Business loans are an important tool for companies of all types to enable their business to grow and expand. But as you’ll likely find with your search into business financing, there are many types of loan options available. Different business loans have different structures, which are meant to address specific needs; for instance, you wouldn’t use an SBA loan, which is often used to finance large, ambitious projects, for cash flow needs (that’s where a line of credit would be handy) .
Picking the right type of business loan for your company based on your needs is a major step in matching yourself with the funding option that’s going to help you reach your goals. Here are the main different types of loans for small business and the most effective way you can utilize them as a small business owner.
Types of business loans
There are several different types of loans available to small businesses. These are the most common—and, likely, most useful for you to understand as you search for small business financing:
- Term loans
- Small Business Administration loans
- Business lines of credit
- Invoice financing and factoring
- Short-term loans
- Equipment loans
- Commercial real estate loans
- Merchant cash advances
- Personal loans for business
- Business credit cards
Different types of Small Business Loans Worth Considering
Business term loans
Business term loans are what many people think of as “traditional” loans—meaning you apply for a loan through a lender, and once you’re approved you receive a lump sum in your business bank account, which you pay back over a set period of time with interest. Repayment periods are generally between 18 months and five years. Interest rates vary based on business owner credit, but begin at 8% to 10% for strong credit. Loan amounts can be in the millions of dollars.
In general, business term loans are excellent for working capital, so if your business has varying expenses that you want to cover and you want to be able to spend flexibly, these can be a great fit. One major contrast to other types of loans is that you need to pay interest on the entire lump sum, whereas you only pay interest on what you actually use with other types of business loans. You’ll generally make monthly payments.
Pros and cons
- Pro: Flexible usage for many different types of expenditures
- Pro: Receive a lump sum in your business bank account
- Pro: Quick approval
- Con: Must pay interest on total loan amount
- Con: May be expensive for small business owners with weaker credit
Best for
- Working capital
- Expansions and renovations
- New investments
SBA loans
Small Business Administration (SBA) loans are widely considered some of the best types of business loans available. They have some of the most desirable loan terms: long repayment periods up to 25 years; high capital amounts in the millions, topping out at $5.5 million; and the lowest interest rates, which often begin around 5%. As such, however, they are highly competitive, and only are awarded to the most qualified business owners who have strong financial history and, often, significant time in business.
- The three main types of SBA loan programs are:
- SBA 7(a) loans: The most popular SBA program, which enables businesses access to flexible capital through a business line of credit or term loan
- SBA CDC/504 loans: Used for major fixed asset purchases, including real estate and land
- SBA Microloans: Small awards up to $50,000, generally for early stage businesses with a focus on minority, women, and veteran entrepreneurs
Note that all of these types of loans are very paperwork intensive and take time—for instance, you’ll need to submit documentation, financial statements, and a business plan—so you won’t be able to get a hold of this business funding overnight, even if you do qualify. Anticipate building in a few months to secure the loan.
Pros and cons
- Pro: High capital amounts with favorable repayment terms
- Pro: Low interest rates
- Pro: Good for a variety of uses and may be accessible to new businesses
- Con: Only granted to the most qualified small business owners
- Con: May take months to process
Best for
- Major fixed-asset purchases
- Working capital
- Investments and improvements
Business line of credit
As one of the most flexible options available, a business line of credit is a strong choice for many business owners who need access to working capital. This is structured differently than a term loan, and more like a business credit card. You work with a lender to get approved for a certain credit line, and then you can “draw” against this credit line as you need the capital, which will then go to your business bank account to spend. The biggest benefit of a business line of credit is that you only pay interest on what you use, and most business lines of credit are “revolving,” which means you have access to borrow the full sum of capital again when the loan is repaid.
Business lines of credit have capital amounts into the millions of dollars. Interest rates begin at 5% and go up to around 35% depending on your credit standing, and repayment terms are generally contingent on your financial profile and business history.
Pros and cons
- Pro: Incredibly flexible usage
- Pro: Quick turnaround time to financing
- Pro: Young businesses may qualify
- Con: Not a lump-sum loan
- Con: Not good for major investments
Best for
- Working capital
- Cash flow issues
- Emergencies
- Short-lead investments
Invoice financing and factoring
Invoice financing is a term to describe a type of small business financing in which a business owner gets fronted a large portion of the amount of an outstanding, unpaid invoice. This is helpful for businesses that work on trade credit with extended next terms, or have clients with overdue invoices. Particularly, this is a great loan for cash flow, since businesses that work with trade credit may need to wait a while to get their hands on cash that they would use for daily operating expenses.
Primarily, these loans work in two ways: first, either “selling” the invoice to a financing company (called “invoice factoring”), who will collect outstanding payment on your behalf; or straightforward invoice financing, in which you get a loan and repay a lender when your customer pays you. Fees for invoice financing generally involve a flat processing fee and a daily percentage (often calculated through a “factor rate”) assessed for every day that the payment is outstanding. Your loan will last until your customer pays.
Pros and cons
- Pro: Frees up cash tied up in outstanding invoices
- Pro: Provides immediate liquidity to businesses that use trade credit
- Pro: Can be a debt-free alternative to a traditional loan
- Con: Fee means you won’t get the full sum of your unpaid invoice
- Con: If customer takes an extremely long time to pay, your fees are higher
Best for
- Improving cash flow
- Business with long net terms on invoices
Short-term loans
If you’re looking for fast access to capital for immediate needs, a short-term loan may be the right fit. These loans are excellent for business opportunities (such as financing inventory that you’ll sell through quickly), and to address issues such as cash flow, payroll, or business emergencies. Small business owners who are qualified candidates can generally secure approval for these loans quickly—often as fast as a single day.
Unlike their longer-term counterparts, short-term loans have lower capital amounts and abbreviated repayment periods. Since short-term loans are not meant for large investments, however, you can generally find the capital amount you want for immediate needs. These loans generally have repayment periods up to 18 months, and repayment is generally weekly (though some short-term loans require daily repayment). Business owners without perfect credit history may also be eligible for a variety of short-term loans.
Pros and cons
- Pro: Can get fast approval to access funds quickly
- Pro: Open to a variety of business owners, even with fair credit
- Pro: Can help business owners address immediate issues and opportunities
- Con: Repayments may be weekly or sometimes daily
- Con: May have higher interest rates than other types of longer-term loans
- Con: Small capital amounts, not for large investments
Best for
- Immediate capital needs, including cash flow
- Businesses that need fast access to capital
Equipment loans
For entrepreneurs who want to finance a large fixed asset, equipment financing is an option that leads the pack. Loan rates for equipment financing will vary, especially based on the type of equipment loan that you choose to use and how niche your desired equipment is. You can expect to pay around 8% to 30%, generally, contingent on your credit and the type of equipment that you’re financing. Your loan will last the lifetime of the equipment.
You have a few options for equipment loans. One type enables you to bring a quote to a lender, who will finance the purchase of your equipment directly. You also have the option to take out a more flexible loan, such as a business line of credit, and use the draw to pay for the equipment.
Pros and cons
- Pro: Enables you to purchase equipment that may be prohibitively expensive otherwise
- Pro: Self-secured, so generally doesn’t require additional collateral
- Pro: May be open to a wider range of business owners
- Con: Loan lasts the life of the equipment
- Con: Equipment can get outdated fast
Best for
- Fixed-asset purchases
- Renovations and upgrades
Commercial real estate loans
For businesses looking to finance the purchase of land, property, or renovate a commercial space, a commercial real estate loan may be the right fit. That’s especially true if the commercial property you’re hoping to finance is expensive—as much of real estate is. You’ll find that the capital amounts for commercial real estate loans varies widely, but very high capital amounts are available to finance major purchases.
The biggest thing to know about this type of small business loan is that the commercial property you’re financing becomes the collateral for the loan. That helps make terms, such as interest rate, more favorable (especially if the property is very valuable) since a lender can seize the property in case of borrower default.
Pros and cons
- Pro: Enables the purchase of very expensive and valuable real estate that may not otherwise be affordable
- Pro: High capital amounts available
- Con: May require additional collateral beyond the asset financed
- Con: Loans may become expensive with weaker credit
Best for
- Commercial land, buildings, or property
- Major fixed-asset purchases
- Renovations and upgrades
Merchant cash advances
If your business needs a fast cash advance, you may consider a merchant cash advance. This is a type of financing in which a financing company lends you money, and takes a percentage of your daily credit and debit card sales, plus a fee, until they’re paid back. Merchant cash advances are the most expensive type of business financing on the market. They are assessed with a “factor fee,” which can go up to 1.5, which converted to APR can go up to 300-400%.
These can be important options for businesses that don’t have strong enough credit to get approved for other types of business loans or don’t have the time or ability to wait around for a loan application to be processed, especially in the case of cash flow emergencies. The duration of the loan will depend on how strong your sales are; if you make a lot of credit transactions daily, you may be able to pay off the loan in a few months as opposed to a year.
Pros and cons
- Pro: Fast access to capital
- Pro: Can be quickly paid off with a high volume of credit card sales
- Con: One of the most expensive types of business loans
- Con: Cuts into daily cash flow
Best for
- Emergencies
- Businesses with weak credit
- Businesses that can’t wait for a loan to process
Personal loans for business
Many business loans require at least some time in business and annual revenue history to qualify due to the way lenders evaluate risk. If your business is young, you may want to consider a personal loan for business. For this loan, you’re evaluated on your personal financial credentials rather than your business’s. A big advantage to these loans is that if your personal credit is strong, these rates may be lower than any business loans for which you do qualify with limited business history.
Rates for these loans will vary based on your personal financial history, including your personal credit score, but you can expect to find interest rates around 5% through about 35%. Terms will often last three to five years. One important thing to keep in mind is that a personal loan for business often won’t give you a significant amount of capital that a business loan will—think in the tens of thousands of dollars, not hundreds of thousands or millions.
Pros and cons
- Pro: Access for early stage businesses without enough history to qualify for a business loan
- Pro: Varying structures and rates
- Pro: Potentially lower rates than other business loans you’d qualify for
- Con: Secured against your personal assets
- Con: Will not help build business credit
- Con: Lower capital amounts
Best for
- Startup and new business expenses
Business credit cards
Business credit cards don’t explicitly seem like a type of loan, but they are—they enable companies to access financing as they need it. To receive a business credit card, you must apply through a credit card company as opposed to a small business lender. You won’t be able to get a huge capital amount like you would with a loan, but for many businesses just starting out, the line of credit from a business credit card is enough. And, many business credit cards enable users to earn perks such as points and cash back, which can be redeemed to help your business grow.
These help with daily operating expenses as well as some investments and startup costs—but you’ll want to make sure that you don’t carry too much of a balance. Importantly, the interest rates for business credit cards will vary highly depending on your credit score and credit history. You can expect an average of about 18% to 20% on many major cards (charge cards will be a great deal higher), which will be assessed if you don’t pay your bill in full and on time. As you might expect, also, the application process for a business credit card is much less intensive than many other types of financing options.
Pros and cons
- Pro: Available to a wide range of businesses
- Pro: Can earn rewards such as travel and cash back
- Pro: Credit-building to help strengthen credit score
- Con: High interest rates
- Con: Limited purchasing power
Best for
- Incremental purchases
- Everyday business expenses
How do I get a business loan?
To get a business loan, you’ll apply to a lender who will evaluate your candidacy. These include reviewing your personal credit score, business history, tax documents, and potentially other financial documents, too. A lender will review your documentation, and let you know their decision on whether you qualify for a business loan.
Do you qualify for a small business loan?
Different types of business loans have different qualification requirements. To find out if you qualify for a small business loan, you can work with a lender to understand their qualifications, or submit a loan application to get a decision.
What is the easiest SBA loan to get approved for?
Though 7(a) loans are the most common SBA loan program, small businesses may have higher approval odds for microloans, which are smaller loans the SBA provides through intermediary lenders. Your chances of being approved depend on your business and criteria determined by the SBA and individual microlenders.
What type of financing do small businesses use?
There are two primary ways small businesses raise capital: debt financing and equity financing. Debt financing is when you take out a loan or line of credit, which your business repays with interest. Equity financing is when you sell shares of ownership in your company to investors.
Business owners may opt for different financing strategies based on cash flow and profitability, growth goals, and their desire for a controlling stake in the company. Both debt and equity financing have their pros and cons.
What’s the most common form of financing for a small business?
Depending on a small business’ industry, goals, and financial situation, many growing companies opt for term loans, SBA loans, or a business line of credit. All are viable options when it comes to sustaining or expanding your business. A business line of credit, in particular, can grow with your company and is a great option if you’ll need access to financing over time rather than all at once.
Where to find the best business loan
You have a few different options when locating the best business loan for your company. Both traditional and online lenders offer several types of business loans, so you shouldn’t feel limited by either option. Importantly, look into all of your loan options! You may be surprised where you find the business loan with the best loan terms.
Traditional Bank
The first place you may think of to get a small business loan is a traditional bank for a bank loan. Indeed, they offer many different types of business financing at highly desirable rates. But the truth is that they don’t lend as generously as they used to; post financial crisis, many banks have limited their business lending to candidates with the lowest risk and best financial profiles. Their application process also takes much longer compared to online lenders. It’s certainly worth inquiring with your local bank to see if you qualify for a small business bank loan, especially if you have a long-standing relationship with them. But if you don’t have excellent credit, you still have options.
Online lenders
As traditional banks have tightened their standards and limited the pool of candidates to whom they’ll loan money, online (or “alternative”) lenders have sprung up to enable access to capital for a wider array of business owners. If your credit isn’t spotless, or you don’t have a long business history, you may still be eligible for a business loan.
Online lenders often have the same array of business financing that banks do—often, more variety in types of business loans—and often include higher-tech benefits, such as dashboards and financial tools. Loans from online lenders may also get approved faster than a bank, whose loans are very paperwork intensive. The tradeoff is that as they take on riskier candidates, online lenders may have slightly less favorable terms than traditional banks. Regardless, it’s worth exploring your options.
Bluevine
Among your options for online lenders, Bluevine may be the right place to find your business loan. Offering several different types of business loans, Bluevine enables many businesses to secure business financing with flexible terms—and faster than many traditional lenders with same-day financing. Younger businesses may qualify for financing as well. To find out if you qualify for a loan, and further understand your options for types of business loans, get in touch with a Bluevine representative who can help you navigate the process.
