What are the different types of small business loans?

Securing a small business loan is critical for small business owners looking to take their companies to the next stage, but navigating so many options can be daunting. Each type of loan has its own features, benefits, and drawbacks—understanding them is the first step toward making informed financial decisions for your business.

Types of small business loans

There are many different types of debt financing options for business owners, and each loan can be categorized as secured or unsecured based on the presence of collateral:

• Secured loans require you to post a business asset (such as equipment or real estate) as collateral to guarantee you repay the loan. Because the risk to the lender is lower, it’s often easier to get approved for a secured loan and get more favorable terms.
• Unsecured loans don’t require collateral. Because the risk to the lender is higher, unsecured loans may carry higher interest rates and approval requirements.

Term loans

A term loan is a lump sum that you repay in fixed monthly installments. They’re appropriate for short-term projects which require a lot of upfront capital.

Business lines of credit

A line of credit is a pool of funds from which you can draw what you need. Your available funds replenish as you make repayments, which may have fluctuating interest rates and/or draw fees. These are good for long-term projects where costs may vary over time.

Business credit cards

A business credit card allows you to make company-related purchases using borrowed funds. Business credit cards can offer useful rewards like cash back or special merchant offers. If your bank reports to the business credit bureaus, repaying your credit card balance on time can help you build business credit, which may help you get approved for other loans in the future. 

SBA loans

The U.S. Small Business Administration offers unsecured small business loans up to $5 million through their partner lenders. Your business must be in operation for two years before you can apply. Read our SBA Loan Guide to learn more.

What type of loan is right for my small business?

Lenders will ask why you need their loan. Your reason will help them calculate which type of loan is right for you and what amount you need. Here are some common reasons for pursuing a business loan:

• Raise startup capital beyond investors and personal funds savings.
• Increase revenue by saving and earning money through rewards and financial tools.
• Expand the company by purchasing equipment, entering a new market, or adding employees or locations.
• Fund a short-term project that requires upfront capital.

Long-term financial goals are best served with long-term business financing, such as a line of credit or business credit card. Short-term projects are better suited to term loans or SBA loans.

3 steps to get a small business loan

1. Gather your application materials

A strong loan application starts with organizing your required documents, including your business plan, financial statements, titles, and/or equity statements for collateral. Make sure your business is in good standing with any lenders and the IRS. Research and evaluate potential lenders for their features, rates, reputation, and customer service.

2. Review loan offers and negotiate terms

If you have a strong business credit history, lenders will typically be open to negotiating interest rates and the length of the loan, so don’t be afraid to request adjustments to the terms to better fit your needs. If you’ve received multiple loan offers, compare their terms and conditions when deciding which to take.

It’s important to know the terminology of loan agreements when choosing a lender. Look carefully at each of the following to help decide:

• Interest rate: the price of borrowing money, paid to the lender on top of the loan amount. Interest rates can be fixed or variable. Term loans have fixed interest rates, while lines of credit and credit cards have variable interest rates.
• Origination fee: an upfront fee for processing your application that scales with your loan amount. Not all lenders charge origination fees.
• Monthly fee: a service fee meant to help pay the lender’s administrative expenses. This fee should be clearly stated in your terms and conditions and included in your annual percentage rate (APR), including the interest rate. Not all lenders charge monthly fees.
• Early repayment penalty: a penalty for repaying your loan early. Not all lenders charge early repayment penalties.
• Repayment terms: for long-term loans, these stipulate how much you’ll need to repay each month and for how long. This is important information for budgeting your debt payments.

3. Secure your funds and repay them on time

Once you accept the loan terms, your lender will give you access to either your funds or your line. From there, you’ll need to manage your money responsibly, so you can repay the loan on time. Use the business plan and revenue forecasts you used to apply.

Track some key performance indicators (KPIs) to help understand how your new capital is affecting your business, and use this data to adjust your financial strategy over time. 

What to do if you can’t pay off your business loan

You should always be sure you can pay off a loan before you take it out, and prepare as best you can for any contingencies your business might encounter, but if you find you can no longer make your repayments, make sure to do the following:

• Contact your lender and inform them that you’ll be missing a repayment. 
• If your inability to pay is the result of a change in external circumstance, ask your lender if you can restructure or refinance your debt.
• Sell any assets you can to raise capital. Streamline your finances by cutting costs and increasing revenue where possible.
• Don’t take out another loan to pay off your loan—this is called loan stacking, and it can be highly damaging to your business credit score and long-term viability. 
• If you have multiple debts already, ask your lender if you can consolidate them into a single loan. This will help you save on interest.