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Business owners have many financing options available, from traditional installment loans to lines of credit to microloans.
However, just as every business is unique, so are the needs for capital. Whether you’re brand new to the industry, your personal or business credit scores are low, or you’re aiming for specific rates and terms, there are different loan products available.
Learn about the most common types of business loans available and find out which type is the best option for your small business.
Table of Contents
Business Term Loan
Business Line Of Credit
Small Business Administration (SBA) Loan
Short-Term Business Loan
Equipment Loan
Invoice Financing
Merchant Cash Advance
Personal Loan For Business
Microloan
Crowdfunding
Commercial Real Estate Loan
Business Credit Card
Get The Right Type Of Loan For Your Small Business
Types Of Business Loans: FAQs
Business Term Loan
A term loan, often called an installment loan, is a traditional type of business loan in which the borrower receives a specific amount of money that is paid back on a set schedule.
Typically, term loan payments are made each month, but the pay schedule will vary based on the policies of the lender. Each payment will be applied toward the principal, or the balance of the loan, as well as to interest charged by the lender.
Best For…
Business growth or expansion
Large, one-time purchases like equipment or real estate
Businesses with a strong borrowing profile
More Resources
Guide to business term loans
Small business term loan rates and fees calculator
Business Line Of Credit
A business line of credit is very similar to a credit card. When approved, the business is given a maximum credit limit. You can borrow from the fund at any time as long as they don’t spend over the borrowing limit. You only pay interest on the money drawn from the credit line.
Best For…
Paying for unexpected expenses
Solving cash flow problems
Seasonal spending
More Resources
Guide to business lines of credit
The best line of credit options for small businesses
Small Business Administration (SBA) Loan
The Small Business Administration is a federal organization that serves as a resource for small business owners. One of the biggest benefits offered by the SBA is its low-cost, government-backed loan programs.
Business owners do not go directly to the SBA for loans. Instead, the SBA works with lenders like banks and nonprofits. A portion of the loans offered by the lenders are backed by the SBA, which translates to lower rates and better terms for borrowers.
Best For…
Business growth or expansion
Working capital
Debt refinancing
Businesses with a strong borrowing profile
More Resources
SBA loans explained
Current SBA loan interest rates
SBA loan rates and fees calculator
Short-Term Business Loan
Short-term business loans are typically considered low risk because they carry short term lengths. Because they are low-risk, they are a good option for new businesses and borrowers with poor credit scores. Most short-term lenders charge a one-time fixed fee instead of an interest rate.
Best For…
Emergency financing needs
Borrowers with poor credit
Borrowers that need cash fast
More Resources
Guide to short-term business loans
Short-term business loan rates and fees calculator
Equipment Loan
An equipment loan is used to purchase equipment. The business will immediately get to use the equipment but won’t have to pay the full cost up front. Instead, the business will be able to pay smaller payments on a regular basis. The lender charges interest for loaning the funds to the borrower.
Best For…
Purchasing equipment
Startups and poor-credit borrowers
More Resources
Guide to equipment loans
The difference between equipment loans and leases
Invoice Financing
Invoice financing is used to solve cash flow problems caused by unpaid invoices. Borrowers can sell their unpaid invoices or use them as collateral in exchange for cash up-front. Because invoice financing is reliant on your customers paying — not your business — this type of financing is a good option for startups and poor-credit borrowers.
Best For…
Businesses that have cash flow problems due to unpaid invoices
Startups and poor-credit borrowers
More Resources
Guide to invoice financing
Best invoice financing companies for small businesses
Merchant Cash Advance
With a merchant cash advance, a lender advances a company money in return for a percentage of future credit card sales.
After receiving a merchant cash advance, daily payments are withdrawn by the lender from the business’ bank account. Payment is often based on a percentage of sales, so when sales are lower, the daily payment is also lower.
Best For…
Emergency financing needs
Poor-credit borrowers
Businesses with strong daily revenue
More Resources
Guide to merchant cash advances
Comparison of top merchant cash advances
Merchant cash advance rates and fees calculator
Personal Loan For Business
A personal loan for business is an option for businesses and entrepreneurs that do not have the credit score or business documentation required to qualify for a business loan. With a personal loan, the small business owner uses his or her own credit score and income documentation to qualify for financing.
Best For…
Business owners with strong personal credit
Entrepreneurs, startups, and new businesses
More Resources
Guide to getting a personal loan for business
Key differences between personal and business loans
Microloan
A microloan is typically defined as a loan of $50,000 or less.
Because these are smaller loans, they are best for smaller businesses, sole proprietors, and startups that have lower capital requirements than other businesses.
Best For…
Startups and new businesses
Businesses that only need a small amount of money
Poor-credit borrowers
More Resources
Guide to business microloans
Guide to the SBA microloan program
Crowdfunding
With crowdfunding, a small business or startup uses an online platform to raise money from a group of investors. The small business pitches its idea to potential investors, and the investors donate money if the idea appeals to them. It’s important for the business seeking financing to map out a strategy and promote their campaign to entice investors.
Best For…
Businesses with an appealing product
Entrepreneurs with a strong, marketable business plan
More Resources
8 tips for launching a crowdfunding campaign
Best crowdfunding platforms for businesses
Commercial Real Estate Loan
Commercial real estate loans can help you purchase or upgrade commercial real estate. These funds can be used to purchase an existing building or land, upgrade or add-on to an existing property, or construct a new building.
Commercial real estate loans are long-term loans that are paid off over a longer period of time, such as 20 or 30 years.
Best For…
Purchasing real estate
Upgrading real estate
More Resources
Guide to commercial real estate loans
Guide to the SBA real estate loan program
Business Credit Card
A business credit card is a revolving line of credit. Business cards are generally used to finance everyday expenses. They also carry savings in the form of rewards programs, signup bonuses, and other special cardholder benefits.
Best For…
Financing everyday expenses
Earning rewards and other benefits
More Resources
How to get a business credit card
Best credit cards for small businesses
Get The Right Type Of Loan For Your Small Business
Running a small business can be expensive, and seasonal increases, unforeseen emergencies, unpaid invoices, or the need for expansion can all lead a business owner to pursue financing options.
While there are many affordable loans available, it’s important to fully evaluate all lending options, the total cost of the loan, and the return on investment from taking the loan.
A smart business owner will take the time to weigh out the pros and cons before signing the paperwork to ensure that the loan will help the business prosper.
Types Of Business Loans: FAQs
How can I get a business loan without any collateral?
Most business loans carry some sort of security the lender can collect if the borrower defaults on their loan. If you can’t or don’t want to put up specific collateral, you can get a loan with a blanket lien. Business loans that commonly carry blanket liens include online loans and some bank loans.
What credit score do I need to get a small business loan?
You might qualify for a business loan even if your credit score is in the 500s. Although you can qualify for financing with poor credit, people with higher scores will qualify for better interest rates and fees.
Which type of loan can be considered best for small businesses?
There is no type of loan that is considered best for small businesses. The best loan for your business will depend on the needs of your business and what you hope to accomplish with the financing.
The 7 Different Loans You Can Get as a Business Owner
In their book Start Your Own Business, the staff of Entrepreneur Media Inc. guides you through the critical steps to starting your business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors outline the seven different kinds of loans you could get from a bank.
When you're looking for debt financing for your business, there are many sources you can turn to, including banks, commercial lenders, and even your personal credit cards. And you don’t need to pinpoint the exact type of loan you need before you approach a lender; they will help you decide what type of financing is best for your needs. However, you should have some general idea of the different types of loans available so you'll understand what your lender is offering.
Here's a look at how lenders generally structure loans, with common variations.
1. Line-of-credit loans.
The most useful type of loan for small-business owners is the line-of-credit loan. In fact, it’s probably the one permanent loan arrangement every business owner should have with their banker since it protects the business from emergencies and stalled cash flow. Line-of-credit loans are intended for purchases of inventory and payment of operating costs for working capital and business cycle needs. They're not intended for purchases of equipment or real estate.
A line-of-credit loan is a short-term loan that extends the cash available in your business’s checking account to the upper limit of the loan contract. Every bank has its own method of funding, but, essentially, an amount is transferred to the business’s checking account to cover checks. The business pays interest on the actual amount advanced, from the time it's advanced until it's paid back.
Line-of-credit loans usually carry the lowest interest rate a bank offers since they're seen as fairly low-risk. Some banks even include a clause that gives them the right to cancel the loan if they think your business is in jeopardy. Interest payments are made monthly, and the principal is paid off at your convenience, though it's wise to make payments on the principal often.
Most line-of-credit loans are written for periods of one year and may be renewed almost automatically for an annual fee. Some banks require that your credit line be fully paid off for seven to 30 days each contract year. This period is probably the best time to negotiate. Even if you don’t need a line-of-credit loan now, talk to your banker about how to get one. To negotiate a credit line, your banker will want to see current financial statements, the latest tax returns, and a projected cash-flow statement.
2. Installment loans.
These loans are paid back with equal monthly payments covering both principal and interest. Installment loans may be written to meet all types of business needs. You receive the full amount when the contract is signed, and interest is calculated from that date to the final day of the loan. If you repay an installment loan before its final date, there will be no penalty and an appropriate adjustment of interest.
The term of an installment loan will always be correlated to its use. A business cycle loan may be written as a four-month installment loan from, say, September 1 until December 31 and would carry the low interest rate since the risk to the lender is under one year. Business cycle loans may be written from one to seven years, while real estate and renovation loans may be written for up to 21 years. An installment loan is occasionally written with quarterly, half-yearly, or annual payments when monthly payments are inappropriate.
3. Balloon loans.
Though these loans are usually written under another name, you can identify them by the fact that the full amount is received when the contract is signed, but only the interest is paid off during the life of the loan, with a “balloon” payment of the principal due on the final day.
Occasionally, a lender will offer a loan in which both interest and principal are paid with a single “balloon” payment. Balloon loans are usually reserved for situations when a business has to wait until a specific date before receiving payment from a client for its product or services. In all other ways, they're the same as installment loans.
4. Interim loans.
When considering interim loans, bankers are concerned with who will be paying off the loan and whether that commitment is reliable. Interim loans are used to make periodic payments to the contractors building new facilities when a mortgage on the building will be used to pay off the interim loan.
5. Secured and unsecured loans.
Loans can come in one of two forms: secured or unsecured. When your lender knows you well and is convinced your business is sound and the loan will be repaid on time, they may be willing to write an unsecured loan. Such a loan, in any of the aforementioned forms, has no collateral pledged as a secondary payment source should you default on the loan. The lender provides you with an unsecured loan because it considers you a low risk. As a new business, you're highly unlikely to qualify for an unsecured loan; it generally requires a track record of profitability and success.
A secured loan, on the other hand, requires some kind of collateral but generally has a lower interest rate than an unsecured loan. When a loan is written for more than 12 months, is used to purchase equipment, or does not seem risk-free, the lender will ask that the loan be secured by collateral. The collateral used, whether real estate or inventory, is expected to outlast the loan and is usually related to the purpose of the loan.
Since lenders expect to use the collateral to pay off the loan if the borrower defaults, they'll value it appropriately. A $20,000 piece of new equipment will probably secure a loan of up to $15,000; receivables are valued for loans up to 75 percent of the amount due; and inventory is usually valued at up to 50 percent of its sale price.
6. Letter of credit.
Typically used in international trade, this document allows entrepreneurs to guarantee payment to suppliers in other countries. The document substitutes the bank’s credit for the entrepreneur’s up to a set amount for a specified period of time.
7. Other loans.
Banks all over the country write loans, especially installment and balloon loans, under a myriad of names. They include:
Term loans, both short- and long-term, according to the number of years they're written for
Second mortgages where real estate is used to secure a loan; usually long-term, they’re also known as equity loans
Inventory loans and equipment loans for the purchase of, and secured by, either equipment or inventory
Accounts receivable loans secured by your outstanding accounts
Personal loans where your signature and personal collateral guarantee the loan, which you, in turn, lend to your business
Guaranteed loans in which a third party—an investor, spouse, or the SBA—guarantees repayment
Commercial loans in which the bank offers its standard loan for small businesses
Secure financing with these 9 types of small business loans
Small business loans can help you finance projects, purchase equipment and get working capital when you don’t have enough cash flow. Here are 9 types of loans.
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
If you’re a business owner who needs access to cash, a small business loan can help you out. But it’s crucial to pick the right type of loan. Choose the wrong loan, and you may get stuck waiting months to receive funds when you need them fast or wind up with the wrong type of financing offer.
Small business loans can be geared toward specific needs, like helping you expand your warehouse or start a franchise. There are also loans that can give you access to cash when you have a pile of unpaid invoices.
Most small business loans are available through online lenders, banks and credit unions. The interest rates, fees, loan limits and terms fluctuate based on the type of loan, lender and borrower.
It’s important to understand how each loan works, so you can choose the best option for your business. Below, CNBC Select reviews nine types of small business loans that can benefit your company.
9 types of small business loans
Term loans
SBA loans
Business lines of credit
Equipment loans
Invoice factoring and invoice financing
Commercial real estate loans
Microloans
Merchant cash advances
Franchise loans
1. Term loans
Term loans are one of the most common types of small business loans and are a lump sum of cash that you repay over a fixed term. The monthly payments will typically be fixed and include interest on top of the principal balance. You have the flexibility to use a term loan for a variety of needs, such as everyday expenses and equipment.
2. SBA loans
Small Business Administration (SBA) loans are enticing for business owners who want a low-cost government-backed loan. However, SBA loans are notorious for a long application process that can delay when you will receive the funding. It can take up to three months to get approved and receive the loan. If you don’t need money fast and want to benefit from lower interest rates and fees, SBA loans can be a good option.
3. Business lines of credit
Similar to a credit card, business lines of credit provide borrowers with a revolving credit limit that you can generally access through a checking account. You can spend up to the maximum credit limit, repay it, then withdraw more money. These options are great if you’re not sure of the exact amount of money you’ll need since you only incur interest charges on the amount you withdraw. That’s compared to a term loan that requires you to pay interest on the entire loan — whether you use part or all of it. Many business lines of credit are unsecured, which means you don’t need any collateral.
4. Equipment loans
If you need to finance large equipment purchases, but don’t have the capital, an equipment loan is something to consider. These loans are designed to help you pay for expensive machinery, vehicles or equipment that retains value, such as computers or furniture. In most cases, the equipment you purchase will be used as collateral in case you can’t repay the loan.
5. Invoice factoring and invoice financing
Business owners who struggle to receive on-time payments may want to choose invoice factoring or invoice financing (aka accounts receivable financing). Through invoice factoring, you can sell unpaid invoices to a lender and receive a percentage of the invoice value upfront. With invoice financing, you can use unpaid invoices as collateral to get an advance on the amount you’re owed. The main difference between the two is that factoring gives the company buying your invoices control over collecting payments, while financing still requires you to collect payments so you can repay the amount borrowed.
6. Commercial real estate loans
Commercial real estate loans (aka commercial mortgages) can help you finance new or existing property, like an office, warehouse or retail space. These loans act like term loans and may allow you to purchase a new commercial property, expand a location or refinance an existing loan.
7. Microloans
Microloans are small loans that can provide you with $50,000 or less in funding. Since the loan amounts are relatively low, these loans can be a good option for new businesses or those that don’t need a lot of cash. Many microloans are offered through nonprofits or the government, like the SBA, though you may need to put up collateral (like business equipment, real estate or personal assets) to qualify for these loans.
8. Merchant cash advances
Like traditional cash advances, merchant cash advances come at a high cost. This type of cash advance requires you to borrow against your future sales. In exchange for a lump sum of cash, you’ll repay it with either a portion of your daily credit card sales or through weekly transfers from your bank account. While you can often quickly obtain a merchant cash advance, the high interest rates make this type of loan a big risk. Unlike invoice financing/factoring, merchant cash advances use credit card sales as collateral, instead of unpaid invoices.
9. Franchise loans
Becoming a franchisee can help you achieve your goal of business ownership quicker and easier than starting from the ground up, though you’ll still need capital. Franchise loans can provide you with the money to pay the upfront fee for opening a franchise, so you can get up and running. While you’re the one taking out the loan through a lender, some franchisors may offer funding to new franchisees.