Small business owners rely on various types of business loans to help them manage cash flow, cover daily expenses, expand, remodel, or invest in equipment or property. Many factors contribute to the type of small business loan you choose, including your industry, how much cash you need, your business’s financials, and what you need funding for.
With so many different types of business loans, deciding which one is right for you can be challenging. In this guide, you’ll learn about the small business loans that can help you meet your goals.
1. Term Loan
Term loans are the most common types of loan for businesses. With these loans, you receive a sum of money upfront and agree to repay the funds, with interest, over a set period. Banks and alternative lenders offer business term loans in varying amounts depending on the type of business loan, applicant’s qualifications, and terms and conditions.
There are both long- and short-term loan options available. Short-term loans are ideal for smaller financial needs like inventory purchases or unexpected expenses. They have fewer requirements and often take less time to fund. Long-term loans often have a stricter approval process and usually require collateral. That’s because they’re typically used for larger expenditures and pose more risk for the lender.
Advantages: Predictable payments over the life of the loan and higher borrowing amounts.
Disadvantages: May require collateral to secure the loan.
Who it’s good for: Small businesses with strong credit and a desire to expand.
2. SBA Loan
A SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. The SBA has numerous loan programs with loan amounts of up to $5 million available for everything from working capital to commercial real estate investments.
There are a few key differences between SBA loans and conventional loans. Most notably, SBA loans are government-backed, resulting in lower interest rates and more flexible terms than conventional loans. A few SBA business loan examples include:
• 7(a) loans: Cover general expenses and is the SBA’s most common type of business loan offered.
• 504 loans: Cover fixed assets, like real estate purchases. Offered in partnership with certified development companies.
• Microloans: Cover working capital costs up to $50,000 and are only offered on a small scale.
Advantages: High borrowing amounts and moderate interest rates.
Disadvantages: May be difficult to qualify and the application process can be lengthy.
Who it’s good for: Borrowers with strong credit who don’t need cash quickly.
3. Business Line of Credit
A business line of credit is a type of business loan that gives borrowers access to cash up to a set credit limit. Like a credit card, a line of credit charges interest only on the money you borrow. Most lines of credit are revolving, while others may end after you’ve spent and paid off the full credit amount.
A business line of credit offers great flexibility, especially with repayment options. You can withdraw any amount needed, up to your credit limit, at any time. Payments can be structured in a few ways, often with minimum monthly payments that include the principal and interest amounts. As the principal is paid off, the business can borrow again, making these lines of credit ideal for handling ongoing expenses.
Advantages: Flexible borrowing for short-term expenses.
Disadvantages: Lower borrowing limits and typically higher interest rates.
Who it’s good for: Businesses that need funding for small ongoing expenses, assistance managing cash flow, or emergency expenses.
4. Equipment Financing
An equipment loan can be used to purchase or upgrade necessary business equipment. The equipment acts as collateral for the loan, and the length of the loan is often equal to the expected life span of the equipment. Rates vary depending on the type of equipment and your business’s qualifications.
Equipment loans cover a wide variety of necessities. This can include kitchen equipment like commercial ovens, medical equipment like X-ray machines, and more. For this reason, these types of business loans are helpful for most businesses that require equipment.
Advantages: Allows small businesses to build equity without having to put down additional collateral.
Disadvantages: Loans can only be used for the purchase of equipment.
Who it’s good for: Small businesses that want to invest in equipment rather than lease.
5. Merchant Cash Advance
Like a business line of credit, a merchant cash advance offers a borrower cash upfront, but payments are made to the lender with a percentage of future credit card sales. This means your payment amount will fluctuate, as the percentage is calculated based on the amount of revenue your business brings in. Automatic withdrawals can be set up directly from your bank account on a daily or weekly basis.
Merchant cash advances are relatively easy to qualify for, as the loan amount is based on your business revenue. One thing to keep in mind: Merchant cash advances are among the most expensive types of business loans. For this reason, you may want to research different types of business loans before deciding on a merchant cash advance.
Advantages: Fast cash, often within 24 to 48 hours of applying.
Disadvantages: Frequent payments with potentially high fees; lack of regulatory oversight could result in undesirable lending practices.
Who it’s good for: Borrowers who struggle to qualify for other types of business loans.
6. Invoice Financing
Invoice financing is a type of business loan in which businesses use their outstanding invoices as collateral to obtain a cash advance from a lender. This allows them to unlock cash tied up in unpaid invoices.
Invoice financing is helpful for businesses with long payment cycles. By converting invoices into immediate cash, businesses can meet their short-term financial obligations, invest in growth opportunities, or handle unexpected expenses without waiting for clients to pay their invoices.
The advance is typically a percentage of the invoice value, with the remaining balance paid to the business once the invoices are settled, minus fees and interest.
An important note: The business owner is responsible for collecting invoice payments to repay the money borrowed with this type of loan.
Advantages: Access to funds from unpaid invoices, flexible use, and quick access.
Disadvantages: Higher fees and interest rates and reliance on customer payments.
Who it’s good for: Businesses with cash-flow issues related to slow-paying clients.
7. Invoice Factoring
Similar to invoice financing, invoice factoring allows you to get fast cash upfront in exchange for unpaid customer invoices. This type of business loan can help business-to-business (B2B) companies that deal in customer invoices and irregular billing cycles maintain regular cash flow. The companies that buy unpaid invoices are known as lenders, factors, or factoring companies.
In this case, unpaid invoices are sold to another company to collect on your behalf. At the point of sale, your business receives approximately 70–90% of the total value of the invoice. You will receive the remaining value, minus applicable fees, once the invoice has been paid.
Advantages: You don’t have to wait for customer invoices to be paid for access to business funding.
Disadvantages: Can be costly and you don’t control collection practices.
Who it’s good for: Small businesses that process invoices regularly and have customers who reliably pay their invoices.
8. Microloan
Microloans are business loans, typically $50,000 or less, often given by nonprofit organizations or mission-based lenders. These can be great types of loans to start a business or for newer businesses in underserved communities.
Microloans shouldn’t be confused with SBA microloans, as SBA microloans are a subset of SBA loans used in specific cases and are government-backed. Many other lenders offer microloans in addition to the SBA.
Advantages: Credit requirements tend to be lower than with traditional loans, and microloans may come with additional services, such as counseling.
Disadvantages: Lower borrowing amounts typically with above-market interest rates.
Who it’s good for: Startups and newer businesses that don’t have established business history.
9. Commercial Real Estate Loan
A commercial real estate loan is used to purchase or improve a building or property that’s used for business purposes. Getting one may help a small business expand and build equity.
These different types of business loans may have different rates, terms, conditions, and purposes, depending on the lender.
• Long-term commercial real estate loans: Have terms between five and 25 years and set repayment schedules. Ideal for construction, land development, or property purchases.
• Short-term commercial real estate loans: Have terms anywhere from one to five years. Best for borrowers who need commercial real estate financing more quickly or who don’t qualify for a long-term loan.
Advantages: Business loan options designed specifically for commercial real estate needs.
Disadvantages: Can be difficult to qualify for.
Who it’s good for: Established small businesses who want to transition from leasing to owning their commercial property or expand their business.
10. Working Capital Loan
A working capital loan is a common loan type for small businesses that need assistance managing cash flow fluctuations as they build their businesses. These types of business loans can be any loan product used to cover everyday expenses, such as payroll, monthly bills, or repairs.
For example, a business owner could opt for a short-term business loan to cover immediate expenses. These loans are typically 18 months or less and given to the borrower in one lump sum. Payments are made monthly, and the interest rate is determined by the market and the borrower’s business financial profile.
Advantages: Quick access to funding for maintaining positive cash flow.
Disadvantages: Short-term and, depending on the type of financing, may be more costly than a longer-term option.
Who it’s good for: Small businesses with seasonal revenue or ones that want to expand and need cash to handle daily expenses during growth.
11. Restaurant Loan
Running a restaurant business requires a significant investment in equipment, inventory, and staffing. Restaurant loans can be helpful in starting, expanding, or supporting various aspects of a restaurant business. These types of business loans can be from traditional banks, alternative lenders, or peer-to-peer (P2P) lenders.
Restaurant loans offer multiple financing options, such as lines of credit, equipment loans, and working capital loans, to address the unique needs of the food service industry. These loans provide flexibility, support for significant purchases, and solutions for managing daily operational expenses.
Advantages: Numerous business loan options to choose from.
Disadvantages: Requires financial stability to ensure repayment of long-term loan options.
Who it’s good for: Startups and established restaurants that want to expand, remodel, or manage cash flow during business fluctuations.
12. Franchise Financing
Franchising loan options are offered by several sources, including traditional banks, online lenders, franchise financing companies, and sometimes even the franchisors themselves. These types of business loans can help cover the many costs associated with opening a franchise location.
Advantages: May be easier to obtain financing as a franchisee than it would be for an independent small business seeking a different loan type.
Disadvantages: May be expensive to start a business under a larger franchise.
Who it’s good for: New franchise owners who need help covering franchise fees and other startup costs.
13. Personal Loans for Business
Using personal loans for business purposes can be a viable option when traditional business financing is not accessible. These loans are unsecured, meaning no collateral is required, but they often come with higher interest rates and lower borrowing limits.
It’s important to remember that this type of loan directly impacts personal credit scores and financial health. Mixing personal and business finances can complicate accounting and tax reporting. Business owners should carefully evaluate their financial situation and consider all alternatives before opting for a personal loan to fund their business.
Advantages: Typically offers a simpler application process and faster approval times than traditional business loans.
Disadvantages:
• Usually has higher interest rates and lower borrowing limits, and can negatively impact personal credit scores.
• Some lenders specify personal loans can’t be used for business purposes.
Who it’s good for: Business owners who need quick funding and may not qualify for traditional business loans.
15. Alternative Lending Options
Alternative small business loans are any offered by lenders other than a traditional bank or credit union. Some alternative business loans examples include:
• Peer-to-peer lending: Connects borrowers directly with individual investors through online platforms.
• Online business loans: Provide fast, accessible funding through digital platforms with streamlined application processes and quick approval times.
• Business credit cards: Offer revolving credit lines for businesses to cover everyday expenses, often with rewards or cash-back programs.
• Crowdfunding: Raise small amounts of money from a large number of people to fund a business project or venture.
• Angel investors: Individuals who provide capital to startups, often bringing expertise and mentorship.
• Venture capitalists: Professional investors who manage pooled funds to invest in high-growth startups in exchange for equity.
• Contributions from friends and family: Informal loans or investments from personal connections to help start or grow a business.
• Grants: Nonrepayable funds provided by governments, nonprofits, or corporations to support businesses that meet specific criteria or objectives.
Advantages: Many alternative business loan options are faster to get than traditional loans.
Disadvantages: Depending on the type of loan, borrowing limits may be lower and interest rates higher.
Who it’s good for: Small business startups or borrowers with poor credit who don’t qualify for a bank or SBA loan.
Recommended: Comparing Personal vs Business Loans
How to Choose the Right Loan for Your Business
As you consider different types of business loans, these five questions can help you clarify your needs and qualifications so you can narrow in on the types of business loans that may be right for your operation.
• What Industry Is Your Business in? Certain types of small business loans are better suited for certain industries, and some lenders have rules about which industries they will lend to. Check that potential lenders work within your industry before applying.
• How Much Funding Do You Need? Know how much money you need before choosing a loan type or a lender. This will show a lender that you understand your business needs and help narrow your search to loans matching your funding needs.
• What Are Manageable Loan Terms for Your Business? Ask yourself if your business is in a position to take on long-term loans or if you should consider short-term options. A term loan, for example, sets a specific amount of time. If you have a five-year loan term, you’ll make regularly scheduled payments for five years. The term also affects your monthly payment. Typically, the longer the term, the lower the monthly payment.
• How Soon Do You Need Money? How quickly you need funding may influence how expensive a particular type of business loan is for you. Typically, the faster you get the money, the more expensive the loan due to interest rates and loan fees. If you’re able to wait, it may help you secure a less expensive loan.
• What Are the Costs of Different Business Loan Types? The cost of a small business loan goes beyond interest rates and monthly payments. It’s also good to know if the type of business loan you choose has additional costs, like fees or penalties.
While you cannot use a personal loan for business expenses, it could help you to consolidate high-interest credit card debt you might have incurred, for instance.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What type of loan is an SBA loan?
An SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. It offers up to $5 million to cover everything from working capital to commercial real estate investments.
What’s the most common type of SBA loan?
The most common SBA loan types are 7(a) loans, which cover general expenses.
What’s the difference between an unsecured vs. secure business loan?
An unsecured business loan does not require collateral, while a secured business loan requires assets as collateral, offering lower interest rates but risking asset loss if the loan defaults.
How do I apply for a small business loan?
Gather your financial documents, business plan, and credit history, then complete an application with a lender.
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