schedule.
Term loans can be obtained from banks, credit unions, and alternative lenders. The best term loans have long repayment terms and low rates and are reserved for creditworthy borrowers that have been in business for at least two years and have a history of strong revenue.
Typically, term loan payments are made each month, but the payment schedule will vary based on the policies of the lender. Each payment will be applied toward the principal (the balance of the loan) and the interest charged by the lender.
When To Use A Business Term Loan
- Business growth or expansion
- Acquiring a business
- Large, one-time purchases like equipment or real estate
- Businesses with a strong borrowing profile
Business Lines Of Credit
Pros
- Flexible funding option
- Interest is only charged on used funds
- No collateral is required for most LOCs
Cons
- Additional fees may be charged
- Cost of borrowing may be higher than other types of loans
A business line of credit is very similar to a credit card. Following approval, the lender gives the business a credit limit. The borrower can make multiple draws provided they don’t exceed their credit limit.
If a line of credit is revolving, funds will be replenished and available for use again as payments are made. Interest is only paid on the money that’s drawn from the credit line.
Lines of credit are typically easier to receive than long-term installment loans, but interest rates may be higher and/or additional fees may apply. Banks, credit unions, and online lenders may provide business lines of credit to qualified borrowers.
When To Use A Business Line Of Credit
- Unexpected expenses & emergencies
- Resolving cash flow issues
- Covering extra seasonal expenses
Small Business Administration Loans
Pros
- Borrowing limits up to $5 million
- Repayment terms up to 25 years
- Low interest rates
Cons
- Lengthy application process
- May take several weeks or longer to receive funds
The Small Business Administration is a resource known for its low-cost, government-backed loan programs. The organization works with SBA-approved lenders like banks and nonprofits to provide small business loans. A portion of each loan is backed by the SBA, which translates to lower rates and better terms for borrowers.
SBA loans are popular for their long repayment terms and high borrowing limits. There are also a number of programs available to fund nearly any business expense, from working capital to commercial real estate.
SBA loans can be difficult to qualify for, and the application process is lengthy. Businesses that need funds immediately will want to check out other options, while businesses that have a few weeks (or possibly months) to wait for funds will be rewarded with very favorable rates and terms.
When To Use SBA Loans
- Business growth or expansion
- Acquiring a business or purchasing a franchise
- Working capital
- Debt refinancing
- Businesses with a strong borrowing profile
Short-Term Business Loans
Pros
- Easier to qualify for than other loans
- Fast funding
- Quick & easy applications
Cons
- Higher rates & fees
- May require frequent payments
- Short repayment terms
Short-term business loans are typically considered low risk because they carry shorter term lengths. Because they are low-risk, they are a good option for new businesses and borrowers with poor credit scores.
Most short-term lenders charge a one-time fixed fee instead of an interest rate. Additional fees may apply, and the overall cost of borrowing is typically more expensive than other loans. However, some lenders can provide approvals in just minutes with funds delivered as quickly as the same business day.
Repayment terms for short-term loans are typically two years or less, although many lenders have much shorter terms. Payments may be required monthly or weekly, depending on the lender.
When To Use Short-Term Loans
- Emergency financing needs
- Poor-credit borrowers
- Fast funding
Equipment Loans
Pros
- Breaks down the cost of expensive equipment into manageable payments
- May not require additional collateral
- Competitive rates & long repayment terms available to qualified borrowers
Cons
- Funds can only be used to purchase equipment
- May require a down payment
An equipment loan is used to purchase equipment, including machinery and vehicles. A business will get to immediately use the equipment without having to pay the full cost at once. Instead, the cost of the equipment will be broken into smaller payments over a set period of time.
Equipment loans are usually easier to qualify for than term loans, so startups and borrowers with credit challenges may be eligible. Many equipment loans use the financed equipment as collateral and don’t require additional business or personal collateral from the borrower.
A down payment may be required based on factors like the lender’s requirements, the value of the equipment, and the creditworthiness of the borrower.
When To Use Equipment Loans
- Purchasing equipment
- Startups
- Poor-credit borrowers
Invoice Financing
Pros
- Options available for borrowers with poor credit
- Fast funding
- Clears up cash flow issues caused by unpaid invoices
Cons
- Fees can be expensive
- Only available to borrowers with unpaid invoices
Invoice financing is used to solve cash flow problems caused by unpaid invoices. Borrowers can sell their unpaid invoices or use them as collateral in exchange for an upfront payment.
With invoice financing, lenders look at your unpaid invoices — the amount, the quantity, and the likelihood that your customers will pay — as opposed to using traditional requirements like credit score and time in business. This means that many businesses may qualify, even borrowers with credit challenges or new businesses.
The application process with many invoice financing companies is quick and easy, and funds are disbursed quickly, making this a good option for businesses that need fast cash.
When To Use Invoice Financing
- Resolve cash flow problems due to unpaid invoices
- Startups
- Poor-credit borrowers
Merchant Cash Advances
Pros
- Low credit score requirements
- Funding opportunities for new businesses
- Fast funding
Cons
- Rates can be very expensive
- Payments are required frequently
With a merchant cash advance, a lender advances cash to a business in return for a percentage of future credit card sales.
After receiving a merchant cash advance, daily or weekly payments are withdrawn by the lender from the business’ bank account. Payment is often based on a percentage of sales, so when sales are lower, the daily payment is also lower.
MCAs can be very expensive, so business owners should shop around for other options, especially if they have good credit and steady revenue. However, since borrowing requirements are often very low, this may be a good option for bad-credit borrowers, newer businesses, and others that can’t find funding elsewhere.
When To Use Merchant Cash Advances
- Emergency financing needs
- Poor-credit borrowers
- New businesses that don’t qualify for traditional business loans
Personal Loans For Business
Pros
- May be easier to receive than small business loans
- Available to new businesses and startups
- No business credit score or revenue required
Cons
- Won’t build business credit
- Borrowers are personally liable for the loan
- Lower borrowing limits than business loans
Business owners that lack steady business revenue, don’t have a business credit score, or haven’t been in business for long can get the funds they need with a personal loan for business.
With this loan, a borrower uses their personal credit score and income to qualify for funding. Fast funding options are available, and borrowers with good to excellent credit can receive low rates and favorable terms.
The downside is that personal loans often have lower borrowing limits than business loans. Personal loans also don’t build business credit, and a borrower will be held personally liable if the loan goes into default.
When To Use Personal Loans For Business
- Business owners with strong personal credit
- Entrepreneurs
- Startups & new businesses
Microloans
Pros
- Borrowing requirements are typically lower than traditional business loans
- Fast funding options available
- Microloans often don’t require collateral
Cons
- Low borrowing amounts
- May have short repayment terms
A microloan is a loan of $50,000 or less. This option is ideal for businesses that don’t need a large amount of cash.
Some lenders offer low rates and long repayment terms for microloans. The SBA Microloan program, for example, stands out for its competitive interest rates and six-year terms.
Because these are smaller loans, they are best for smaller businesses, sole proprietors, and startups that have lower capital requirements than other businesses.
When To Use Microloans
- Startups & new businesses
- Businesses that only need a small amount of money
- Poor-credit borrowers
Crowdfunding
Pros
- No credit score requirements
- Funding opportunities for new businesses
- Can help businesses build a customer base
Cons
- Can be time-consuming
- May not reach funding goals
With crowdfunding, a small business or startup uses an online platform to raise money from a group of investors. The small business pitches its idea to potential investors, and the investors donate money if the idea appeals to them.
A business that opts to raise funds through crowdfunding will have to map out a strategy and promote its campaign to entice investors.
When To Use Crowdfunding
- Businesses with an appealing product
- Entrepreneurs with a strong, marketable business plan
Commercial Real Estate Loans
Pros
- Low interest rates for qualified borrowers
- Long repayment terms
- High borrowing limits
Cons
- Strict borrowing requirements
- The application process can be lengthy
Commercial real estate loans can help you purchase or upgrade commercial real estate. These funds can be used to purchase an existing building or land, upgrade or add-on to an existing property, or construct a new building.
Commercial real estate loans are long-term loans that are paid off over a longer period of time, such as 20 or 30 years. These loans typically have very strict borrowing requirements, so borrowers must have good to excellent credit, strong revenue, and over two years in business.
The application process can be complex, and it may take some time to close the loan. However, borrowers that need a large amount of money for a real estate purchase will be able to access high borrowing limits at competitive rates.
When To Use Commercial Real Estate Loans
- Purchasing real estate
- Upgrading real estate
Business Credit Cards
Pros
- Revolving line of credit
- Can be used as needed up to the assigned credit limit
- May offer rewards & other perks
- May be easier to qualify for than other loans
Cons
- May have higher interest rates than other loans
- Lower borrowing limits than some other loans
A business credit card is a revolving line of credit. This means that funds that are spent are replenished as the borrower makes payments.
Business cards are generally used to finance everyday expenses. They can also be used to cover unexpected expenses and emergencies.
Business credit cards may have higher interest rates than other business loans. However, the best business credit cards typically offer good rates for qualified borrowers. They also carry savings in the form of rewards programs, signup bonuses, and other special cardholder benefits.
When To Use A Business Credit Card
- Financing everyday expenses
- Earning rewards and other benefits
- Emergency expenses
The Bottom Line On The Types Of Business Loans
There are plenty of small business loans available for any purpose, whether you need to purchase commercial real estate or fund an unexpected expense.
While there is plenty of funding available, make sure to take the time to find the right product. Do your research, compare rates, and make sure that taking on additional debt is a sound choice for your business.
Types Of Business Loans FAQs
What types of loans are available for small businesses?
Businesses have access to many types of loans, including options like term loans, lines of credit, SBA loans, equipment loans, microloans, and more.
Which type of loan can be considered best for small businesses?
There is no type of loan that is considered best for small businesses. The best loan for your business will depend on the needs of your business and what you hope to accomplish with the financing.
How can I get a business loan without any collateral?
Most business loans carry some sort of security the lender can collect if the borrower defaults on their loan. If you can’t or don’t want to put up specific collateral, you can get a loan with a blanket lien. Business loans that commonly carry blanket liens include online loans and some bank loans.
What credit score do I need to get a small business loan?
You might qualify for a business loan even if your credit score is in the 500s. Although you can qualify for financing with poor credit, people with higher scores will qualify for better interest rates and fees.
What type of business loan is easiest to get?
Short-term loans and merchant cash advances are typically the easiest to get. Certain business credit cards and lines of credit may also be easy to get. One thing to note that many business loans that are fast and easy to obtain come with shorter repayment terms and higher rates and fees.

Erica Seppala


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