12 Types Of Business Loans

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 is the need 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. Once you’ve narrowed down the types of loans you’re interested in, kick off your search for a lender with our picks for the best small business loans.

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 many affordable loans are 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

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. Typically, payments are made each month, although this varies by lender. Payments are applied toward the principal (the balance of the loan) and the interest charged by the lender.

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.

Business Lines Of Credit

A business line of credit is similar to a credit card. A borrower can make multiple draws up to the credit limit assigned by the lender. Interest is only paid on the funds that are drawn from the credit line. With a revolving line of credit, funds are replenished and available for use as payments are made.

Lines of credit are typically easier to receive than long-term installment loans, but interest rates may be higher and additional fees may apply. Lines of credit are available through banks, credit unions, and online lenders.

Small Business Administration Loans

The Small Business Administration works with SBA-approved lenders like banks and nonprofits to provide low-cost, government-backed small business loans.  Multiple programs are available to fund nearly any business expense, from working capital to commercial real estate.

The application process for SBA loans is lengthy, so this funding isn’t ideal for businesses that need fast access to cash. However, borrowers who can afford to wait for several weeks (or possibly months) will be rewarded with low rates, high borrowing limits, and long repayment terms.

Short-Term Business Loans

Short-term business loans are similar to traditional term loans, only with much shorter term lengths — typically two years or less, although some lenders have shorter terms. 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, weekly payments may be required, 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.

Equipment Loans

An equipment loan is used to purchase equipment, including machinery and vehicles. The business will get immediate use of the equipment while paying for it with smaller payments over a set period. 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.

Invoice Financing

Invoice financing allows borrowers to sell unpaid invoices or use them as collateral in exchange for an upfront payment. With this type of funding, lenders consider factors such as the amount of the invoices, the quantity, and the likelihood that customers will pay instead of 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.

Merchant Cash Advances

With a merchant cash advance, a lender advances cash to a business in return for a percentage of future credit card sales. Daily or weekly payments are withdrawn by the lender, and payments are typically based on a percentage of sales. This means that when sales are lower, the 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 who can’t find funding elsewhere.

Personal Loans For Business

A personal loan for business allows a borrower to use their personal credit score and income to qualify for funding. This is ideal for businesses that lack steady business revenue, don’t have a business credit score, or operate a new business.

Fast funding options are available, and borrowers with good to excellent credit can receive low rates and favorable terms. However, 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.

Microloans

A microloan is a loan of $50,000 or less and is suitable 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.

Crowdfunding

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.

Commercial Real Estate Loans

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 expand an existing property, or construct a new building. Commercial real estate loans have long repayment terms, such as 20 or 30 years, competitive rates, and high borrowing limits.

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 is also complex, and it may take some time to close the loan.

Business Credit Cards

Business cards are generally used to finance everyday expenses. They can also be used to cover unexpected expenses and emergencies. A business credit card is a revolving line of credit, so funds that are spent are replenished as the borrower makes payments.

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 and offer savings in the form of rewards programs, signup bonuses, and other special cardholder benefits.

The Bottom Line On The Different 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 plenty of funding is 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.

Additionally, taking the time to check your credit score, gather your documentation, and calculate how much of a loan you can afford can make the business loan approval process go smoothly. Good luck!