Types of Business Loans: Compare the 9 Best Options

Updated on June 3, 2020
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Types of Small Business Loans

Small business owners can choose from among several different types of business loans to meet their financing needs. Each loan product has unique qualification requirements, interest rates, and terms. Whether you’re looking to buy equipment, real estate, inventory, or just need working capital, there’s a type of small business loan that will suit your needs and preferences.

Here are the nine most common types of business loans available to entrepreneurs:

  1. Term loans
  2. Business lines of credit
  3. SBA loans 
  4. Equipment financing
  5. Invoice financing
  6. Commercial real estate loans
  7. Microloans
  8. Personal loans for business use
  9. Merchant cash advances

In this guide, we’ll explain all of the different types of business loans in greater detail, so you can learn more about all the funding options that are available to your business and find out which is best for your needs.

See Your Loan Options

Overview

At some point, nearly every small business will require some extra capital—whether to boost existing cash flow, to bring on new employees, or simply to grow the business to the next level. Luckily, there are several business financing options to choose from, each as unique as the business they’re funding.

Below, we’ll dive into the details explaining the different types of business loans (as well as the best lenders for each type), but first, you can find a summarized version in the following chart:

The Different Types of Business Loans, Summarized

Loan Type Typical Amounts, Terms, and Rates Best For
Term loans
Up to $600,000; about 1 – 5 years; 7% – 30%
Variety of business owners across different purposes; faster processes and fewer requirements than traditional bank loans
Business lines of credit
Up to $250,000; up to 2 years; 7% – 25%
Business owners who want a flexible form of financing to cover more immediate funding needs
SBA loans
Up to $5 million; 5 – 25 years; variable based on the prime rate
Established businesses with strong financials who need funding for a variety of purposes
Equipment financing
Up to the amount of the equipment; 5 – 6 years; 4% – 40%
Business owners looking for funding specifically to purchase physical equipment
Invoice financing
Up to 100% of the invoice value; until the customer pays the invoice; about 3% processing fee, plus factor fee (~1%) each week until the invoice is paid
Business owners with unpaid invoices who need an advance of capital to cover cash flow or other short-term financing needs
Commercial real estate loans
Up to the amount of the property; up to 25 years; 5% – 30%
Business owners looking to finance purchasing new or existing commercial property or renovating commercial space
Microloans
Up to $50,000; up to 6 years; starting at around 7%
New or established businesses looking for a small amount of capital
Personal loans for business use
Up to $35,000; 3 – 5 years; 5.99% – 35% APR
Newer businesses who are just starting out and need access to affordable financing
Merchant cash advances
Up to $250,000; paid daily via your merchant account; factor fee of 1.14 – 1.18
Businesses that can’t qualify for other types of financing; access to fast (but expensive) capital

1. Term Loans

Good for:

  • Business owners who want to make investments in specific business areas or have an ongoing need for working capital.

Skip If:

  • You only need capital for emergencies or occasional, one-off situations.

With a traditional term loan, you borrow a set amount of money upfront, and pay back the money, with interest, on a specific repayment schedule. A variety of lenders offer term loans, including banks and online lenders.

If you have strong credit and can afford to wait for financing, you should apply for a bank loan, as bank loans will have the most desirable rates, terms, and amounts. On the other hand, if your credit isn’t as strong, you might try applying with a short-term lender.

Reasons why you might use a term loan include:

  • Buying real estate
  • Acquiring another business
  • Investing in remodeling or renovating commercial space
  • Planning long-term business expansion

Top options for business term loans:

Lender Eligibility Criteria Loan Amount Cost and Term Length
Two years in business; $100,000 annual revenue; 600 credit score
$20,000 – $500,000
8% – 30% APR; 1- 4 year term
One year in business; $100,000 annual revenue; 600 credit score
$5,000 – $500,000
9% – 99% APR; 3 – 36 month term
Two years in business; no minimum annual revenue; 620 credit score
$25,000 – $500,000
4.99% – 22.99% interest rate; 6 months to 5 years
LoanBuilder by PayPal
Nine months in business; $42,000 annual revenue; 550 credit score
$5,000 – $500,000
2.9% – 18.72% of the loan amount; 13 – 52 week term
Learn More About Business Term Loans

2. Business Lines of Credit

Good for:

  • Business owners who want a cash cushion for cash flow gaps or emergencies.

Skip If: 

  • You want to invest in expansion or other long-term business goals.

One of the other most well-known types of business loans is a business line of credit. With a business line of credit, the lender gives you access to a specific amount of money that you can draw from at any time as needed. There are both fixed and revolving lines of credit. With the latter type, the credit line resets after you pay your balance in full (similar to a credit card).

Lines of credit are available from different types of lenders, but banks offer the best interest rates and the longest time between renewals. Online lenders offer shorter-term lines of credit for younger businesses and business owners with lower credit scores. Small businesses can benefit from lines of credit for any of the following:

  • Paying for recurring operating expenses
  • Tiding over cash flow while waiting for customers to pay you
  • Covering seasonal cash flow droughts
  • Paying for unexpected situations or emergencies

Business lines of credit can create a cushion in case of a cash flow emergency, and come in handy when you need money quickly. Banks usually offer both secured and unsecured credit lines. For secured lines, you have to put down some assets as collateral.

Top options for business lines of credit:

Lender Eligibility Criteria Credit Line Amount Cost and Term Length
One year in business; $50,000 annual revenue; no credit score minimum
$2,000 – $250,000
24% – 99% APR; 6, 12, or 18 months
Three months in business; $25,000 annual revenue; 500 credit score
$1,000 – $100,000
Starts at 4.66% of draw amount; 12 or 24 weeks
Six months in business; $100,000 annual revenue; 600 credit score
$5,000 – $250,000
14% – 78% APR; 6 or 12 months
One year in business; $100,000 annual revenue; 600 credit score
$6,000 – $100,000
13.99% – 63% APR; 12 months
Explore Business Lines of Credit

3. SBA Loans

Good for:

  • Business owners with great credit who are seeking long-term loans.

Skip If: 

  • You’re in need of quick capital or have low credit.

The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they eliminate some risk and encourage lenders to make loans to small business owners.

SBA loans are a great product for small businesses, and outside of a traditional bank loan, the most affordable sources of capital. New and established businesses can apply for SBA loans, but there are different SBA loan programs for different business needs.

The standard SBA 7(a) loan is a good option for business owners who need working capital or want to expand or acquire a business. The SBA 504/CDC loan is ideal for business owners who want to finance the purchase of equipment or real estate or make upgrades to existing property.

It’s also important to note that even though SBA loans are designed to help small business owners who can’t qualify for traditional bank loans, they still require that you meet high qualifications, including strong business financials, solid credit history, and a few years in business.

This being said, although the rates, terms, and amounts for SBA loans will largely depend on the specific program and lender, you can typically expect interest rates ranging from 5% to 13%, loan amounts up to $5 million, and terms as long as 25 years.

See Your Loan Options

4. Equipment Financing

Good for:

  • Business owners who need to purchase or lease business equipment, machinery, or vehicles.

Skip If: 

  • You don’t have an immediate need for business equipment, machinery, or vehicles.

One of the most popular asset-based loans is equipment loans, also called equipment financing. This type of small business loan is a potential fit if you’re looking for money to acquire a piece of new or used equipment. Instead of paying for expensive equipment outright, you can take an equipment lease or loan to fund the purchase.

Equipment financing is available to established and new businesses, and even business owners with lower credit scores are typically able to qualify. Unlike some other types of business loans, business owners with less-than-ideal credit can often qualify for equipment financing because the equipment itself secures the loan. In this way, you don’t need to put up any other collateral—the equipment itself serves as collateral.

Equipment loans have pretty affordable interest rates, ranging from 8% to 30%, depending on your business’s age, credit, and finances. You can use equipment financing to buy or lease a range of equipment types, which can include computers, appliances, and vehicles that you use in the course of business.

Top options for equipment financing:

Lender Eligibility Criteria Loan Amount Cost and Term Length
No time in business requirement; $120,000 annual revenue; 620 credit score
$5,000 – $2 million
As low as 6% interest rate; 6 months – 7 years
Two years in business; no annual revenue requirement; 650 credit score
$5,000 – $500,000
As low as 5% interest rate; 2 – 7 years
One year in business; $300,000 annual revenue; no credit score minimum
$3,000 – $1 million
Average interest rate of 12.75%; 2 – 5 years
See Details About Equipment Financing

5. Invoice Financing

Good for:

  • B2B businesses that have cash flow problems stemming from unpaid invoices.

Skip If: 

  • You are a B2C business or do not invoice customers.

Another popular type of asset-based loan for businesses is invoice financing. With this type of business loan, you use your outstanding invoices to get a cash advance from a lender. The unpaid invoices act as collateral for the advance.

With invoice financing, a lender advances you a percentage of your total invoice amount, usually around 85% to 90%, and holds onto the remaining percent. You can use the advance to cover business expenses while you’re both waiting for your customers to pay. During that time, the lender will typically charge a weekly fee. Once your customer pays, the lender will return the remaining 10% to 15% minus the fee.

Overall, invoice financing is a great option if you have cash flow problems as a result of billing several customers, all of whom pay at different times. You can use the advance to cover payroll, rent, and other operating expenses.

Top invoice financing options:

Lender Eligibility Criteria Amount of Financing Cost 
BlueVine
Three months in business; $120,000 in annual revenue; 530 credit score
$20,000 – $5 million
0.3% – 1.7% per week; 1 – 13 weeks
Fundbox
Three months in business; $25,000 in annual revenue; 500 credit score
$1,000 – $100,000
Starts at 4.66%; 12 or 24 weeks
Learn More About Invoice Financing

6. Commercial Real Estate Loans

Good for:

  • Financing the purchase of a building, shop, office space, or other commercial property.

Skip If: 

  • You don’t need to acquire commercial property.

If your business wants to acquire commercial property—such as a retail shop, office building, or manufacturing facility—you’ll likely want to opt for a commercial real estate loan. Similar to equipment financing, the underlying property acts as collateral for this type of business loan.

Commercial real estate loans can take on different structures depending on the lender you work with and the amount of financing you need. Banks provide commercial real estate loans with longer repayment terms and lower interest rates.

Hard money lenders, on the other hand, are private lenders who work with a wider pool of borrowers to offer commercial real estate loans. These lenders are more likely to offer hard money business loans or balloon loans for commercial real estate purchases. With a balloon loan, you make smaller payments for several years based on a longer amortization period, followed by a large balloon payment at the end of the loan. If you can’t afford the balloon payment, you might have to renegotiate terms with the lender or refinance the debt.

Ultimately, the size of your commercial real estate loan will depend on a factor called loan-to-value (LTV). LTV is a comparison of the size of the loan versus the value of your commercial property. A typical LTV for commercial real estate loans is 75% or 80%. For example, if your building is valued at $100,000, you might get a maximum amount of $80,000 and have to provide the rest as a business loan down payment from your own funds.

Explore Commercial Real Estate Loans

7. Microloans

Good for:

  • Business owners who need $50,000 or less in financing.

Skip If: 

  • You need larger amounts of financing.

In some cases, your small business might need just a little bit of money to reach that next goal. Microloans are a type of small business loan with amounts of $50,000 or less. These loans can be used for working capital, expansion, or startup costs, and the qualification requirements generally aren’t too stringent.

Most microloans come from nonprofit lenders, such as Accion and Kiva. These lenders provide capital to early-stage businesses because they want to help underserved entrepreneur communities and aid the local economy where the business is located. Although any business owner can apply for these loans, they are especially well-suited for female business owners and minority business owners.

Additionally, there is also an SBA microloan program that’s meant for businesses looking for loans up to $50,000. The SBA partners with community-based nonprofit lenders to make these loans.

A microloan can be a good option for those who are looking to launch a startup and for entrepreneurs with micro-businesses (e.g. food trucks, vendors, and freelance businesses). The maximum term on SBA microloans is six years. The interest rates are typically the highest among SBA loans but still relatively low. You can expect interest rates of around 9% to 16%.

Learn About Microloans

8. Personal Loans for Business Use

Good for:

  • Owners of startups with a good credit history.

Skip If: 

  • You can qualify for a traditional business loan.

One popular option for startup funding is using a personal loan for business purposes. Both banks and online lenders offer personal loans. These are based solely on your personal finances and credit, so your personal credit score is extremely important. Ideally, your credit score should be above 650 to qualify.

Although these loans are called personal loans, you can use them for business purposes. One thing to note, however, is that these loans are for smaller amounts of capital (up to $35,000). If you need a large amount of money, this can help you get there, but you’ll need to combine this loan with other sources of funding.

Interest rates on personal loans range from around 7% to 36%, depending on the lender and your qualifications, and the repayment term is usually under five years. In addition to personal loans, there are other ways to tap into personal finances for business purposes. For instance, if you’re a homeowner, you might be able to use a home equity loan for business purposes.

Compare Personal Loans for Business

9. Merchant Cash Advances

Good for:

  • Business owners who aren’t able to qualify for other types of business loans.

Skip If: 

  • You are able to qualify for another, less expensive business loan product.

With a merchant cash advance, a lender basically grants you an advance of capital and purchases a portion of your daily credit and debit card sales. You pay back the advance with a percent of your daily card sales.

The benefit of this type of small business loan is that when business is slow, you pay back less, and when business is booming, you pay back more. The downside, however, is that a merchant cash advance is the most expensive type of business financing on the market. The APRs can approach 100% or even higher.

Therefore, if you’re considering a merchant cash advance, you should be certain that your cash flow can handle it and that there aren’t any other types of business loans you might qualify for.

Top merchant cash advance options:

Lender Eligibility Criteria Amount of Advance Cost
Three months in business; $5,000 in monthly card sales; 550 credit score
$5,000 – $500,000
Factor rate starting at 1.22
6 months in business; $150,000 in gross revenue; no credit score minimum
$2,000 – $250,000
Factor rates ranging from 1.15 – 1.48
Learn About Merchant Cash Advances

The Bottom Line

As we’ve discussed, there are many different types of business loans—and the right one for your business ultimately comes down to a number of factors.

At the end of the day, each type of small business loan is designed for a different business need. Therefore, you’ll need to consider your credit, your business’s finances, the length of time you’ve been operating, and your reason for the loan before narrowing down your options.

Once you do that, you’ll likely have a few—or several—options for which you’re eligible. This being said, rather than applying separately for a handful of loan products, you can use an online marketplace, like Fundera, and fill out a single application to find out which financing options you qualify for—plus, receive assistance throughout the entirety of your business funding process.

See Your Loan Options
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera, specializing in small business finance, credit, law, and insurance. She has a law degree from the University of Washington and a bachelor's degree from U.C. Berkeley in communications and political science. Priyanka's work has been featured in Inc., Fast Company, CNBC, and other top publications. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup. Email: priyanka@fundera.com.
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