10 Types of Business Loans and When To Use Them

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Are you looking for a business loan that can help to take your company to the next level? The good news is that there are plenty of options. You’ll find financing for new businesses, businesses with bad credit, businesses that need equipment, and the list goes on. The bad news? There are so many options that it can be hard to decide. So where do you start?

Here you’ll find 10 of the most popular types of business loans on the market. Learn how they work, the pros and cons, and when it’s best to use each one. Not every loan type is going to be right for your business. However, there is likely at least one that will be a good fit!

Now, let’s take a closer look at each of the 10 business financing options.  

1. SBA loans

First up, SBA loans are loan programs designed and backed by the U.S. Small Business Administration (SBA). They’re offered to borrowers through the SBA’s network of partner  lenders, so you don’t get them directly from the government. The key with these loans is that the SBA’s guarantee helps to lower the risk for the lenders, which enables them to offer you low-cost financing. 

There are various SBA loan programs available that cater to borrowers in different situations. For example, SBA 7(a) loans are the most popular as they offer up to $5 million for a wide range of expenses, from working capital and refinancing debt to purchasing supplies. Microloans are similar but are limited to $50,000. Then, there are SBA CDC/504 loans, which cater more specifically to businesses buying real estate, equipment, or machinery. 

Each program has detailed rules on eligibility, costs, uses, etc. so you’ll need to review them carefully to find the best fit. 

Rates and terms

• Amounts: Up to $5 million
• Terms: Up to 25 years
• Repayments: Down payment and monthly payments
• Interest: 2% to 10% APR
• Fees: Guaranty fees may apply, other lender fees are prohibited

Best for

SBA loans can be a helpful option if you’re having trouble qualifying for traditional bank loans. They can also be a good way to reduce your financing costs due to the SBA’s limits on lender fees and interest rates. However, they won’t be a good fit if you are in any kind of hurry to get funding. The application, approval, and disbursement process is known to take months. To qualify, you’ll need to meet the SBA’s requirements and take other steps such as making a down payment and submitting a business plan. 

Pros

• Guaranteed by the SBA 
• Competitive interest rates
• Limited fees
• Long terms
• Available for startups, new businesses, and established businesses
• Many programs 

Cons

• Drawn out and involved application process
• Long wait for funds
• Only available to companies that qualify as a small business (fewer than 500 employees and less than $7.5 million in annual revenue)
  

2. Business term loans

Next up are business term loans. These loans offer you a lump sum upfront which you repay, plus interest, over a set number of years. Term loans are very common in the marketplace, being offered by many online lenders as well as traditional brick-and-mortar banks. You can find short-term loans with repayment periods up to three years, and long-term loans with repayment periods from three to five years or more. 

Rates and terms

• Amounts: Up to $2 million
• Terms: 1 to 5 years
• Repayments: Monthly payments
• Interest: 5% to 99% APR
• Fees: Origination fees are common

Best for

Term loans are good for business owners with strong personal credit scores (personal guarantees are often required), at least a year or two in business, and stable revenue. If you turn to online lenders, you can usually get these loans fast and without any money out of pocket. However, if your credit isn’t great, the costs can be high. 

Pros

• Get the money fast
• No down payment
• High loan amounts available
• A range of loan repayment terms are available

Cons

• Origination fees may apply
• Interest rates can be on the higher end
• Must have good credit to qualify
  

3. Business lines of credit

Business lines of credit are credit lines that make a lump sum amount of money available to your business for a certain amount of time, known as the draw period. Draw periods often last five to 10 years during which time you can withdraw from the credit line as needed. Once the draw period ends, the outstanding balance either becomes due, or more commonly, it is converted into a term loan that you repay over a set term (often 10 to 20 years).

Rates and terms

• Amounts: $10,000 to $1 million
• Terms: Five to 10 years
• Repayments: Interest-only during draw period in most cases
• Interest: 10% to 35% APR
• Fees: Annual, in some cases

Note: Annual fees may be waived if your credit line is under a certain amount or if your credit utilization is over a certain percentage.

Best for

Business credit lines are ideal for established companies with short-term funding needs. For example, you can use them to bridge cash flow gaps, cover payroll, increase inventory, or purchase supplies. They can be particularly helpful for seasonal businesses that need off-season working capital. It’s best if you can pay off the amounts you borrow within a few months. To qualify, you’ll often need to have a good credit history, a business bank account, a year or more in business, and at least a minimum amount of annual revenue. 

Pros

• Lower interest rates than credit cards
• Helps you build business credit
• Only pay interest on amounts you use
• Reuse the credit line after you pay it off
• Quick, easy access to funds when you need them

Cons

• May be subject to credit review and annual review
• An annual fee may apply
• Monthly payments will be due once you used the credit line
• Must be an established business to qualify
  

4. Merchant cash advance (MCA)

A merchant cash advance (MCA) is a type of funding that enables businesses with merchant accounts to get advances on their credit card sales or other revenue receivables. The amount you receive (plus the applicable fee) will be repaid automatically from your daily credit card sales. For example, you could take an advance of $10,000 and then repay the amount by having 15% of your daily credit card sales automatically go towards the repayment. 

Rates and terms

• Amounts: $3,000 to $500,000
• Terms: As long as it takes to repay from daily sales payments
• Repayments: Automatic, a percentage of daily sales
• Interest: Factor rates often range from 1.1 to 1.5
• Fees: Usually just the factor rate

Best for

MCAs are helpful for businesses with high volumes of credit card sales, especially when bad credit limits their other loan options. It’s best to use the advance to invest in growth strategies that will increase revenue like purchasing inventory, upgrading equipment, hiring new staff, or expanding your marketing strategy.

Pros

• Fast, can be deposited within 24 hours
• Flexible approval requirements, good credit not required
• Large amounts available
• Automatic repayments

Cons

• Costs can be high
• Can restrict cash flow
• Must have merchant account with credit card sales
  

5. Business credit cards

You’re likely familiar with business credit cards. They offer a revolving line of credit up to a certain amount that you can use, repay, and use again. The cost? You’re charged interest on outstanding amounts based on your APR. While you’re not required to pay off your whole balance as long as the card is open, you will have to make minimum payments each month that you have an outstanding balance. Many companies also offer rewards and card benefits.

Rates and terms

• Amounts: $55,000, on average
• Terms: Revolving, no term
• Repayments: Monthly minimum payments
• Interest: 15% to 30% APR
• Fees: Annual fees may apply

Best for

Business credit cards are best for business owners with good-to-excellent personal credit, as a personal guarantee is often required. However, there are some options available if you have bad credit. Credit cards are best used for short-term financing needs to limit interest charges. Rewards credit cards can also be beneficial if they offer significant savings for your company, such as business travel cards that enable you to earn miles that can cover the cost of flights.

Pros

• Rewards may be offered (points, miles, cashback, etc.)
• Card benefits (airport lounges, rental car insurance, etc.)
• Low monthly minimum payment requirements
• 0% APR introductory offers may be available

Cons

• Credit limits may be modest in comparison to other options
• Must have good credit to qualify
• APRs can be high and interest charges can get expensive
• Annual fees can be expensive
  

6. Equipment loans

Equipment financing involves getting a secured term loan from a lender for the specific purpose of purchasing equipment. Going this route, you’ll first need to get a quote on the equipment, then you can apply for the loan with a lender. Upon approval, you’ll get the money to purchase the equipment, minus a down payment, and then will repay the amount through monthly payments over a set term. Note, the equipment is used as collateral for the loan so if you can’t make the payments, the lender can seize it to recoup its losses. 

Rates and terms

• Amounts: $1,000 to $1 million
• Terms: 5 to 10 years
• Repayments: Down payment and monthly payments are often required
• Interest: 5% to 36% APR
• Fees: Origination fees are common

Best for

Equipment loans are a great option if your business needs to purchase new or used equipment such as farm machinery, office furniture, computers, commercial ovens, or medical equipment. To qualify, you’ll often need to have a certain amount of annual revenue, a good personal credit score, and a year or two in business. 

Pros

• Large loan amounts available
• Easier to qualify
• Long loan terms
• Low fixed interest rates

Cons

• Down payment
• Origination fees common
• Can lose equipment if you can’t make payments
• Not available for startups
  

7. Commercial real estate loans

Commercial real estate loans are secured term loans that can be used to purchase land or commercial property for your business. You’ll typically have to pay a down payment and closing costs upfront, then the remaining amount plus interest is repaid over a set term through monthly payments.

Rates and terms

• Amounts: $25,000 up to $1 million
• Terms: 5 to 20 years
• Repayments: Down payment plus monthly payments
• Interest: 2% to 18% APR
• Fees: Origination fees and closing costs apply

Best for

This is a good option to consider for small business owners that are looking to purchase commercial property such as an office, warehouse, or retail location. However, you will need good personal credit, multiple years in business, and stable annual revenue that meets the lender’s minimum requirements. You’ll also need to be prepared to make a down payment and pay closing costs. 

Pros

• Purchase commercial real estate
• Spread payments out over a long term
• Competitive interest rates
• Build equity

Cons

• Prepayment fees may apply
• Not available to startups
• Must pay down payment, closing costs, and other applicable fees
• Will lose the property if you default on the loan
  

8. Invoice factoring

Invoice factoring involves selling your invoices to a company so you can get paid right away. The majority of your invoice is usually paid upfront, less the company’s fee. The remainder is paid once your client pays (often within 90 days). The invoice factoring company will then be responsible for collecting the payment from your clients. If your clients don’t end up paying, you may be required to pay back the amount you received upfront.

Rates and terms

• Amounts: Up to $30 million
• Terms: 90 days
• Repayments: Fee deducted upfront
• Interest: A factor rate will determine your cost (often 2% to 10% of the invoice)
• Fees: A variety of other fees can apply

Best for

Invoice factoring can be helpful if you have an established business that invoices other businesses, especially if you commonly issue longer payment terms (30 to 90 days). It’s commonly used in the construction, recruiting, retail, courier services, and manufacturing industries. The working capital can help businesses cope with seasonal fluctuations, expand into new markets, or finance other business needs. However, you’ll need to have creditworthy clients to qualify. 

Pros

• Get paid on invoices fast
• Costs deducted upfront
• Good personal credit is not required
• Receive the majority of your unpaid invoices upfront

Cons

• High costs
• Must have invoices due from creditworthy businesses
• A third party will collect your invoices and may hurt your reputation in the process
• The entire invoice amount, less the fee, won’t be paid until your client pays
• Recourse factor may require invoice buybacks if clients don’t pay
  

9. Invoice financing

Invoice financing is another way to get cash based on your unpaid invoices. However, instead of selling them, you borrow against them. Companies advance you a majority portion of your invoice (80-90%) and pay you the remainder, minus the fee, once your invoice is paid.

Rates and terms

• Amounts: $15,000 up to $4 million per month
• Terms: 90 days
• Repayments: The fee is subtracted from your final payment
• Interest: A factor rate will determine your cost (often 1% to 2% of the invoice per week)
• Fees: None additional

Best for

This can be a helpful solution if your business is experiencing cash flow problems due to the long repayment terms on your invoices. Plus, it will be especially helpful for business owners with poor credit as the loan is secured by your invoices rather than relying on your business or personal credit. It also removes the potential problems that can come from a third party collecting payments on your behalf. You’ll remain the collector. However, to qualify, your clients will need to be creditworthy.

Pros

• Improve cash flow by getting paid on invoices earlier
• Collect payment from clients, protecting your relationships
• Invoices as collateral ease credit qualification requirements

Cons

• Fees can get expensive, especially if clients take 90 days to pay
• Can’t calculate the exact cost upfront
• Responsible for the full amount if the client doesn’t pay
• Only available to B2B businesses
  

10. Personal loans for business use

If you have good personal credit, you may be able to get a personal loan that you can use for your business. They’re structured as term loans that give you a lump sum upfront which you repay over a set term through monthly payments. There are a plethora of online lenders offering personal loans so you can shop around to find the best deal. 

Rates and terms

• Amounts: Up to $50,000
• Terms: 3 to 5 years
• Repayments: Monthly payments
• Interest: 5% up to 35% APR
• Fees: Origination fees may apply

Best for

Personal loans may be a good funding option for you if your business is new, you need money fast, and you don’t qualify for other loan options. However, you’ll need to have good credit and a stable income to get the highest loan amounts and best rates. You’ll also have to be okay mixing business and personal finances. Even if the business fails, you’ll personally be responsible for the debt. These also don’t help you build business credit, putting your personal credit on the line instead.

Pros

• Available to new business owners (many business loans aren’t)
• Many lenders offer them
• Online applications are easy and fast

Cons

• Must have good credit
• Personally responsible if the business fails
• Mixes business and personal finances
• APRs can be on the high end
• Need to make sure lender allows funds to be used for business.
  

How to find the right business funding solution for you

The right business financing solution depends on a variety of factors. However, a good place to start is figuring out what you qualify for — find out what options are available to you.

For example, if you’re a business owner with less-than-perfect credit, no business credit, and a high amount of credit card sales, an MCA may be one of your only options. On the other hand, if you have great credit, a good amount of revenue, and several years in business, you’ll likely be able to choose from term loans, credit lines, credit cards, and more.

Once you know what you can get, it’s time to figure out which will be the most cost-effective solution. Look at the rates and terms to see how the fees and payments work. At this point, you can get quotes from lenders to get a better idea of how much it will cost you, specifically. 

With an understanding of the costs, you’ll then want to consider other pros and cons like the level of convenience it offers, the risks it presents, and any perks it comes with. For example, if you’re comparing invoice factoring and invoice financing, you’d want to consider the issue of a third party collecting invoices on your behalf. If you’re considering a term loan and equipment loan to buy equipment, you’d want to consider whether you want the equipment to serve as collateral or not. 

Taking these steps will help to narrow down your options and reveal the best overall type of loan for your business. From there, you can shop around with lenders to find the best deal, get the funding, and use it to take your business to the next level!