Compare 11 Types of Business Loans

There are many types of business loans available if you need money for your business. The type of loan you choose will depend on the amount you want to borrow and the speed at which you need it. No matter your situation, there’s likely to be a business loan that meets your needs.

Small Business Loans: 11 Different Types

1. Term Loans: Best for Funding Established Businesses

Term loans are one of the most common forms of financing for businesses. The funds are usually distributed as a lump sum upfront. You repay the amount, plus interest, in regular, fixed installments over a specified period.

Short-term loans: Typically range from three to 24 months, repaid in weekly or daily installments. Frequently used for working capital or as emergency business loan.
Long-term loans: Can last for up to 10 years, with monthly repayments. Often available through brick-and-mortar banks and credit unions.

Term loans can be either unsecured or collateralized and are often subject to strict credit requirements, making them best suited for businesses with strong financial profiles.

2. SBA Loans: Best for Large Expenses

The Small Business Administration (SBA), in partnership with financial institutions throughout the United States, provides funding to businesses. SBA loans are backed by a guarantee to protect lenders in the event of default, allowing for more flexible qualifying requirements.

The SBA offers a range of loan options, from INR 35000 to INR 5 Cr with terms as long as 25 years. Their various loan programs have different lending limits and requirements, including:

7(a) Loan: The SBA’s primary offering, used to cover general business costs like inventory, working capital, and supplies.
504 Loans: Designed for certified development companies, covering fixed assets like commercial real estate and machinery.
SBA Microloans: Intended for small-scale financing and working capital expenses.

While SBA funding can seem ideal, it has some drawbacks. One significant challenge is the lengthy application process, with funding often taking 60 days or more after approval.

3. Business Lines of Credit: Best for Flexible Financing

A business line of credit works similarly to a credit card. You can use the funds whenever you need them, up to an agreed limit, and make payments only for the amount borrowed. Once you pay off your balance, you can borrow again. This makes lines of credit a great option for those needing flexible funding regularly. Qualifying requirements vary widely by lender, with some imposing strict income criteria. Understanding what is a business line of credit equips entrepreneurs with the knowledge to choose the right financing tool and ensures they maximize its benefits while minimizing risks.

4. Equipment Loans: Best for Purchasing Equipment

Equipment loans are specifically designed to help businesses buy necessary equipment, ranging from machinery to computers. The equipment purchased serves as collateral for the loan.

5. Commercial Real Estate Loans: Best for Buying Property

If you plan to purchase a brick-and-mortar location for your company, you’ll need a commercial property loan. This type of loan is similar to a mortgage and is paid back over time with regular monthly payments. It’s important to note that commercial real estate transactions do not have the same protections as residential mortgages, so it’s crucial to read the fine print before signing.

6. Invoice Factoring: Best for Emergency Funding

Invoice factoring differs from other financing methods. It involves an advance against unpaid invoices. Factoring companies typically pay an advance of 70% to 90% on unpaid invoices. Once the invoices are paid, you receive the remaining amount, minus any collection fees.

7. Accounts Receivable Financing: Best for Short-Term Funding

Accounts receivable financing is similar to invoice factoring, allowing you to leverage unpaid invoices for cash. Your invoices are used as collateral for a line of credit or loan. You, as the business owner, must collect payment for the invoices before repaying the loan.

8. Merchant Cash Advances: Best for Leveraging Card Sales

Merchant cash advances allow you to convert a portion of your credit card sales into a cash advance. The money is provided in a lump sum, and the advance company takes a percentage of your daily or weekly credit card sales until the advance is settled, rather than requiring monthly payments.

9. Personal Loans: Best for Using Your Personal Credit Score

Startups and new businesses might consider personal business loans, as banks and traditional financial institutions may hesitate to lend to businesses with limited operational histories. Personal loans are often unsecured and do not require collateral, but a high credit score is usually needed to qualify. While these loans can provide fast funding with few restrictions, failure to repay can negatively impact your personal credit score.

10. Business Credit Cards: Best for Ongoing Expenses

Business credit cards are a type of revolving credit. You can borrow up to the credit limit and borrow again as you pay off your balance. This financing is ideal for ongoing expenses such as travel, supplies, or utility payments. To avoid interest charges, it’s best to pay your balance in full. Many business credit cards also offer rewards or benefits, but remember that your personal credit score is closely linked to your business credit card activity.

11. Microloans: Best for Small Purchases

Microloans, as the name suggests, are small loans typically offered in amounts less than INR 40,00,000 by government or nonprofit agencies. They can help businesses that might struggle to qualify for larger funding, such as startups or entrepreneurs from disadvantaged backgrounds. Microloans usually have lower interest rates and more flexible terms than other forms of financing.

How to Qualify for Business Loans

After determining which type of financing suits your company best, you should learn how to qualify for a loan. Here are some common requirements:

Credit Scores: Lenders use both your business and personal credit scores to assess your likelihood of repaying the loan. Generally, a higher credit score results in a lower interest rate for business loan.
Annual Income: Lenders consider your annual income to determine your ability to repay the loan. Some lenders may only lend to businesses with a proven operational history, so startup loans might be more appropriate for newer businesses.
Size and Industry of the Business: Lenders like the SBA have specific requirements that vary by business type and location.
Collateral or Personal Guarantees: Lenders may require collateral or a guarantee from the borrower to secure the loan, often in the form of physical assets like machinery or equipment.
Business Plan: A detailed business plan helps lenders understand your future plans and how you intend to achieve them.
Financial Statements: Expect to submit common financial statements with your loan application, such as bank statements, cash flow statements, and balance sheets.
Accounts Payable and Receivable: These documents give lenders insight into your current financial status, especially if you’re seeking funding for invoice factoring or accounts receivable.
Legal Documents: Lenders want to ensure that the business they are financing is legally sound. You may need to provide proof of licenses, permits, or articles of incorporation.

Compare 11 Types of Business Loans

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