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10 Types of Business Loans
These are the most popular types of business loans, their pros and cons and best use cases.
Sally Lauckner has over a decade of experience in print and online journalism. Before joining NerdWallet, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She has a master's in journalism from New York University and a bachelor's in English and history from Columbia University. Email: slauckner@nerdwallet.com.
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There are many types of small-business loans — your options include a business line of credit, an equipment loan or invoice factoring, among others. Each is fit for a different business circumstance, and comes with its own pros and cons.
The right type of small-business loan for your business will depend on variables like what you qualify for, when you need the money and what you need it for. Exact loan terms, rates and qualifications will vary by lender.
Here are the 10 most popular types of business loans.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
1. Term loans
Best for:
Businesses looking to expand.
Business owners who have been operating for at least six months.
A business term loan is one of the most common types of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period of time. Payments are fixed, usually on a monthly basis. A variety of lenders offer small-business term loans, including banks, online lenders and other types of alternative lenders, like nonprofits.
Term loans can be one of the most inexpensive types of small-business loans; however, qualifying for the best rates and terms can be difficult. Banks, which usually offer the lowest rates, usually require at least two years in business, for example, and a good credit score (between 690-719). Online lenders are typically more lenient with their qualifications, but often offer higher rates than banks.
Fixed monthly payments offer stability to help you improve cash flow and grow your business over time.
May allow you to borrow a higher amount than other types of small-business loans.
Cons
If you want the lowest rates and longest terms, term loans may be difficult to qualify for.
May require a personal guarantee or other collateral.
Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks.
2. SBA loans
Best for:
Businesses looking to expand or refinance existing debts.
Strong-credit borrowers who can wait a long time for funding.
An SBA loan is a type of small-business loan that is partly guaranteed by the U.S. Small Business Administration and offered by banks and other lenders.
There are several types of SBA loans but the most popular offering is the SBA 7(a) loan. SBA loans can be used for working capital, business expansion, equipment or commercial real estate purchases and more. Loan amounts are available up to $5 million for 7(a) and 504 loans (up to $5.5 million for select 504 projects) and up to $50,000 for SBA microloans.
SBA loan rates are among the lowest available, and repayment terms can go up to 10 or 25 years, depending on loan usage. The SBA loan application process, however, can be long and rigorous, and a personal guarantee is required for everyone who owns 20% or more of the business.
Pros
Low rates.
Loan amounts up to $5 million.
Long repayment terms.
Cons
Hard to qualify.
Long and rigorous application process.
3. Business lines of credit
Best for:
Short-term financing needs, managing cash flow or handling unexpected expenses.
Seasonal businesses.
A business line of credit is a revolving source of funding that provides access to funds up to a predetermined amount. Similar to a credit card, you pay interest only on the money you’ve drawn. Once you’ve repaid your funds, you can draw on your line again.
Lines of credit are offered by banks, online lenders and other alternative lenders. Qualification requirements are similar to those for business term loans – banks have more stringent qualifications and lower rates, while online- or private business lenders may be more lenient, but offer higher rates.
Business lines of credit can provide more flexibility than term loans. They are typically unsecured, but can require good credit and business financials to qualify.
Pros
Flexible way to borrow.
Revolving access to funds.
Typically unsecured, so no collateral required.
Cons
May carry additional costs, such as maintenance fees and draw fees.
Businesses in need of only a small amount of financing.
Microloans are a type of business loan available in a small amount, typically between $500 and $50,000. Microloans are sometimes offered by banks, but because they are not very profitable for large banks, you will more commonly find them at alternative lenders, like online and nonprofit lenders. For example, Accion Opportunity Fund is a community development financial institution that offers loans as small as $5,000 for disadvantaged businesses. The SBA also has a microloan program.
Microloans are typically used for working capital to start small businesses or help them grow. They can also be beneficial for borrowers who are having trouble qualifying for bank loans, though rates are usually higher than bank loans.
Pros
Typically offered by small lenders who provide other services, such as consulting and training.
Accessible to borrowers facing credit challenges, or other barriers to bank loans.
Cons
Rates are typically higher than traditional bank loans.
Microlenders can be tricky to find.
Did you know?
Startups may be able to qualify for business loans with just three months in operation. Explore our roundup of the best startup business loans.
5. Equipment loans
Best for:
Businesses that want to own their equipment outright.
Major equipment purchases.
Equipment loans are a type of small-business loan that is designed to finance equipment, which can include things like semi trucks, other commercial vehicles, commercial fridges or office furniture.
Generally, equipment financing can be easier to qualify for than term loans because the equipment itself will serve as collateral to secure the loan. Your exact rates and terms, however, will still be dependent on your business financials and personal credit history.
Pros
Equipment being purchased serves as collateral for the loan.
Equipment lenders may understand nuances of financing large equipment as opposed to traditional small-business lenders.
Cons
Some equipment lenders require a down payment.
Equipment may depreciate faster than the length of your financing.
Businesses with unpaid invoices that need fast cash.
Businesses with reliable customers on long payment terms (30, 60 or 90 days).
Invoice factoring is not technically a small-business loan. It allows you to sell unpaid customer invoices in exchange for cash. If approved, a factoring company will give you a certain percentage of the value of an unpaid invoice, and then take over collecting payment from your customer. Once that payment is received, the company will give you the remainder of the value, minus fees.
Invoice factoring can be helpful to cover gaps in cash flow for the purchase of inventory or paying for labor; however, it does require you to relinquish control of your invoices, and factoring companies may be required to probe your customers about their personal credit and business financials. Funding is usually fast, but it can be expensive.
Pros
Fast cash for your business.
Easier approval than traditional funding options.
Cons
Costly compared with other options.
You lose control over the collection of your invoices.
7. Invoice financing
Best for:
Businesses looking to turn unpaid invoices into fast cash.
Businesses that want to maintain control over their invoices.
Invoice financing is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance. You maintain control over your invoices and the responsibility for collecting payment from your customers. Like invoice factoring, it is fast to fund and can help cover short term gaps in cash flow.
Pros
Fast cash.
Can be revolving.
You retain control over your invoices and customers (unlike invoice factoring).
Businesses that have high and consistent credit card sales and can handle frequent repayments.
Businesses that can't get financing anywhere else and can't wait for capital.
A merchant cash advance (MCA) is an alternative type of financing, and is technically not a type of small-business loan. An MCA company will advance you a lump sum of money in exchange for a portion of your future sales revenue.
Repayment can be daily, weekly or monthly as either a fixed debit from your business bank account or as a percentage of your sales revenue. With the latter, your payment will fluctuate depending on how much money your business is bringing in.
Approval for an MCA is based on your business’s revenue rather than your personal credit or available collateral; however, it is one of the most expensive forms of business financing, with APRs that can reach triple digits. It is usually recommended to look for other types of small-business loans before turning to an MCA.
Pros
Fast cash.
Flexible requirements.
Cons
Very expensive type of small-business loan.
Frequent repayments can create cash flow problems.
9. Personal loans for business
Best for:
Startups and newer businesses with strong personal credit.
Borrowers willing to risk damaging their credit score.
It is possible to use a personal loan for business purposes, and can be a good option for startups, as banks typically don't lend to businesses with no operating history.
Depending on your credit history, personal finances and personal assets, personal loans can carry some of the most affordable rates and terms. It may be difficult to qualify for the amount you need, however, as a standard business term loan typically goes higher than a personal one.
Business credit cards are revolving lines of credit. You can draw from and repay the card balance as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.
Business credit cards are typically unsecured, meaning they do not require collateral, but they can be expensive if you’re not paying the balance off every month. Rewards will vary based on the credit card you get, so make sure you factor that into your decision, especially if you plan on using the card a lot.
