Small business owners often rely on various types of business loans to help them manage cash flow, cover daily expenses, expand, remodel, or invest in equipment or property. Many factors contribute to the type of small business loan you choose, including your industry, how much cash you need, your business’s financials, and what you need funding for.
With many business loan options to choose from, how can you decide which one is right for you? In this guide, you’ll learn about the 15 types of small business loans that can help you meet your business and financial goals.
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1. Term Loans
Many of the small business loan types available come in the form of term loans. With these loans, you receive a sum of money upfront and agree to repay the funds, with interest, over a set period of time. Banks and alternative lenders offer term loans in varying amounts depending on the type of business loan, applicant’s qualifications, and terms and conditions.
There are long- and short-term business loan options available. What you receive will depend on your business needs and qualifications. Typically, long-term business loans are more difficult to qualify for since they present more risk to the lender.
Advantages: Predictable payments over the life of the loan and higher borrowing amounts.
Disadvantages: May require collateral to secure the loan.
Who it’s good for: Small businesses with strong credit and a desire to expand.
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2. SBA Loans
An SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. The SBA has numerous loan programs with loan amounts up to $5 million available for everything from working capital to commercial real estate investments.
Advantages: High borrowing amounts and moderate interest rates.
Disadvantages: May be difficult to qualify and the application process can be lengthy.
Who it’s good for: Borrowers with strong credit who don’t need cash quickly.
3. Business Line of Credit
A business line of credit is a type of business funding that gives borrowers access to cash up to a set credit limit determined by the lender. Like a credit card, a line of credit charges interest only on the money that you withdraw. Most lines of credit are revolving, while others may end after you’ve spent and paid off the full credit amount.
Advantages: Flexible borrowing for short-term expenses.
Disadvantages: Lower borrowing limits and typically higher interest rates.
Who it’s good for: Businesses that need funding for small ongoing expenses, assistance managing cash flow, or emergency expenses.
4. Equipment Financing
An equipment loan can be used to purchase or upgrade necessary business equipment. The equipment acts as collateral for the loan, and the length of the loan is often equal to the expected lifespan of the equipment. Rates vary depending on the type of equipment and your business’s qualifications.
Advantages: Allows small businesses to build equity without having to put down additional collateral.
Disadvantages: Loan can only be used for the purchase of equipment.
Who it’s good for: Small businesses that want to invest in equipment rather than lease.
5. Merchant Cash Advance
Like a business line of credit, a merchant cash advance offers a borrower cash upfront, but payments are made to the lender with a percentage of future credit card sales. Automatic withdrawals can be set up directly from your bank account on a daily or weekly basis.
Advantages: Fast cash, often within 24 to 48 hours of applying.
Disadvantages: Frequent payments with potentially high fees; lack of regulatory oversight could result in undesirable lending practices.
Who it’s good for: Borrowers that struggle to qualify for other types of business loans.
6. Inventory Financing
Inventory financing loans are asset-based and used to purchase necessary inventory, maintain consistent cash flow, or support working capital. The inventory serves as collateral and lenders base financing on a percentage of the inventory’s value.
Advantages: Helps prep for seasonal highs with no need for additional collateral.
Disadvantages: May require assessments (with fees).
Who it’s good for: Small businesses with high inventory turnover or seasonal demands.
7. Invoice Factoring
Invoice factoring allows you to get fast cash upfront in exchange for unpaid customer invoices, which the factoring company is then responsible for collecting. This type of business loan can help B2B companies that deal in customer invoices and irregular billing cycles maintain regular cash flow.
Advantages: You don’t have to wait for customer invoices to be paid for access to business funding.
Disadvantages: Can be costly and you don’t control collection practices.
Who it’s good for: Small businesses that process invoices regularly and have customers who reliably pay their invoices.
8. Online Business Loans
Online business loans are types of alternative business loans offered by lenders that aren’t traditional banks or credit unions. The types of small business loan products vary from lender to lender, but they typically have a quick application and approval process.
Advantages: Usually have a speedy application and approval process.
Disadvantages: May have higher costs than a traditional bank loan.
Who it’s good for: Small businesses who want more business loan options and faster funding.
9. Microloan
Microloans are business loans, typically for $50,000 or less, that are often given by nonprofit organizations or mission-based lenders. These can be great types of loans to start a business or for newer businesses in underserved communities.
Advantages: Credit requirements tend to be lower than with traditional loans, and microloans may come with additional services, such as counseling.
Disadvantages: Lower borrowing amounts typically with above-market interest rates.
Who it’s good for: Startups and newer businesses that don’t have established business history.
10. Commercial Real Estate Loan
A commercial real estate loan is used to purchase or improve a building or property that’s used for business purposes. Getting one may help a small business expand their business and build equity.
Advantages: Business loan options designed specifically for commercial real estate needs.
Disadvantages: Can be difficult to qualify for.
Who it’s good for: Established small businesses who want to transition from leasing to owning their commercial property or expand their business.
11. Working Capital Loan
A working capital loan can be any type of loan product used to cover everyday expenses, such as payroll, monthly bills, and repairs. These are common loan types for small businesses that need assistance managing cash flow fluctuations as they build their business.
Advantages: Quick access to funding for maintaining positive cash flow.
Disadvantages: Short-term and, depending on the type of financing, may be more costly than a longer-term option.
Who it’s good for: Small businesses with seasonal revenue or ones that want to expand and need cash to handle daily expenses during growth.
12. Restaurant Loans
Restaurant loans can be helpful in starting, expanding, or supporting various aspects of a restaurant business. These types of business loans can be from traditional banks, alternative lenders, or P2P lenders, and they come in a variety of forms, including term loans, business lines of credit, equipment loans, etc.
Advantages: Numerous business loan options to choose from.
Disadvantages: You need financial stability to ensure repayment of long-term loan options.
Who it’s good for: Startups and established restaurants that want to expand, remodel, or manage cash flow during business fluctuations.
13. Franchise Financing
Franchising loan options are offered by a number of sources, including traditional banks, online lenders, franchise financing companies, and sometimes even the franchisors themselves. These types of business loans can help to cover the many costs associated with opening a franchise location.
Advantages: Loans may be easier to obtain than they are for an independent small business.
Disadvantages: It may be expensive to start a business under a larger franchise.
Who it’s good for: New franchise owners who need help covering franchise fees and other startup costs.
14. Peer-to-Peer Lending
Peer-to-peer (P2P) business lending allows borrowers to get funding directly from other individuals (lenders), eliminating the need for a financial institution to act as a middleman. Borrowers and lenders can quickly connect using online platforms that facilitate the entire loan process.
Advantages: Quick and easy access to funding that may be easier to qualify for; potentially lower APRs compared to traditional lenders.
Disadvantages: Less regulation compared to traditional loan types, and application review is based largely on personal credit score.
Who it’s good for: Small businesses that don’t qualify for other types of small business loans.
15. Alternative Lending Options
Alternative small business loans are any offered by lenders other than a traditional bank or credit union. This category may include:
• Crowdfunding
• Angel investors
• Venture capitalists
• Contributions from friends and family
• Grants
Advantages: Many alternative business loan options are faster to get than traditional loans.
Disadvantages: Depending on the type of loan, borrowing limits may be lower and interest rates higher.
Who it’s good for: Small business startups or borrowers with poor credit who don’t qualify for a bank or SBA loan.
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Choosing the Right Loan for Your Business
As you consider different types of business loans, take the time to assess your business. The following five questions can help you clarify your needs and qualifications so you can start to narrow in on the types of business loans that may be right for your operation.
1. What Industry Is Your Business in?
Certain types of small business loans are better suited for certain industries, and some lenders have rules about which industries they will lend to. For example, some lenders choose not to lend to cannabis companies, and some types of loans, like invoice factoring, are typically better suited for B2B operations. Check that potential lenders work within your industry before applying.
2. How Much Funding Do You Need?
Know how much money you need before choosing a loan type or a lender. If you are planning on making specific purchases or renovations, you may want to get pricing or estimates. This will show a lender that you understand your business needs and also help narrow your search to loans that match your funding needs.
3. What Are Manageable Loan Terms for Your Business?
Loan terms can refer to different things. Most often, loan terms refer to how long the loan repayment period will last if you’re making timely payments to your lender. Ask yourself if your business is in a position to take on long-term loans, or if you should consider short-term options.
A term loan, for example, sets a specific amount of time. If you have a five-year loan term, that means you’ll be making regularly scheduled payments for five years. The term also affects your monthly payment. Typically, the longer the term, the lower the monthly payment. However, with long-term loans, more interest is paid over the life of the loan than with short-term loans.
Loan terms can also refer to additional features or business loan options that come with the loan. When you search for lenders, ask questions about additional terms and conditions on the loan to make sure it aligns with your needs and ability to pay.
4. How Soon Do You Need Money?
How quickly you need funding may influence how expensive a particular type of business loan is for you. Typically, the faster you get the money, the more expensive the loan, due to interest rates and loan fees. Essentially, you pay extra for the convenience of getting the money quickly. If you’re able to wait, it may help you secure a less expensive loan.
5. What Are the Costs of Different Business Loan Types?
The cost of a small business loan goes beyond interest rates and monthly payments. While those are important in determining if you can responsibly pay back the loan, it’s also good to know if the type of business loan you choose has additional costs.
These may include:
• Origination fees
• Prepayment penalties
• Balloon payments
• Late payment fees
• Factoring fees
• Monthly service fees
• SBA guarantee fees
Do your research to ensure you understand all of the costs associated with the type of business loan you’re interested in so there aren’t any unpleasant surprises down the road.
The Takeaway
Long- and short-term loans are available for small businesses, with your business needs setting the type of loan you desire. Your credit profile will be key in what you qualify for, as well as length of time in business, revenue, and business plan.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
Photo credit: iStock: FG Trade
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