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Understanding the Types of Business Loans You Can Get

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There are several types of business loans you may choose from when seeking capital for your company. The type of business loan you pick would depend on details such as your plans for the funds, how quickly you could repay debt, and whether you have a strong credit profile. But no matter what your situation, there’s likely an option to meet your financing needs.

Term loans

Consider if: You need to make an investment in your business growth or cover general, everyday expenses.

 Pro: Long and short repayment terms available.

 Con: Collateral may be needed to secure funding.

Small business term loans provide a lump sum of funding that business owners can pay back in installments over time. Long-term business loans generally have steady, monthly payment schedules, while short-term loans can be repaid quickly with daily or weekly payments. Both short- and long-term loans from online lenders are typically available between $5,000 and $500,000 or more.

Long-term loans are best suited for a large purchase or business investment, such as purchasing machinery or hiring new employees. Short-term business loans, which must be repaid between three and 18 months, are better for an immediate financial need. For instance, if you need help covering an upcoming payroll period, a short-term loan may be the best option.

Term loans may be secured or unsecured. Secured loans require business owners to provide assets like commercial real estate or equipment as collateral, while unsecured loans do not require specific assets as collateral. Securing a loan with collateral may result in lower interest rates, making unsecured loans a potential costly funding option.

SBA loans

Consider if: You have trouble qualifying for business financing and have time to wait for funding.

 Pro: Borrowers may receive favorable rates and terms.

 Con: Application and approval process typically takes a month or more.

SBA loans come with a guaranty from the U.S. Small Business Administration. The SBA partners with financial institutions across the U.S. to approve loans for businesses that may not otherwise qualify for financing. These partner lenders issue the loans, but the SBA sets limits on how much interest and fees they can charge.

There are several SBA loan programs available to small business owners, including the 7(a) loan program, the 504 loan program and the microloan program.

  • 7(a) loans: These loans are the SBA’s primary offering for general business expenses, such as working capital costs, inventory and supplies.
  • 504 loans: The SBA partners with certified development companies to fund 504/CDC loans, which are designated for commercial real estate costs and fixed assets like machinery and equipment.
  • Microloans: Small-scale financing is available through nonprofit lenders to cover working capital needs.

SBA loans are generally available between $500 and $5.5 million. A key characteristic of SBA loans is the lengthy application and approval process. It could take at least 30 days for funds to hit your account after you’re approved.

Business lines of credit

Consider if: You need ongoing access to funds.

 Pro: Interest only applies to the amount borrowed from the credit line.

 Con: Relatively low borrowing limits, unless collateral is provided.

A business line of credit is an open-ended funding option that can be used to fund various general business costs, like inventory, equipment repairs, or a gap in cash flow. Business owners can draw from a fixed amount of capital on an as-need basis up to their credit limit. With a revolving business line of credit, the full credit amount becomes available again once debt is repaid. Credit limits typically range from $1,000 to $100,000, though you may find credit lines as high as $250,000 or more.

Like a term loan, a line of credit can be secured or unsecured. A secured line of credit requires a business owner to pledge specific assets as collateral, while an unsecured line does not. Interest rates may be higher and credit amounts smaller for an unsecured line of credit compared to a secured line, which can go into the millions at traditional banks.

Interest would only be incurred when you make a withdrawal from your business line of credit. You could face additional fees, such as a recurring maintenance fee to keep the credit line open, though you may be able to request reduced fees and a credit line increase after establishing payment history with a lender.

Equipment loans

Consider if: You need to purchase a specific piece of equipment.

 Pro: Spreads the cost of expensive equipment out over time.

 Con: The loan term could exceed the useful life of the equipment.

Equipment financing gives you the ability to buy assets like commercial ovens, manufacturing equipment or office furniture without making the purchase outright. You could secure an equipment loan to pay off the cost over time. However, a lender may seize the equipment if you default on the loan.

Lenders typically finance up to 80% of the cost of the equipment, with some offering loans as large as $1 million. You may be able to finance used equipment as well.

Equipment leases are also available for assets that need to be frequently replaced. Borrowers would make regular payments to use the equipment for a set amount of time, then return the equipment when the lease term ends. You may have the option to renew your lease at the end of the term or purchase the equipment for market value.

Microloans

Consider if: You need a small amount of funding and cannot qualify for traditional business loans.

 Pro: Often reserved for business owners in underserved communities or industries.

 Con: Relatively low loan limits.

Microloans are generally $50,000 or less and are typically issued through nonprofit lenders or community-based financial institutions. Startup businesses, low-income entrepreneurs and business owners looking to build credit are prime candidates for microloans. As mentioned earlier, the SBA microloan program is a popular option.

Microloans from nonprofit or government lenders often come with competitive interest rates and terms, as well as few fees. However, these lenders may restrict the use of funds or reserve loans for business owners who meet certain criteria, which may be based on location, industry or demographics.

Commercial real estate loans

Consider if: You plan to purchase commercial real estate or develop commercial property.

 Pro: Large funding amounts available.

 Con: Loan use typically limited to building or land purchases and renovations.

Commercial real estate loans are similar to home mortgages but instead finance the purchase or renovation of commercial property. To qualify for a commercial real estate loan, a business must occupy at least 51% of the property being financed.

Commercial real estate loans are available from traditional banks and commercial lenders, as well as online lenders. Loan amounts could be as high as $5 million. Typical loan-to-value ratios range from 60% to 80%, which means you would need to invest the remainder out of your own funds.

When applying for a commercial real estate loan, expect a lender to assess the property, as it would serve as collateral on the loan. A lender would review documentation related to the property, as well as your personal and business financial information. This may slow down the funding timeline.

Accounts receivable financing

Consider if: You have invoices that could secure a loan or line of credit.

 Pro: Borrowing against money that’s already owed to your business.

 Con: Quality invoices and strong personal credit may be needed to qualify.

Accounts receivable financing, also called invoice financing, allows business owners to unlock cash that is tied up in unpaid invoices. Business owners can use outstanding invoices to secure funding, getting a cash advance in the form of either a one-time loan or an ongoing line of credit. When customers pay their invoices, a fee for the financing company would come out of that payment.

Financing companies may give you 60% to 97% of the value of your invoices. Invoice financing may be attractive for risk-averse business owners because you’d be borrowing from money your business has already made but not received. You wouldn’t have to worry about making payments based on income you have yet to earn.

Accounts receivable financing typically has more lenient borrower requirements than other forms of business funding. The main criteria is that applicants typically need to follow the business-to-business (B2B) model. Financing companies would also review your annual revenue and credit history, though you may be able to qualify with a credit score as low as 530.

Invoice factoring

Consider if: Your B2B business has limited credit history.

 Pro: Customer credit profiles weighted more heavily than business owner’s credit.

 Con: Generally an expensive financing option.

Invoice factoring is similar to accounts receivable financing in that it gives business owners access to funds from unpaid bills. Invoice factoring requires business owners to sell their outstanding invoices to a factoring company in exchange for funding. The factoring company then takes control of the invoice, accepting payments from customers and collecting a fee before sending the remaining amount to the business owner.

You may be able to choose which invoices to sell individually for cash, or you can set up a longer-term agreement and sell all of your invoices to the factoring company. Depending on your industry, a factoring company could advance you up to 97% of the value of your invoices, minus their fee, which may be high.

Because a factoring company would collect invoice payments directly, your clients’ credit history would be more important than yours. You may be approved for financing with a personal credit score in the 500s.

Merchant cash advances

Consider if: Your business has a high volume of daily transactions.

 Pro: Same-day funding is often available.

 Con: High-risk repayment schedule.

A merchant cash advance is not technically a loan, but is a viable option for business owners who need quick access to cash, generally up to $250,000 to $500,000. Rather than lending money, an MCA provider issues a lump sum of capital in exchange for a portion of the business’s future receivables, such as credit card sales. The MCA provider then collects a set percentage of each transaction until the advance is repaid.

MCAs also typically come with factor rates to express the cost of financing, instead of more traditional interest rates and APRs. You would multiply the factor rate, which is typically a decimal figure between 1.1 and 1.5, by your advance amount to calculate the total amount that you’d repay.

MCA providers usually have lenient eligibility requirements and are typically most concerned with your monthly volume of credit card transactions. Although, you may receive a high factor rate if you have poor credit history or operate in a risky industry, such as food service. A high factor rate would increase the total cost of funding, which could negatively impact your cash flow. Make sure your business can afford to forfeit a portion of each sale before taking on an MCA.

Business credit cards

Consider if: You need ongoing funding for daily expenses or startup costs.

 Pro: Many business credit cards come with reward programs.

 Con: Card balance should be paid off each month, though only the minimum monthly payment is required.

Business credit cards are a convenient tool for making everyday business purchases, like supplies. If you choose a card with a rewards program, you may earn perks for using your card for certain expenses, such as business travel. You may even be able to find a card with an introductory 0% APR offer.

Remember that business credit cards are tied to your personal credit. Carrying a balance from month to month could lower your personal credit score, and your personal credit score impacts your eligibility for many types of business loans. On the other hand, using a business credit card responsibly could boost your personal credit profile.

FAQs

How do I choose the right type of business loan?

When assessing different types of business loans, consider how you plan to use the funds, as well as how much you need and how soon you need it. There are some business loans for specific purchases like equipment and commercial real estate, while others are better suited for general expenses. And certain loans, like short-term loans, have shorter waits to funding than longer-term options. You can also use a business loan calculator to determine how much your business may be able to borrow.

What types of business loans am I eligible for?

Your business loan eligibility would vary by lender, but may be primarily based on three factors: your personal credit score, annual revenue and time in business. Having at least a few months to a year in business, solid credit history and consistent revenue would increase your chances of approval. But if you pursue financing options such as invoice factoring or a merchant cash advance, a lender may overlook those details and instead focus on your sales volume.

Where can I find business loans?

You can apply for business loans from traditional financial institutions like banks or from alternative, online business lenders. Banks typically offer larger funding amounts and favorable rates and terms, but the approval process can take a while and require significant revenue and credit and business history. Online lenders are known to fund loans quickly, but may charge high rates in exchange for the convenience.

 

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