Updated April 12th. 2024.

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 different types of small business loans available on the market.

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.

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There’s no simple answer when it comes to finding the best type of small 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 a major factor, too.

In this post, we’ll outline the different types of loans to help you make sure you’re getting the best deal and moving your business forward.

types of small business loans

How Are the Types of Small Business Loans Different from Each Other?

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. Different types of small business loans will have a different interest rate.
  • Term Length: The duration of the payback period. For example, short-term small business loans can range from 3 to 18 months, while long-term loans can have a repayment period of up to 25 years.
  • Loan Amount: The total funds offered will also vary by loan type, ranging from $25,000 to $500,000.
  • Your Business’s Goals: What you’re hoping to accomplish by receiving funding also matters when it comes to choosing the right type of loan for your business.

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.

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How to Choose the Best Type of Small Business Loan

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 for different types of small business loans 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 Business Capital 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 allow you to choose what’s best for your business instead of settling for the first offer.

The 7 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.

Type of Financing Description Pros/Cons
Small Business Loans Standard small business loans, also called term loans, are one of the most popular funding options for entrepreneurs seeking capital.

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.

Best for: Projects where you know the exact cost.

  • Pros: High funding amounts, straightforward repayment process, ability to build business creditworthiness

  • Cons: Less flexible than other financing products, will need robust qualifications for longer terms
Business Lines of Credit Business lines of credit don’t work like most other types of small business 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.

Best for: Projects where you don’t know the exact cost and ongoing capital needs.

  • Pros: Flexible access to capital, favorable interest format, ability to always have capital on hand

  • Cons: Higher interest rates, strong eligibility requirements
Equipment Financing 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.

While collateral requirements vary by lender and product, through equipment financing, the equipment itself is the collateral.

Best for: Businesses looking to spread the cost of equipment over a longer schedule

  • Pros: Extended repayment terms, no need for further collateral, potential tax advantages

  • Cons: Higher interest rates, longer funding times
SBA Loans SBA loans tend to be the most sought-after product, and the reason is simple. You can qualify for low rates, long terms, and high funding amounts if you can meet their rigid eligibility criteria.

SBA lenders can offer such low rates because 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.

Best for: Well-established businesses that can meet the qualifications

  • Pros: Low rates, long terms, and high funding amounts

  • Cons: Strict qualifications, lengthy funding times, numerous usage restrictions
Revenue-Based Financing Most types of corporate loans lock you into a monthly, weekly, or daily agreement. With revenue-based financing, you can take a different approach. This financing option allows you to avoid set payments and pay back your interest based on daily credit and debit card sales.

Among other benefits, one major advantage of revenue-based financing 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.

Best for: Fast funding needs and businesses that can’t meet traditional financing qualifications.

  • Pros: Easy eligibility requirements, fast funding times, no collateral requirements

  • Cons: High interest rates, short repayment terms
Accounts Receivable Financing Also called invoice factoring and invoice financing, accounts receivable financing allows you to get an advance of a percentage of the submitted invoice. Generally, this amount ranges from 85-90% of the total amount.

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.

Best for: Businesses with strong, current A/R

  • Pros: High funding amounts, flexible structures, ability to unlock the value of receivables

  • Cons: Potential for fees, slow funding times
Commercial Mortgage Loans 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.

The building acts as collateral. To qualify, you’ll generally need to be in business for at least 2 years and have strong credit.

Best for: Businesses seeking to purchase real estate or other land assets.

  • Pros: High funding amounts, no additional collateral requirements

  • Cons: Strict qualifications, restricted use cases.

Which Type of Small Business Loan Works Best For Your Business?

There’s no such thing as a one-size-fits-all business loan. One option may work perfectly for one business but cause challenges in another, so it’s important that you explore the options available to you before finalizing an offer.

As you search, keep the following in mind:

  • The lender’s reputation
  • Their offered programs
  • The lender’s experience with your specific industry
  • Their minimum qualifications
  • How the offered terms will work in the day-to-day of your business

Forecasting is crucial, yet it’s almost impossible to get it perfect. Do the best that you can, and never be afraid to ask questions about specific terminology or the intricacies of your use of funds.

Why Choose National Business Capital for Small Business Loans?

Giving yourself options to choose from means you’ll have to apply to multiple lenders and wait for decisions from each. As you can assume, this is a time-consuming process that can take your focus away from your business.

At National Business Capital, we specialize in helping you evaluate your options. After completing a simple digital application, one of our Business Finance Advisors will contact you to learn more about you, your business, and your goals. 

Then, we apply your business to the lenders in our network most likely to return a competitive offer. Don’t worry; You’ll stay in the driver’s seat the entire time.

Your business could be funded in just a few hours! Apply now to get started!

Joe Blog Bio
About the Author

Joseph Camberato

Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.

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Frequently Asked Questions

Which is the best type of small business loan for me?

The best type of small business loan depends on your specific needs, financial situation, and goals. For immediate expenses, consider short-term loans. For larger investments, medium or long-term loans may be more suitable. Lines of credit offer flexibility, while SBA loans provide favorable terms. 

Evaluate your requirements and compare loan options to determine the best fit for your business.

Which type of small business loan offers the best rates?

Among small business loans, SBA loans often offer the best rates due to government backing, typically ranging from 7% to 10%. Traditional bank loans may also provide competitive rates, depending on creditworthiness and financial history. However, rates can vary widely depending on the lender and loan program. 

Online lenders may offer higher rates but provide faster approval and more flexible terms. It’s essential to compare offers from multiple lenders to secure the most favorable rates for your business.

Which type of small business loan offers the best terms?

SBA loans typically offer the best terms among small business loans. With government backing, SBA loans provide longer repayment periods, lower down payments, and competitive interest rates. Additionally, they offer flexibility in use, covering various business needs from working capital to real estate purchases. 

While the application process may be more complex, the favorable terms make SBA loans an attractive option for many businesses seeking financing. However, eligibility requirements can be stringent, and approval times may be longer compared to other loan types.

Do I need to provide collateral for small business loans?

Whether collateral is required for small business loans depends on the type of loan and the lender’s policies. Some loans, like secured loans or equipment financing, may require collateral, which serves as security for the lender in case of default. 

Collateral can include business assets, real estate, or personal assets like vehicles or property. However, certain loans, such as unsecured lines of credit or SBA loans under a certain threshold, may not require collateral but may have stricter eligibility criteria. 

It’s essential to clarify collateral requirements with the lender before applying for a loan.

What documents do I need in order to apply?

To apply for a small business loan, you typically need business financial statements, tax returns, bank statements, business licenses, and legal documents like articles of incorporation. Personal financial documents such as tax returns and identification may also be required.