12 Popular Types Of Loans & Funding Options For Small Businesses

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

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

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 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

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 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

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

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

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

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 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

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

Businesses have access to many types of loans, including options like term loans, lines of credit, SBA loans, equipment loans, microloans, and more.

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.

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.

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.

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.