The Top 10 Types of Business Loans to Consider
Fortunately, there are a variety of small business loans to consider. However, these options differ depending on the financing lender, term length, amount, use of funds, and other financial factors. Because of this, it’s crucial that you take time to educate yourself on the ins and outs of different business loan types.
In this blog post, we’ll evaluate the various types of small business loans at your disposal so you can choose the ideal option for your situation. After reading this post, you should understand how each loan type works and who typically qualifies for these funding options.
The Different Types of Business Loans:
1. Small Business Administration (SBA) Loans
SBA loans are government backed loans that are guaranteed by the Small Business Administration (SBA).
Since they are secured loans, you must pledge your personal or business assets as collateral to qualify for financing. The most popular SBA loan is the 7(a) Loan, but the SBA has numerous loan programs available. While terms and conditions vary by loan type, loan amounts go up to anywhere between $350,000 and $5 million.
The SBA also offers Microloans, which provide financing that ranges from $10,000 to $50,000. If you own a startup, have limited collateral, or simply need a money to get up and running, a Microloan may be a viable funding option.
The SBA also offers the CDC/504 Loan Program, which is designed to help small businesses expand or modernize. It may help you finance large equipment or real estate purchases. CDC/504 loans usually come in larger loan amounts with a cap of $5 million and terms of 10, 20, or 25 years.
2. Business Term Loans
Business term loans are some of the most common business loan types. With business term loans, you receive a lump sum of money upfront. You repay your loan with a fixed interest rate for an agreed upon term. While borrowing amounts terms vary from lender to lender, they usually range from $25,000 to $500,000 with short or long terms.
You can use a business term loan to pay for a large business purchase like a new facility or expensive piece of equipment. There are countless lenders that offer business term loans including various banks, credit unions, and online lenders.
3. Business Lines of Credit
Business lines of credit are flexible because you can borrow as much or as little as you want up to your set credit limit, just like you could with a credit card. You’ll only pay interest on the amount you borrow and be able to draw money whenever you’d like if you don’t go over your credit limit.
If you decide to apply for a secured business line of credit, you’ll have to put up an asset like your property or inventory as collateral. The lender may seize this asset if you default on your business loan.
Although you may be able to take out an unsecured business line of credit, a business lender can still require a personal guarantee or lien on your business assets.
Pursuing a business line credit is wise if you’re unsure of how much money you need.
4. Equipment Loans
Depending on the nature of your business, you’ll likely need money to purchase, upgrade, or replace equipment.
Equipment loans are intended to help you do so. You can use an equipment loan for machinery such as:
- Medical machinery
- Industrial equipment
- Phone systems
- Virtually anything else you need to operate
An equipment loan may give you the funds you need to increase efficiency and productivity through quality equipment.
Although terms vary, most equipment loans can allow you to finance about 80% of the total price of the equipment. However, you should note that you’ll likely need a 20% down payment to take one out.
5. Inventory Loans
Inventory loans are provided to business owners seeking financing to purchase inventory for their business.
If you rely on inventory to operate successfully, an inventory loan may be worth pursuing. For example, if you own a clothing store, you can take out an inventory loan to purchase apparel or accessories.
Some inventory loan providers can give you a lump sum of money upfront while others will give you a line of credit. In most cases, you’ll be able to finance at least 50% of the inventory costs upon approval.
6. Bridge Loans
Bridge loans offer short-term financing that may range from a few weeks to a few years. If you’d like to bridge the gap between your cash shortage and business expenses, this type of financing can help.
Since many business lenders take weeks or even months to approve borrowers, bridge loans offer fast funds to help businesses bridge their financial needs.
A bridge loan can give you the opportunity to receive the money you need to pay for immediate expenses while you wait for longer term financing. It may be useful in other circumstances, such as:
- If your tax bill is higher than expected
- You need to cover some costs during a low period
- You want to take advantage of time-sensitive opportunities to grow your business.
7. Merchant Cash Advances
A merchant cash advance is a form of lump sum financing given to business owners in exchange for a portion of their future credit or debit card sales.
Merchant cash advances may make sense for your business if you need money quickly, as most cash advances deposit funds 24 hours after approval.
Although merchant cash advances are one of the fastest forms of business financing, they often come with a high annual percentage rate (APR). If you borrow more than you can afford, a merchant cash advance can easily steer you into a cycle of debt.
8. Invoice Factoring
Invoice factoring is when you sell all or some of your unpaid invoices at a discount to a factoring company.
Here’s how it works: You provide products and services to your customers as you normally would and invoice them for your work. Then, you “sell” the outstanding invoice to a factoring company. The factoring company pays you anywhere from 80% to 90% of the invoice value.
Your customers will pay the factoring company directly, instead of you. Once the factoring company has been repaid in full, they’ll pay you the remaining invoice amount less their fee. If you have cash flow issues because your customers tend to pay at different times, invoice financing may be the right choice.
9. Commercial Real Estate Loan
If you’re planning to invest in real estate for your business, you may benefit from applying for a commercial real estate loan.
Usually, this type of of financing is used to finance an income-generating property, such as:
- Office building
- Shopping mall
- Apartment complex
Typically, this is a larger loan type, so if you aren’t financing a large-scale construction project, this won’t be the right funding option for you.
10. Purchase Order Loan
If you received a customer order that you can’t afford to fulfill, you can pursue purchase order financing. Once you receive a purchase order loan, you’ll be able to fulfill orders, despite existing cash flow issues.
Conclusion: Shop Around to Find the Best Business Loan for Your Company
Not all types of business loans are created equal. In fact, they vary significantly based on loan type and financing lender. Therefore, it’s in your best interest to do your research before applying for a funding option.
We suggest shopping around and comparing the pros and cons of each financing option available to you. Move forward with the loan that works best for your unique industry, financial situation, and future goals.
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.