The Different Types of Business Loans

Small business owners across the country are turning to online business lenders for financing solutions as they look to expand and grow their operations. Regardless of the type of small business you have, there are different types of business loans you can consider (and it’s essential to find the right one, lest you start owing more than you’re growing).

Each of these small business loan types have different terms, requirements to qualify, and interest rates. Let’s explore 9 of the most common types of loans for businesses.

9 Types of Business Loans You Should Consider

1. Term Loans

These business loan options provide loan amounts in the form of an upfront lump sum. The funds are repaid, with interest, according to a set repayment schedule. The length of these loans can be short (18 months), medium (1-3 years), or long term (3-25 years).

Working capital loans (by contrast) provide short-term funding to cover some of the everyday expenses of running a business. This type of business loan is best for businesses with a steady revenue stream and a reliable credit history.

Pros:

• Obtain a lump sum of cash
• Fast funding approval (get approved in as little as 24 hours)

Cons:

• You may be required to provide collateral as security for the loan
• Finance charges may be higher than traditional banks

To qualify for this type of small business loan you may need:

• A minimum credit score of 500+
• At least 6+ months in business
• Over $15,000 in average monthly bank deposits (Depending on the lender, $50,000 – $250,000 in annual revenue may be required.)

2. SBA Loans

SBA loans provide funding backed by the Small Business Administration (SBA). These types of loans are funded by private lenders and are guaranteed (up to 80 percent) by the Small Business Administration.

Depending on the purpose of the small business loan, the repayment term can vary from 7 years for working capital and up to 25 years for real estate.

Pros:

• Favorable, low interest rates
• Longer repayment terms
• Up to $5 million in funding

Cons:

• Can be difficult to qualify for
• Time-consuming application process

To qualify for a federally-backed SBA financing option, you will need:

• A minimum personal credit score of 620
• A minimum of 2 years in business
• U.S. citizenship or legal permanent resident status
• No outstanding tax liens
• No foreclosures or bankruptcies in the last three years

3. Business Lines of Credit

A business line of credit is one of the most popular types of small business loans because you can flexibly borrow however much you need up to your credit limit. This type of financing is generally used to cover short-term operating expenses.

Pros:

• More flexible than a short-term small business loan
• Does not require collateral
• Interest is payable only on the amount you borrow

Cons:

• Can be hard to qualify for
• Higher costs, such as draw fees and maintenance fees

To qualify for this business loan option, you will need:

• A minimum personal credit score of 560+
• A minimum of 6+ months in business—must be located in the United States
• A minimum of $50,000 in annual revenue

4. Equipment Loans

Equipment loans can help you purchase equipment needed for your business operations, such as heavy machinery. Similar to a personal auto loan, the equipment generally serves as collateral for this type of loan.

Due to depreciation, these types of loans typically have terms matching the lifecycle of the equipment.

Pros:

• You own the equipment
• Highly competitive interest rates, depending on creditworthiness
• Lower monthly payments than other loan options

Cons:

• Down payment of up to 20% may be required
• The equipment’s life cycle may be shorter than the loan term
• Can be difficult for new businesses to qualify without an established revenue stream

While the qualifying criteria for equipment loans will vary by lender, you will generally need:

• A strong credit score
• Steady revenue
• Available cash flow to cover a down payment of up to 20%

5. Invoice Factoring

Invoice factoring (invoice financing is something similar but not the same) allows you to access funds that are still in the accounts receivable status—such as unpaid invoices. This type of loan allows you to access the funds you need for daily business operations without having to wait for a customer to pay their invoice(s).

Unlike other loan programs, invoice factoring eliminates the burden of having to follow a fixed repayment plan.

Pros:

• Reliable form of immediate cash flow
• Save time and money you would normally spend chasing down accounts receivable
• No monthly repayment required

Cons:

• Required to share information with the invoice factoring company to verify invoices
• Not all invoices will qualify
• May have higher costs than traditional term loan options

Some common minimum requirements to qualify for invoice factoring are:

• Provide an accounts receivable aging report
• Proof of Incorporation (if applicable)
• Copies of outstanding invoices
• Clients with a good credit history
• Business checking account
• Federal Tax Identification Number
• Valid form of personal identification

6. Merchant Cash Advances

A merchant cash advance is an excellent option for small businesses with less-than-perfect credit and fluctuating revenues. With this type of business financing, funds are provided in a lump sum in exchange for a percentage of future income.

Merchant cash advance remittances can be satisfied by drawing funds directly from your daily credit and debit card sales. You may also choose to have your remittance withdrawn daily or weekly from a business bank account.

NOTE: Because merchant cash advances aren’t loans, you do not make ‘repayments’. Instead, a remittance, or transfer of money, is made to satisfy the purchased amount of receivables. Make sure you work with a lender who can help you understand these differences!

Pros:

• Quick access to funds
• Provides short-to-mid-term solutions for cash flow
• Set remittance schedule
• Easy to qualify
• Does not require personal collateral

Cons:

• Shorter duration
• Can be more expensive than traditional loan programs
• Remittances may be adjusted based on fluctuations in revenue

In order to qualify for a merchant cash advance, you will need:

• A minimum personal credit score of 500+
• A minimum of 6+ months in business
• A minimum of $15,000+ in average monthly bank deposits

7. Personal Loans

Personal loans don’t come to mind when considering the different types of business loans—and with good reason. Many lenders will not approve personal loans for business use.

Additionally, most commercial banks are unwilling to extend personal loans for businesses that do not have a solid operating history. In order to qualify, you will need a good credit score and possibly personal collateral to secure the loan.

Pros:

• Business credit is not required
• Rapid funding
• Business revenue is generally not a requirement
• Can be a great option for startups

Cons:

• Higher finance charges
• Lower loan amounts
• Risk to personal credit score—in the event of default
• Shorter repayment term

To qualify for a personal loan for business use, you will generally need:

• A minimum personal credit score of 600+
• A debt-to-income ratio no greater than 50%
• Two years of business tax records
• Some form of collateral

8. Business Credit Cards

Business credit cards can mean the difference between the success or failure of a small business. Most businesses fail due to their inability to pay their operating expenses.

A business credit card can be a viable solution that allows small business owners to stay in business.

Unlike traditional types of business loans, business credit cards involve revolving credit lines. Minimum monthly payments are required and are generally lower than standard business loan types.

Pros:

• Build business creditworthiness
• Does not require personal collateral to secure the loan
• Ability to earn various rewards on qualifying purchases

Cons:

• Potentially higher interest rates compared to different types of small business loans
• Annual fees may apply
• May require a personal guarantee that links your personal credit to the account

To qualify for most commercial business credit cards, you will need:

• A minimum credit score of 670+
• Meet minimum annual revenue requirements (revenue requirements vary based on the creditor)
• Ability to produce financial documents such as profit and loss reports, bank statements, and tax returns (business and personal depending on how the business was formed)

9. Commercial Real Estate Loans

Commercial real estate loans allow you to finance property for your business operations. These types of business loans generally run for 5, 10, 15, or 25 years.

As with many other loan options, lenders range from commercial banks to private lenders. The Small Business Administration may also back commercial real estate financing for owner-occupied properties.

Commercial real estate loans backed by the SBA boast longer terms, lower monthly payments, and lower interest rates.

Pros:

• Variety of loan terms
• Quick application process
• Lower interest rates

Cons:

• May have fees associated with early payoff
• May have an interest guarantee, regardless of early payoff
• Can require a lock-out period that prevents you from paying off the loan earlier than a specified date
• Can be difficult to qualify for

To qualify for a federally-backed SBA financing option, you will need:

• A minimum personal credit score of 620
• A minimum of 2 years in business
• U.S. citizen or legal permanent resident
• No outstanding tax liens
• No foreclosures or bankruptcies in the last three years

Find the Right Type of Business Loan

If a bank has declined your application, there are many other types of small business loans you can consider.

Online lenders generally offer faster approvals, which translates to faster funding. You can get funding in days, not weeks, with approval times in as little as 48 hours.