Small business owners looking for financing have a variety of options available. Banks, online lenders, microlenders, and other organizations offer loan products for businesses at every stage, with a range of terms, options, and interest rates. Below, we cover the most common loan types available to small businesses.
Types of Small Business Loans
| Loan Type | Best For |
|---|---|
| Term loan | Qualified businesses looking for short or long-term financing needs and predictable repayment schedules |
| Business line of credit | Businesses that need flexible access to working capital |
| SBA loan | Small businesses that have trouble getting approved for more traditional loans but are otherwise qualified |
| Equipment financing | Businesses looking to finance the purchase of new equipment |
| Microloan | Startups and newer businesses looking for small amounts of capital (less than $50,000) |
| Invoice financing | Businesses that regularly invoice clients and have capital locked up in large outstanding invoices |
| Merchant cash advance | Seasonal businesses that take card transactions and need quick access to cash |
| Commercial real estate loan | Businesses looking to expand, renovate, or purchase commercial property |
| Personal business loan | New business owners with good personal credit looking for small amounts of funding |
| Business acquisition loan | Business owners looking to purchase an existing business, buy a franchise, or buy out a business partner |
1. Term Loan
One of the most common types of business loans, term loans allow businesses to borrow a lump sum that is repaid in installments over time. The length of the loan can range from months in the case of short-term loans to years for medium- and long-term loans. Most term loans are for one to five years.
Term loans can be used for a wide range of business needs, including purchasing real estate, inventory, or equipment, hiring new employees, performing renovations, expanding a business, or refinancing debt.
Term loans are available from banks and credit unions as well as online lenders. Term loans are likely to have favorable interest rates, especially for longer-term bank loans.
2. Business Line of Credit
Unlike a term loan, a business line of credit is a revolving line of credit—it gives businesses access to a fixed amount of capital that they can draw from as needed. As you repay your loan, funds become available again.
Business lines of credit are flexible and can help businesses access working capital. Business lines of credit are often used for buying inventory, paying suppliers, dealing with late invoices, paying for urgent expenses such as maintenance, or starting a new contract or project.
3. SBA Loan
SBA loans are guaranteed by the U.S. Small Business Administration, making them a much lower-risk loan for lenders. There are a number of loan programs through the SBA, each with their own requirements, and the lenders that work with the SBA may have additional requirements.
Designed for small businesses that would otherwise struggle to obtain financing, SBA loans require extensive documentation and can be more difficult to qualify for, but they offer favorable terms, with lower interest rates and longer repayment terms than many other business term loans.
4. Equipment Financing
Equipment financing allows businesses to borrow funds to purchase new equipment or replace or upgrade existing equipment. This type of financing is structured as a term loan, with borrowers paying off the cost in regular installments, with added interest.
Equipment financing is a great choice for small businesses that need to purchase equipment, with a relatively easier approval process and more favorable terms than other types of loans, including fixed interest rates and longer terms. This means that payments are generally manageable and predictable.
5. Microloan
Microloans offer smaller loan amounts, ranging from a few hundred dollars up to $50,000. This type of loan can be a good option for small businesses and startups since it has less stringent requirements for credit scores, length of time in business, and collateral.
6. Invoice Financing
Invoice financing is an option for businesses that regularly bill or invoice their customers. Companies can borrow against unpaid invoices, with the invoices serving as collateral. If your customers may take a long time to pay their bills and you need working capital in the meantime to cover payroll costs, supplier payments, and other expenses, this type of funding can provide assistance. However, invoice financing may have high fees compared to other types of loans.
7. Merchant Cash Advance
A merchant cash advance allows your business to exchange your future earnings for immediate cash. With MCAs, you receive a lump sum of cash from a merchant cash advance provider, which you pay back using a percentage of your daily sales.
8. Commercial Real Estate Loan
A commercial real estate loan, also called a commercial mortgage, is a loan used to purchase or develop commercial property such as office space, retail shops, factories, restaurants, warehouses, or hotels. A commercial mortgage can be used to purchase existing property, perform renovations or expansions to an existing building, construct a new property, or refinance debt.
9. Personal Business Loan
A personal business loan is a personal loan used for business purposes, including inventory purchases, payroll, or marketing initiatives. For new or small businesses, personal business loans may be the ideal route for funding because it can be difficult to obtain a loan with little to no operating history. With no established track record to refer to, approval for a personal business loan is based on your personal financial history instead.
10. Business Acquisition Loan
A business acquisition loan is a loan used to fund the purchase of an existing company. Loans can be used to purchase an existing business, buy a franchise, or buy out a business partner. Business acquisition loans are typically structured as medium- or long-term loans.
Compare Small Business Lenders
There are a variety of loan options and lenders in the market, and it may be difficult sorting through all of the options. AdvisorSmith analyzed over 30 different lenders and determined the top lenders for small businesses. To determine the best lenders, AdvisorSmith considered a number of factors, including financial strength ratings, customer satisfaction data, complaint ratings from the Better Business Bureau, available terms and loan amounts, and availability of information and ease of use of the lender websites.
| Lender | Best For | Description |
|---|---|---|
| National Business Capital | Overall | National Business Capital is a financing marketplace that specializes in connecting small businesses with a variety of loan products and over 75 lenders. |
| Rapid Finance | Short-term Loans | Rapid Finance is an alternative lender known for offering a variety of short-term loans targeted at small and midsize businesses. |
| Lendio | Startups | Lendio is a financing marketplace that works with a variety of lenders, many of whom offer loans specifically for startups. |
| Fundbox | Lower Credit Scores | Fundbox is an alternative lender that is best known for offering lines of credit and invoice financing for small businesses. |
| Accion Opportunity Fund | Microloans | The Accion Opportunity Fund is a non-profit lender focused on providing funding to small businesses, particularly business owners who are underrepresented minorities and women who may not qualify with other traditional lenders. |
Business Loan Requirements
Depending on the type of loan you’re applying for and the lender you’re applying with, there are different requirements you must fulfill in order to be approved. Traditional loans from banks or credit unions and loans guaranteed by the SBA generally have stricter requirements, while online lenders may offer greater flexibility. However, all lenders typically consider a number of factors, including credit scores, business history, financial status, debt, and more.
Below, we’ve listed some common business loan types along with their major requirements.
| Loan | Key Requirements |
|---|---|
| SBA loan | Business plan, financial history, personal credit score, business credit score |
| Traditional term loan | Personal credit score, business credit score, in business for at least two years, collateral |
| Online term loan | Revenue, in business for at least one year, credit score |
| Business line of credit | Business credit score, personal credit score, revenue |
| Startup loan | Business plan, personal credit score |
| Equipment financing | Equipment as collateral, personal credit score, in business for at least one year |
| Invoice financing | Financial strength and payment history of customers, credit score, in business for at least one year |
| Merchant cash advance | Annual sales of at least $50,000, two years of credit card sales history |
| Personal business loan | Personal credit score and personal financial history |
| Microloan | Business plan, personal credit score, business credit score |
| Commercial real estate loan | Net operating income, personal credit score, business credit score, in business for at least one to two years, financial history |
Business Loan Interest Rates
When evaluating business loans, interest rates will play a big part in your decision process. Ultimately, the interest rate on a loan will be the bulk of the cost to the loan, in addition to various fees that lenders charge. Interest rates can vary by type of loan and by lender, and depending on the financial standing of your business and your personal credit score, you may be offered varying rates.
| Type of Lender | Average Interest Rates |
|---|---|
| Banks or Credit Unions | 1.7% to 5.4% |
| Alternative or Online Lenders | 4.8% to 30.1% |
It’s important to understand how interest rates work, and how you can make an apples-to-apples comparison between lenders as you are shopping for a business loan. Take a look at our guide on business loan interest rates, and learn about the types of interest rates you’ll see, common fees that lenders charge, and the different factors that affect interest rates.
How to Get a Small Business Loan
There can be a lot involved in securing a small business loan, and you’ll want to make sure you’re doing your due diligence to get a loan that fits your business’s needs. A little bit of upfront work can help you avoid potential headaches in the future, not to mention save you money in interest rates and fees. Follow our basic seven-step guide to learn how you can get the right loan for your business.
- Determine your goals for the loan.
- Explore the different types of business loans available.
- Compare small business lenders.
- Understand the requirements to qualify for a business loan.
- Calculate the cost of a loan and determine affordability.
- Gather documentation.
- Apply.
Final Word
Small business loans can assist business owners in a variety of ways, from helping your business to expand, bridge a seasonal gap or slow period, or purchase new equipment. With a range of loan products available for small businesses, it’s wise to do your due diligence and understand what type of loan would be best suited for your unique needs and requirements. Once you’ve decided on the type of loan you need, make sure to compare lenders in order to find the most favorable terms and rates.
