This post was first published on May 5, 2020. It has been updated to include more information about the different types of small business loans. Updated on January, 2022
There’s no question about it: at some point or another, your growing business will need capital. If you’re like most business owners, your first step may be to research the types of small business loans available.
From fast, same-day funding to low-interest SBA loans, there are a lot of options on the table. The rise of fintech lending has widened that pool. However, many business owners searching for funding have one crucial problem: they don’t know which works best for them.
There’s no simple answer when it comes to finding the best type of business loan. Each one has different requirements, interest rates, and terms. To make things more confusing, your intended use of the funds (and especially your timeline) can be major factors, too.
In this post, we’ll outline the different types of small business loans to help you make sure you’re getting the best deal, and moving your business forward.
How Are the Types of Business Loans Different?
In practice, every type of business loan will help you accomplish your primary goal by giving you the funding you need.
But, the way these products are structured can vary quite a bit.
When you’re trying to find the ideal type of funding, there are a few factors that you should evaluate:
- Interest rate: the amount of the loan that you’ll be charged as part of the agreement
- Term length: the duration of the payback period
- Loan amount: the total funds offered
- Your business’s goals: what you’re hoping to accomplish by receiving funding
Your intended use of the funds is especially important, and if this is your first time receiving funding, easy to overlook.
Overall, your priority should be to find the option that best suits your business, and gives you the resources to take things to the next level.
How to Go About Finding the Best Financing and Loan Programs
There are numerous financing options on the market today, many available through countless lenders. However, you have to do your due diligence and ask if the option you accept is the best one for your business.
Just because you qualify for financing quickly and easily doesn’t necessarily mean that moving forward with it is the best idea. Instead of jumping at the first option, do your homework and select the one that best fits your needs.
Beyond the program itself, you can also make your search easier by applying through a source of capital with access to multiple options, not just one.
When you apply through a direct lender, you’re limiting your options to only what they offer. In other words, you force yourself to shop around, or accept the first offer you get.
On the other hand, applying through a marketplace like National opens the door to more opportunities. You can often find options through several lenders, instead of just one. Marketplaces also offer a faster, simpler and easier funding process.
This freedom and flexibility allows you to choose what’s best for your business, instead of settling for the first offer.
The 8 Best Types of Small Business Loans
While lenders typically offer various programs under similar names, it’s important to learn what you can about your options. You can use a business loan calculator to determine your monthly payments.
This breakdown of the most popular types of small business loans will help you learn what you need to know.
- Small Business Loans
- Business Lines of Credit
- Equipment Financing
- SBA Loans
- Merchant Cash Advances
- Accounts Receivable Financing
- Commercial Mortgage Loans
- Startup Business Loans
1. Small Business Loans
In a nutshell: Straightforward, lump sum loans with amounts, terms and rates based on your business
Standard small business loans, also called term loans, are one of the most popular funding options for entrepreneurs seeking capital.
The way small business loans work is simple. You qualify for a set amount based on a number of factors, and pay it back with interest. Almost all lenders will offer term loans, including banks and online lenders.
Small business loans can be used for a variety of purposes. If you have a large, specific expense at hand (or coming up), this funding can help you cover the cost. Or, if your business is growing and you want capital to help overcome the growing pains, you can use a small business loan, too.
Bank small business loans may limit your use of the funds, but fintech and online lenders won’t.
Depending on your needs and financials, term lengths can vary quite a bit. You may qualify for terms as short as 6 months, or as long as 5 years.
You could receive a 100,000 loan with a 6 month term, or a 500,000 loan with a 2-year term—it depends entirely on your needs and qualifications.
2. Business Lines of Credit
In a nutshell: All-purpose, flexible financing that you can draw from as you need (and only pay interest on what you take)
Business lines of credit are another popular option for business owners in need of cash.
Business lines of credit don’t work like most other types of small business loans (though lines of credit are not technically loans).
Instead of qualifying for and receiving money upfront, you’ll qualify for a maximum amount. Then, you can draw as much as you need from the pool of funds, and you’ll only pay interest on that amount. As you pay it back, you can draw those funds again.
Many small business owners take advantage of this structure by drawing funds as needed.
If an unexpected expense pops up as your business grows, you can use your line of credit to cover it without skipping a beat.
You can also use lines of credit for everyday expenses, like:
- Operating costs
- Seasonal cash flow shortages
While lines of credit offered by banks are generally secured, unsecured lines of credit have become a popular new type of business financing.
3. Equipment Financing
In a nutshell: Finance new equipment for your business (instead of buying outright) and reap tax benefits
If your business needs new equipment to replace outdated pieces or offer new products/services, equipment financing might be the solution. Through equipment financing, you can pay for your equipment on a monthly basis, instead of buying it outright.
This financing option helps business owners keep things moving or take things to the next level, without a significant upfront cost holding them back.
While collateral requirements vary by lender and product, through equipment financing, the equipment itself is the collateral. This means that the lender can seize the equipment to cover the costs if the borrower defaults. However, it also means that you won’t have to put up other collateral—like personal or business assets.
Another advantage of equipment financing is that there are rarely credit barriers.
If you finance equipment, you can enjoy tax breaks by writing off the full cost in year 1.
4. SBA Loans
In a nutshell: Long-term, low-interest loans for established businesses with excellent credit
If you’re looking into types of small business loans, chances are you’ve considered applying for an SBA loan.
SBA loans tend to be the most sought-after product, and the reason is simple. You can qualify for low rates and long terms. However, that desirable structure comes with a few hefty caveats.
The first—and most important—is that the application process can be quite lengthy, especially compared to the other products, which can be available in just a few hours. Even in an ideal scenario, it could take as long as 45 days to get funded. If things are moving quickly in your business, then that’s probably too long to wait. And, that 45 days begins after you complete a lengthy application—if you don’t have the info ready, that could take days on its own.
Nevertheless, SBA loans are one of the best small business loans for businesses that can qualify. Because they offer low rates at long terms, it’s an ideal choice when using the funds won’t directly drive revenue in your business. On the other hand, though, this structure might not be the best choice if you plan to double or triple sales by utilizing funding.
The reason that SBA lenders can offer such low rates is that the funds are backed by the Small Business Administration. However, in light of this, the bar for qualifying is also quite high.
In order to receive an SBA loan, you’ll need to be in business for at least two years. You’ll also need a strong credit history, and excellent financials.
The SBA backs a few different products.
The 3 Different SBA Loan Types
Depending on your business, you may choose to pursue one or several types of SBA loans. These are the most common options out there.
- SBA 7(a) loan: the most common SBA loan, which can be used for a wide variety of purposes including working capital, refinancing debt, business acquisition, real estate and equipment.
- CDC/ SBA 504 loan: another common option, which is generally used to purchase commercial real estate or equipment
- SBA Microloans: primarily targeted toward new businesses with a max funding amount of 50K and lower qualifications
5. Merchant Cash Advances
In a nutshell: Borrow money in exchange for future debit and credit card sales
Most types of corporate loans lock you into a monthly, weekly or daily agreement. With a merchant cash advance, you can take a different approach. This financing option allows you to avoid set payments, and instead pay back your interest based on daily credit and debit card sales.
When merchant cash advances first became a popular financing option, business owners were wary of high interest rates. As they’ve become more prominent, interest rates have dropped significantly. Now, they can be a great option for business owners in need of quick capital.
Among other benefits, one major advantage of the merchant cash advance is that your payments adjust as your sales ebb and flow. During slow periods, you won’t be locked into unreasonable payments—you’ll only pay down a percentage of your sales.
Generally, funding from a merchant cash advance can be used for any purpose.
6. Accounts Receivable Financing
In a nutshell: Fast cash in exchange for unpaid invoices
Your business doesn’t have to struggle with cash flow due to unpaid invoices. Instead, you can benefit by leveraging them for capital through accounts receivable financing.
Also called invoice factoring and invoice financing, this allows you to get an advance of a percentage of the submitted invoice. Generally, this amount rages from 85-90% of the total amount.
The lender retains the remaining amount, as they’ve purchased the invoice. The invoice acts as collateral, too.
You can use the advance to cover business expenses—like payroll, operating expenses and more. During this time, you’ll pay a weekly fee. After your customer pays the invoice (which will go directly to the lender, you’ll receive the remaining percent. This may also include a small fee.
This structure might be ideal if you experience frequent problems with late customer payments.
7. Commercial Mortgage Loans
In a nutshell: Get cash to purchase, refinance or expand property
Purchasing (or refinancing) real estate is a huge step for businesses on the rise. For business owners seeking a lot or building to call home, a commercial mortgage loan might be the best type of small business loan. This type of loan can also be used to expand an existing building.
Fortunately, the building itself will act as collateral—you won’t need to add additional collateral to secure the loan. Purchasing your own land or building also allows you to start building equity.
Qualifying for a commercial real estate loan isn’t impossible, but the bar can be a bit higher than other programs. To qualify, you’ll generally need to be in business for at least 2 years, and have a credit score of 620 or above.
The amount offered normally depends on the loan-to-value ratio. In other words, you can normally qualify for approximately 75-80% of the building’s total value.
8. Startup Business Loans
In a nutshell: Lower amounts for businesses taking their first steps
Every business needs to start somewhere. That’s where startup business loans come in.
In the early stages (before 6 months in business), it can be difficult (or even impossible) to qualify for traditional programs. And, taking on investors means giving up a share of your profits forever—unless you go through the expensive process of buying them out.
Startup loans can help you cover the many expenses involved in starting a new business, like finding a space, buying equipment, hiring, and more.
While you may not qualify for the large funding amounts offered through other products, startup loans can help you cover the many expenses involved in starting a business. They can also help you to establish a business credit score, which will be a key factor in obtaining future loans. – Bridge loans.
Which Works Best For Your Business?
There’s no such thing as a one-size-fits-all business loan. And for business owners with more important things to consider, applying for the different types of SME loans can be time-consuming.
At National, we specialize in helping you evaluate your options. After completing a simple, 60-second application, one of our Business Financing Advisors will contact you to complete the process and walk you through your options.
Your business could be funded in just a few hours! Apply now to get started!