Whether solving immediate cash flow shortfalls or providing capital for expansion, loans, and lines of credit are critical tools that help businesses survive and thrive.
In a 2019 survey by the Federal Reserve Banks, 54% of small businesses said they used loans or lines of credit regularly, and 43% reported having sought financing in the last year.
The optimal source of funding depends on a company’s specific needs. Each type of business loan has benefits and downsides, and knowing the ins-and-outs of these options enables entrepreneurs to more effectively drive the success of their companies.
| Typical Loan Amount | Typical Loan Length | Pro | Con | |
| SBA Loans | Up to $5.5 million | 5-25 years | •SBA backing improves accessibility and terms
•Can fund bigger projects for growth and expansion |
•Limited to established small businesses
•Longer and often slower application process |
| Term Loans | Up to around $500,000 | Up to 25 years | •Ability to fund diverse business needs
•Longer repayment timeline |
•Primarily for established businesses |
| Merchant Cash Advances | Up to $250,000 | Up to 1 year | •Fast application process and turnaround time
•High approval rates; available to businesses with limited options •Repayment timeline tied to daily sales |
•High fees and interest rates |
| Business Lines of Credit | Up to $500,000 | Up to 2 years | •Provides flexibility to borrow on an as-needed basis
•Boosts available capital without repeat loan applications |
•Application process and loan terms vary and can be costly for businesses with lower credit scores |
| Business Credit Cards | Up to $25,000 | 1 month | •Immediate access to capital for purchases
•Rewards programs provide extra perks •Tools to track and monitor spending •Ability to have multiple cards for employees |
•High interest rates
•Low credit limits •Short repayment schedule |
| Microloans | Up to $50,000 | Up to 6 years | •More accessible for early-stage companies
•Less stringent lending requirements |
•Limited capital
•Higher potential interest rates |
| Equipment Financing | Up to cost of equipment | Up to 6 years | •Facilitates longer-term repayment on investments in fixed assets
•Equipment itself acts as collateral |
•Narrow scope |
| Invoice Financing | Up to the value of unpaid invoices | Until invoices are paid in full | •Provides short-term capital while invoices are pending payment | •Only available to companies with pending invoices
•High weekly fees and/or interest rates |
| Cash Flow Loan | Up to $100,000 | Up to 1 year | •Offers immediate working capital based on projected revenue | •Requires established track record of revenue generation
•High interest rates |
| Commercial Real Estate Loan | Up to value of commercial property | Up to 25 years | •Serves as long-term financing tool for major investments
•Property value helps secure the loan |
•Narrow scope |
1. SBA Loans
SBA loans don’t originate with the U.S. Small Business Administration; instead, the SBA backs the loans to encourage lenders to provide financing to small companies.
The two main SBA programs are for 7(A) and 504 loans. 7(A) loans can finance various types of projects while 504 loans are intended for sizable purchases of fixed assets like equipment.
Express Loans and Small Loans are special categories within the 7(A) program that have lower capital limits but faster turnaround. A separate SBA Microloan program offers up to $50,000 for earlier-stage companies.
Interest rates are determined by the lender but have a cap required by SBA. A proven business track record is needed for an SBA loan, but guarantees from SBA encourage lending to companies that may have been denied other types of financing.
2. Term Loans
Term loans are a type of traditional bank loan that normally involve amounts under $500,000 and a longer repayment schedule. The loan structure depends on the lender’s evaluation of the company’s financials, including their business credit score, so it’s easier for established firms to get term loans.
3. Merchant Cash Advances
Merchant cash advances provide a quick cash infusion that is repaid with a percentage of daily sales made by credit and debit cards. When sales are higher, a larger portion of the cash advance is paid back.
Merchant cash advances have a high approval rate and quick turnaround time but carry a heavy cost in terms of fees or APRs. They are primarily used when speed and convenience are priorities and when other funding options are not available.
4. Business Lines of Credit
A business line of credit allows a company to borrow cash as needed up to a maximum amount. This buffer can resolve cash flow shortfalls, which is especially useful in emergencies or when navigating temporary or seasonal fluctuations.
A major benefit of a business line of credit is its flexibility, especially because interest is only accrued on the amount that is withdrawn.
The terms, including the credit maximum, interest rates, and repayment schedule, are negotiated with the lender and are more favorable for companies with good credit scores. Credit risk also affects the required collateral and documentation for the line of credit.
5. Business Credit Cards
Similar to a personal card, a business credit card gives immediate access to funds for purchases. This can overcome short-term cash flow problems that might otherwise restrict purchases critical to fulfilling customer orders.
Online or app-based tools to track spending that come with business credit cards are useful for effective budgeting and improving cash flow. Many cards also have perks like rewards points.
Although these cards provide flexibility, their interest rates can be high. It’s important to manage cards carefully to limit costly late fees and interest charges.
6. Microloans
Microloans provide limited capital, typically up to $50,000, for initial costs or working capital. Microloans can come from traditional banks, online banks, and non-government organizations focused on community development.
Less strict eligibility requirements make microloans appealing to startups and early-stage companies, but these loans may fall short of the funding needs for many businesses.
7. Equipment Financing
Equipment loans provide financing for machinery, vehicles, computers, or other fixed assets. A longer repayment schedule allows companies to invest in growth without an oversized up-front investment.
The equipment serves as collateral, reducing the need to secure the loan. Specific terms are negotiated with the lender and depend on the equipment being purchased and the company’s creditworthiness.
8. Invoice Financing
Invoice financing offers a cash advance based on outstanding invoices, creating short-term liquidity to cover expenses until customers meet their payment obligations. This type of loan usually comes with a weekly fee paid to the lender.
Another version is invoice factoring, in which the cash advance is equal to a percentage of the pending invoices. When the invoices are paid, the business receives the total minus the lender’s charges.
The fees for invoice financing can be substantial, and the business takes on added risk if customers delay or default on payments.
9. Cash Flow Loan
A cash flow loan extends capital based on the lender’s estimation of a company’s projected revenue. For businesses, it can mean rapid access to funds, but getting this type of loan requires strong evidence of sales performance. In addition, high interest rates can make cash flow loans costly.
10. Commercial Real Estate Loans
With parallels to a home mortgage, a commercial real estate loan is used to finance properties like offices, factories, or storefronts.
The term and interest rate depend on the property and the company’s financials. The real estate itself is the primary securitization for the loan. As with home loans, refinancing is an option, and businesses can often use the equity in the property to obtain credit.
Conclusion
For small business owners, there’s a type of loan for almost any situation. There are benefits and downsides to each type, and choosing wisely can deliver more manageable interest payments, improved cash flow, and better opportunities for growth.
