12 Popular Types Of Loans & Funding Options For Small Businesses

Business owners have many financing options available, from traditional installment loans to lines of credit to microloans.

However, just as every business is unique, so are the needs for capital. Whether you’re brand new to the industry, your personal or business credit scores are low, or you’re aiming for specific rates and terms, there are different loan products available.

Learn about the most common types of business loans available and find out which type is the best option for your small business.

Business Term Loan

A term loan, often called 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, term loan payments are made each month, but the pay schedule will vary based on the policies of the lender. Each payment will be applied toward the principal, or the balance of the loan, as well as to interest charged by the lender.

Best For…

• Business growth or expansion
• Large, one-time purchases like equipment or real estate
• Businesses with a strong borrowing profile

More Resources

• Guide to business term loans
• Small business term loan rates and fees calculator

Business Line Of Credit

A business line of credit is very similar to a credit card. When approved, the business is given a maximum credit limit. You can borrow from the fund at any time as long as they don’t spend over the borrowing limit. You only pay interest on the money drawn from the credit line.

Best For…

• Paying for unexpected expenses
• Solving cash flow problems
• Seasonal spending

More Resources

• Guide to business lines of credit
• The best line of credit options for small businesses

Small Business Administration (SBA) Loan

The Small Business Administration is a federal organization that serves as a resource for small business owners. One of the biggest benefits offered by the SBA is its low-cost, government-backed loan programs.

Business owners do not go directly to the SBA for loans. Instead, the SBA works with lenders like banks and nonprofits. A portion of the loans offered by the lenders are backed by the SBA, which translates to lower rates and better terms for borrowers.

Best For…

• Business growth or expansion
• Working capital
• Debt refinancing
• Businesses with a strong borrowing profile

More Resources

• SBA loans explained
• Current SBA loan interest rates
• SBA loan rates and fees calculator

Short-Term Business Loan

Short-term business loans are typically considered low risk because they carry short 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.

Best For…

• Emergency financing needs
• Borrowers with poor credit
• Borrowers that need cash fast

More Resources

• Guide to short-term business loans
• Short-term business loan rates and fees calculator

Equipment Loan

An equipment loan is used to purchase equipment. The business will immediately get to use the equipment but won’t have to pay the full cost up front. Instead, the business will be able to pay smaller payments on a regular basis. The lender charges interest for loaning the funds to the borrower.

Best For…

• Purchasing equipment
• Startups and poor-credit borrowers

More Resources

• Guide to equipment loans
• The difference between equipment loans and leases

Invoice Financing

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 cash up-front. Because invoice financing is reliant on your customers paying — not your business — this type of financing is a good option for startups and poor-credit borrowers.

Best For…

• Businesses that have cash flow problems due to unpaid invoices
• Startups and poor-credit borrowers

More Resources

• Guide to invoice financing
• Best invoice financing companies for small businesses

Merchant Cash Advance

With a merchant cash advance, a lender advances a company money in return for a percentage of future credit card sales.

After receiving a merchant cash advance, daily 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.

Best For…

• Emergency financing needs
• Poor-credit borrowers
• Businesses with strong daily revenue

More Resources

• Guide to merchant cash advances
• Comparison of top merchant cash advances
• Merchant cash advance rates and fees calculator

Personal Loan For Business

A personal loan for business is an option for businesses and entrepreneurs that do not have the credit score or business documentation required to qualify for a business loan. With a personal loan, the small business owner uses his or her own credit score and income documentation to qualify for financing.

Best For…

• Business owners with strong personal credit
• Entrepreneurs, startups, and new businesses

More Resources

• Guide to getting a personal loan for business
• Key differences between personal and business loans

Microloan

A microloan is typically defined as a loan of $50,000 or less.

Because these are smaller loans, they are best for smaller businesses, sole proprietors, and startups that have lower capital requirements than other businesses.

Best For…

• Startups and new businesses
• Businesses that only need a small amount of money
• Poor-credit borrowers

More Resources

• Guide to business microloans
• Guide to the SBA microloan program

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. It’s important for the business seeking financing to map out a strategy and promote their campaign to entice investors.

Best For…

• Businesses with an appealing product
• Entrepreneurs with a strong, marketable business plan

More Resources

• 8 tips for launching a crowdfunding campaign
• Best crowdfunding platforms for businesses

Commercial Real Estate Loan

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.

Best For…

• Purchasing real estate
• Upgrading real estate

More Resources

• Guide to commercial real estate loans
• Guide to the SBA real estate loan program

Business Credit Card

A business credit card is a revolving line of credit. Business cards are generally used to finance everyday expenses. They also carry savings in the form of rewards programs, signup bonuses, and other special cardholder benefits.

Best For…

• Financing everyday expenses
• Earning rewards and other benefits

More Resources

• How to get a business credit card
• Best credit cards for small businesses

Get The Right Type Of Loan For Your Small Business

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 the loan.

A smart business owner will take the time to weigh out the pros and cons before signing the paperwork to ensure that the loan will help the business prosper.