9 types of business loans

Different types of small business loans are designed to meet various funding needs. From long-term commercial real estate loans to short-term ways to cover dips in cash flow, there’s likely a loan — or several — that will work for your situation.

You may qualify for specific types of loans based on your business finances, the amount you need and the repayment terms you’re looking for. For example, invoice financing is based on unpaid invoices, so your business would only qualify if it has unpaid invoices from creditworthy clients. Look at the pros and cons and the uses for different types of business loans to see which ones are best suited for your business.

Small business loan options

1. Term loan

Term loans are the standard business loan option for both established businesses and startups. They meet individual expenses and are repaid over time — usually five or more years. In addition, you can expect interest rates to start between 8 percent and 30 percent, though the exact rate will vary based on the lender and your business’s finances.

Most banks and online lenders offer business term loans. The amount you can borrow depends on your industry, the purpose of the loan and your business’s financial status. A term loan can be secured or unsecured and can be used for many costs, such as buying new equipment or expanding your business.

Pros

• Widely available from banks and online lenders
• Loans to cover various business expenses

Cons

• Most lenders require high revenue and a personal guarantee
• May have higher interest rates for startups and newer businesses

Who this is best for

Term loans are best for businesses with large, one-time expenses to cover.

2. Line of credit

Lines of credit are similar to business credit cards but are meant for larger expenses than you can cover with the typical credit card. A business line of credit will likely have a higher funding limit than a card, which makes it ideal for midsize expenses.

With a line of credit, you will have a set credit limit and a draw period — a period during which you can borrow money. One of the main benefits of a line of credit is that you can borrow, repay and borrow again for as long as you need until the draw period is over. The ability to reuse the line is helpful for covering gaps in cash flow if you have uneven revenue and still need to pay expenses.

With some lenders, only interest payments are due during the draw period. Interest rates start around 7.50 percent to 9.00 percent but can go as high as 60 percent with some lenders. After the draw period, you will be required to pay back what you owe. You may be able to renew your line of credit after your draw period ends.

Pros

• Improved cash flow
• Accessible requirements
• Builds a relationship with the lender
• May help build business credit
• Line of credit resets as you repay

Cons

• Additional fees not charged with other business loans
• Higher interest rates than other business loans
• Short repayment terms
• Lack business credit card rewards
• Draw period limits time to spend funds

Who this is best for

Businesses that have regular, variable expenses can take advantage of lines of credit. They are more flexible than term loans and may offer better rates than business credit cards.

3. Merchant cash advance

A merchant cash advance (MCA) is a short-term business loan option offered by online lenders. The amount you receive is based on your credit or debit card sales rather than your business’s credit score or total revenue. Like invoice factoring and invoice financing, you receive a lump sum to cover issues with cash flow. Then, you repay it with a percentage of daily credit card sales. For example, PayPal offers a working capital loan that allows you to repay with each PayPal sale you make.

A merchant cash advance company charges a factor rate instead of interest, and the fees are significant. MCAs are easy to access, have short terms and are designed for businesses that lack other funding options. But the high fees mean you may take on more debt than your business can handle. Before you borrow, exhaust all other funding options.

Pros

• High approval rates
• Quick funding based on credit card sales
• No collateral needed

Cons

• Daily or weekly repayments
• High fees
• Doesn’t build credit
• Not required by law to set maximum interest rates

Who this is best for

Merchant cash advances are expensive, so they should only be used if your business needs quick access to working capital and does a significant amount of its sales through credit or debit cards.

4. Invoice factoring

With invoice factoring, you use the amount due from your customers as collateral to cover small gaps in cash flow. Specifically, it involves selling your invoices directly to a lender for a lump sum in exchange for between 70 percent and 90 percent of the total invoice amount. Once the invoice is paid, the lender will send you the remaining amount minus fees and sometimes interest.

These short-term options offered by online lenders tend to be pricey. The fees may accumulate the longer a client doesn’t pay the invoice. Additionally, lenders take fees from the paid invoices directly, cutting into your business profits.

Pros

• Faster access to cash than many other types of business financing
• Doesn’t impact your credit score
• Covers cash flow gaps

Cons

• Fees taken out of invoices collected
• Steep fees and factor rates cut into your profits
• If your clients aren’t creditworthy, this may not be an option for you

Who this is best for

If you have bad credit or you’ve had trouble getting another business loan, you might consider this option. However, invoice factoring is best used as a short-term solution if you need money quickly since the fees can be exorbitant.

5. Invoice financing

Similar to invoice factoring, invoice financing uses your accounts receivables — unpaid money owed to you by clients — as collateral for an advance. It’s slightly different, however, because the lender advances you up to 90 percent of the total amount, which you’ll need to repay (plus fees) once the invoice is paid by your client.

The main benefit is that it relies on your client’s creditworthiness for paying the invoice, rather than your business or personal credit history. The fees you pay are significant and may go up the longer your invoice goes unpaid. But it may be worth it if your invoices aren’t due for 60 or 90 days and you need money to cover expenses in the meantime.

Pros

• Doesn’t rely on business credit
• No extra collateral required
• Quick turnaround for unexpected gaps in cash flow

Cons

• Complicated fee structure
• High fees based on when your client repays
• Advances are typically for 90 percent of invoice or less

Who this is best for

Invoice financing is best for businesses that do not qualify for traditional business loans. Because it is convenient and quick, you will pay a significant fee when you use an invoice financing company.

6. SBA loan

SBA loans — loans backed by the U.S. Small Business Administration — are one of the most sought-after types of small business loans. Its different programs meet different business needs:

• 7(a) loans. These are good for businesses looking for working capital up to $5 million. Depending on the loan amount and the lender, 7(a) loans may be secured or unsecured.
• 504 loans. Meant for major purchases, 504 loans are secured by property — either commercial real estate or equipment.
• Microloans. Your business can borrow up to $50,000 for costs associated with expansion and growth.
• SBA CAPLines and lines of credit. The SBA offers multiple line of credit options. You can use them to cover working capital needs, seasonal fluctuations, expenses for a specific contract or exporting products for your business.

You can use the SBA Lender Match Tool to compare options and find a lender that will fit your business. The government caps interest rates and fees on SBA loans, so it’s easier for your business to repay the loan while your company continues to grow.

Pros

• Backed by the SBA and run by lenders across the nation
• Competitive rates for each loan program
• Welcomes startups
• Welcomes borrowers with bad credit
• Helps underserved communities

Cons

• Lengthy application process
• Takes longer to receive funds

Who this is best for

SBA loans are among the most popular types of small business loans, but they have an involved application process. Even so, they are a good option for working capital, big expenses or growth opportunities. Most business owners will likely benefit from applying. And since many banks are registered as SBA lenders, there is little difference between an SBA 7(a) loan and a traditional bank loan.

7. Microloan

Microloans are designed for newer businesses just starting to grow, offering relaxed requirements to help these businesses qualify. Microloans include any business loan that offers small loan amounts, such as $1,000 to $50,000. Examples of microloans include Accion Opportunity Fund, which offers loans starting at $5,000, and Kiva, which offers loans from $1,000 to $15,000. Microloans are repaid within a few years and function as working capital.

The SBA runs a popular microloan program, offering loans up to $50,000. Microloans have fairly low rates — between 8 to 13 percent for an SBA microloan.

Pros

• Designed for working capital and small expenses
• Most backed by the SBA

Cons

• Lower limits than most business loans
• Some microloans are geared at startups or founders from underserved communities, so your business may not qualify

Who this is best for

Since microloans are meant to cover small expenses or be used as working capital, they are good for very new businesses that need a boost in funding to get ahead.

8. Equipment financing

Equipment financing runs the gamut from funding inexpensive point-of-sale systems to earthmoving equipment. They are widely available and secured by the property you buy — similar to auto loans or commercial mortgages.

The amount you can borrow depends on what you need to finance. Most banks and online lenders are flexible, so you should be able to get financing that covers the full cost of equipment. Equipment loans are typically repaid in fixed monthly installments — though some lenders may offer quarterly or annual payments.

Interest rates are based on your business’s finances and revenue and your personal credit history. The equipment you buy also plays a role. One major benefit to equipment loans is that interest rates tend to be low since the equipment secures the loan.

Pros

• Fast funding
• No need for additional collateral
• Repayment terms often flexible

Cons

• Limited to financing equipment
• May require a down payment
• Larger loan amounts mean higher monthly payments
• Loan could outlast the equipment

Who this is best for

Because equipment loans are secured by the property you finance, they tend to have lower rates than their unsecured counterparts. This makes them a good option for big purchases your business needs to operate.

9. Commercial real estate loan

For businesses that want to invest in a brick-and-mortar location, commercial real estate loans are the solution. Most are available through banks, and your business can use funding to either purchase property outright or lease a space. While it depends on your business’s needs and location, you may be able to borrow up to $5 million.

Commercial real estate loans are similar to mortgages and have repayment terms to match. Expect to repay your loan over 10 to 20 years, and interest rates tend to be low because the real estate acts as the loan’s collateral. You can also explore SBA 504 loans, which are backed by the U.S. Small Business Administration and come with competitive interest rates.

Pros

• Typically low interest rates
• Long repayment terms for large loans

Cons

• Meant for established businesses with high revenue
• May have a more involved application process and property inspection

Who this is best for

A loan for commercial real estate allows you to purchase or lease property. If your business isn’t at this stage but needs funding, you can explore equipment loans and term loans secured by property.

What can small business loans be used for?

Small business loans can be used for a variety of purposes. You may need to detail your intended purpose to the lender when applying for the loan unless you’re applying for a business line of credit. You might use the business loan for:

• Equipment purchases
• Stocking up on inventory
• Business acquisition
• Buying real estate through a commercial mortgage
• Refinancing an existing business loan
• Increasing working capital for operational expenses
• Building business credit

Unsecured vs. secured types of business loans

As you’re exploring the different types of small business loans, you may notice that some are secured while others are unsecured. So, what’s the difference? If a loan is secured, you’ll need to put up collateral  — such as equipment, real estate or inventory  — to back the loan. If you default, your lender can seize that collateral.

In comparison, unsecured loans don’t require collateral. They’re usually reserved for borrowers with stronger credit scores because lenders believe these types of borrowers will repay their debts, as they have in the past. Lenders may still require you to sign a personal guarantee for a secured or unsecured loan. This guarantee allows the lender to use personal assets to pay back the loan if necessary.

Bottom line

The best small business loan option depends entirely on how your business will use its financing. However, some convenient options come at a high cost. Consider traditional types of business loans like SBA loans, term loans and equipment loans before turning to short-term funding. If your business already has an account with a bank, see what it offers. An established relationship may give you access to lower rates and more competitive terms.

Frequently asked questions about types of business loans

• What kind of loan is good for small businesses?

  The needs of the small business determine which loan option is best. For example, an equipment loan would be ideal if a small business needs to purchase equipment. However, a line of credit could be better if a business plans to use the funds to cover larger, short-term expenses.

• What is the most popular type of SBA loan?

  The most popular type of SBA loan is the 7(a) loan. As of July 2024, for fiscal year 2024, the SBA has approved over 55,000 7(a) loans, equaling more than $24 billion in funding. In comparison, over 4,800 504 loans were approved, equaling $5.31 billion in funding.

• What type of loan is used to start a business?

  Microloans are a popular option for starting a business. They offer up to $50,000 to new businesses needing capital to cover startup costs and small expenses. The best business loans for startups can also provide funding for new businesses. Business loans for startups typically have lower time in business and annual revenue requirements, making them more accessible for brand-new businesses.

• Where can I get a business loan?

  Many business owners look for a business loan at a nearby bank or credit union, such as the bank where you already hold your business checking account. But you can find business loans from online lenders as well, such as fintech companies like SMB Compass. Online lenders tend to have fast funding timelines and lenient requirements for eligibility.