10 Types of Business Loans: Compare Financing (2024)

⏰ Estimated read time: 10 minutes

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 circ*mstance, 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.

1. Term loans

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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.

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2. SBA loans

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An SBA loan is a type of small-business loan that is partly guaranteed by the 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, and can range from below $15,000 for SBA microloans up to $5.5 million for 504 loans.

SBA loan rates are among the lowest available, and repayment terms can go up to 10 or 25 years, depending on loan usage. However, the SBA loan application process can be long and rigorous, and a personal guarantee is required for everyone who owns 20% or more of the business.

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3. Business lines of credit

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A business line of credit is a revolving source of funding that provides your business 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 strong credit and business financials to qualify.

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4. Equipment loans

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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; however, your exact rates and terms will still be dependent on your business financials and personal credit history.

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5. Invoice factoring

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Invoice factoring, also known as accounts receivable 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.

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6. Invoice financing

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Invoice financing, or accounts receivable 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.

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7. Merchant cash advances

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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.

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8. Personal loans for business

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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.

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9. Business credit cards

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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.

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10. Microloans

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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.

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