14 Types of Business Loans To Help Your Company Grow
8 MIN READ
Published January 11, 2024 | Updated January 26, 2024
Your business may need money to expand operations, buy new equipment, or for working capital. While there are several types of business loans to choose from, it's important to research before you apply.
You need to consider factors like loan purpose, qualification requirements, and the cost of borrowing before you take on any new business debt.
14 Types of Business Loans
Below are 14 types of business loans, along with their pros and cons.
|Small businesses that want a competitive interest rate
|Established businesses interested in expanding
|Businesses needing quick access to funds
|Purchasing commercial cars and vehicles
|Business Lines of Credit
|Short-term need for managing cash flow
|New businesses and startups
|Businesses that don’t have access to traditional business loans
|Businesses needing quick access to funds but don’t qualify for other loans
|Working Capital Loans
|Businesses that need help covering the costs of daily operations
|Merchant Cash Advances
|Businesses with high credit card sales in need of quick funding
|For financing large equipment purchases
|Commercial Real Estate Loans
|Established businesses interested in opening new physical locations
|Personal Loans for Business
|Newer businesses with strong personal credit
|Businesses with debts from multiple sources
1. SBA Loans
SBA loans are small-business loans partly guaranteed by the Small Business Administration. The loan rates are among the lowest available, with repayment terms of up to 25 years. SBA 7(a) loan is the most popular type of SBA loan.
SBA loans can be used for business expansion, working capital, equipment, and more. The total amount you can borrow can range from $15,000 to $5.5 million, depending on the type of loan you apply for.
However, the application process can be long, and you’ll need to provide a personal guarantee if you own over 20% of the business.
- Flexible repayment terms
- Large loan amounts available
- Competitive interest rates
- The application process can be long
- Harder to qualify for
2. Term Loans
Business term loans are one of the most used types of financing. You’ll receive a lump sum amount and then repay it over a fixed term with interest. Banks, alternative lenders, and online lenders offer term loans.
While these loans can be one of the fastest and easiest ways to get funding, qualifying for the lowest rates can be difficult if you don’t have strong credit. You may also have to provide collateral or a personal guarantee to secure lower rates.
- Fixed monthly payments
- Quick funding
- Hassle-free application process
- It may be difficult to qualify for lower rates
- May have to provide collateral or a personal guarantee
3. Short-Term Loans
A short-term business loan is a good option if you only want to borrow money for less than three years. Funds are usually available quickly, with many online lenders offering online applications and next-day funding.
If you’re qualified, you may be able to secure interest rates as low as 8%. Repayment terms are usually six to 18 months.
- Fast funding
- Easier qualification
- APRs may be high for some
- There may be other fees, such as prepayment penalty and origination fees
4. Car Loans
A business car loan or commercial auto loan can be used to purchase a vehicle for business use. The vehicle you purchase acts as collateral for the amount you borrow. This means your lender may repossess your car if you don’t repay the loan.
You’ll have fixed monthly installments like most other types of business loans, and the interest rates you qualify for will depend on your credit score, like standard car loans.
- Interest rates are competitive
- You’ll be able to build equity
- Interest on auto loans is tax-deductible
- There may be restrictions on the type of vehicle you can buy
- Credit requirements can be strict compared to standard auto loans for personal use
5. Business Lines of Credit
A business line of credit works like a credit card. It’s a revolving source of funding, and you only pay interest on the money you’ve drawn. You can draw on the line of credit again once you repay your outstanding balance.
Banks may offer lower rates but usually have stricter qualification requirements compared to online lenders. If you want flexibility and the ability to withdraw money when you need it, this can be a good option.
- No need to provide collateral
- Flexible funding option
- Ability to access funds whenever needed
- Strict credit and revenue requirements
- There may be additional costs, such as maintenance fees
Microloans refer to smaller loans, typically up to $50,000. You’ll commonly be able to find microloans at nonprofit, online, or alternative lenders, not at banks. Another option is the microloan program by the SBA.
This option is usually best if you need funds to start a small business and aren’t able to qualify for other types of business loans.
- Available for borrowers who aren’t able to qualify for traditional bank loans
- Easier qualification requirements
- Lenders may be harder to find
- Interest rates may be higher than conventional bank loans
7. Invoice Factoring
Invoice factoring is a process where you can receive cash in exchange for your unpaid customer invoices. A factoring company can provide you with a percentage of the value of the unpaid invoice and collect the payment from your customers. You’ll then receive the remainder of the invoice value minus fees.
This may be a good option to get quick access to funds to cover any cash flows. However, compared to other types of business loans, it can be expensive.
- Easy to qualify for
- Quick access to cash
- Expensive compared to other options
- You’ll have to give up control over your invoices
8. Invoice Financing
Unlike invoice factoring, with invoice financing, you can use your invoices as collateral for cash advances. You’ll still have to collect payments and have control over your invoices. This can be a suitable option if maintaining control over your customers is important to you.
You can use invoice financing to cover short-term financing needs and cash flow gaps. However, it can be an expensive option.
- Full control over customers and invoices
- Fast access to cash
- Easy to qualify for
- Can be expensive
- Not suitable for frequent cash needs
9. Working Capital Loans
A working capital loan can help you cover the costs of your daily operations. These are short-term loans, which are usually preferred by seasonal businesses and those that require funding until revenue picks up.
You’ll be able to get this type of business loan from traditional banks and online loans. Interest rates can vary from 16% to 35%, depending on the amount you borrow and the type of business.
- Qualification requirements may be easy
- Low credit score requirements in some cases
- Interest rates may be higher
- Some lenders may require weekly payments
10. Merchant Cash Advances
A merchant cash advance is technically not a type of business loan. With this type of funding, you’ll get a lump sum amount in exchange for a predetermined portion of future sales revenue.
Repayment may be daily, weekly, or monthly, as a percentage of sales revenue or fixed debit from your bank account. This is a very expensive type of financing with annual percentage rates (APRs) often in triple digits. We recommend exploring other options before you consider a merchant cash advance.
- Easier to qualify for
- Fast access to cash
- Daily or weekly repayment schedules may not be suitable for all businesses
- It can be very expensive
11. Equipment Financing
Equipment loans can be used to finance commercial vehicles, office furniture, semi-trucks, and more. Compared to term loans, it’s easier to qualify for equipment financing because the equipment serves as collateral.
- Easier to qualify for
- Equipment lenders are better equipped to understand the needs of your business compared to traditional lenders
- You may need a down payment
- Equipment may be repossessed if you default
12. Commercial Real Estate Loans
If you plan to purchase a commercial property for your business, a commercial real estate loan can help. The asset you purchase serves as collateral for the loan. If you default on the loan, the lender can foreclose to recover its investment.
Your loan terms will depend on a number of factors, such as down payment, creditworthiness, business revenue and debt, cash flow, and the loan-to-value ratio.
- APRs can be quite low with good credit
- Longer repayment periods
- The application process can be extensive
- Stringent eligibility and business credit score requirements
- The lender can foreclose in case of default
13. Personal Loans for Business Use
Another option is to use a personal loan for business use, especially if you’re a startup and don’t have an operating history. You may be able to get affordable terms and rates depending on your personal assets and finances and your credit history. However, loan amounts may be lower compared to other types of business loans.
- Fast funding
- Easy to qualify for even for new businesses
- Online loan applications are available
- Smaller loan amounts
- Borrowing costs can be higher in some cases
- Your personal credit score may be damaged if you default
14. Consolidation Loans
Business debt consolidation loans allow you to combine multiple debts into a single loan. If you have multiple business credit cards, merchant cash advances, or other business loans, you can roll them together so you’ll only have a single payment each month.
Consolidation loans can provide you with a better interest rate and lower monthly payments if you qualify. This can make it easier for you to repay your debt faster.
- Single loan payment each month
- Lower interest rate
- Ability to pay off your debt faster
- Easily available at most financial institutions
- It may not be easy to qualify for lower interest rates
- There may be additional costs, such as closing fees, annual fees, and origination fees
Pros and Cons of Taking Out a Business Loan
Now that we’ve explored the types of business loans you can choose from let’s take a quick look at the pros and cons of borrowing a loan for your business.
- Business loans can provide you access to funds for expansion projects, operating expenses, and inventory purchases.
- You’ll be able to build your business credit through on-time payments.
- The interest you pay on business loans is usually tax-deductible.
- Many financing options offer fast funding and easy qualification requirements.
- Some types of business loans may have higher interest rates.
- Any debt you take on can increase your financial obligations.
- If you default on the loan, it can hurt your business’s financial stability and credit history.
- In the case of secured loans, you risk repossession if you don’t repay the loan.
Teresa Dodson, a debt expert and the founder of Greenbacks Consulting, shares her advice about business debt loans. “There are pros and cons when you take out any loan,” Dodson shares. “Do your research and make sure you choose the right loan for you,” she adds.
What Business Loan To Choose
With so many types of business loans to choose from, it may be difficult to determine the right option for your business needs. The specifics of each loan program vary, so it’s important to consider and compare the repayment terms, minimum credit score requirements, and cost of borrowing before you apply for a new loan.
We also recommend these tips to determine the right type of loan:
- Determine how much you need and review your business’s credit report and score. For example, if you only need to borrow a small amount, the SBA’s microloan program may be a great option.
- Determine if you have any collateral to offer. You may be able to get better rates if you provide collateral for term loans.
- Consider how you’ll use the funds you borrow. For example, if you need to borrow funds as needed and not as upfront cash, a business line of credit may be a good option.
- Consider the lender’s reputation, as well as the loan terms your business qualifies for, to find the most economical loan option.