Key takeaways
- There are nine types of business loans that small businesses often select for funding
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The type of business loan impacts the rates, terms and loan amount
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Small business loans usually range from $1,000 to $5 million
Small business loans are designed to meet specific needs. From long-term commercial real estate loans to short-term ways to cover dips in cash flow, there’s likely a loan for your situation. In fact, small business loan amounts can range from $1,000 to $5 million.
Rates, loan terms and the amount your business qualifies for depend on the types of business loans you look into — along with other important factors like the age of your business and your revenue.
Types of business loans
| Loan type | Amount | Best for |
|---|---|---|
| Term loan | Small to large | Established businesses with a big upcoming expense |
| Line of credit | Small to large | Companies with consistent expenses of varying amounts |
| Merchant cash advance | Small to medium | Businesses that accept credit card payments and need a quick injection of cash |
| Invoice factoring | Small to large | Companies that can’t access traditional funding or need money quickly |
| Invoice financing | Small to large | Businesses that need fast access to cash and don’t qualify for other types of loans |
| SBA loan | Small to large | Small businesses that aren’t in immediate need of cash and want a competitive interest rate |
| Microloan | Small | Startups and new businesses |
| Equipment financing | Medium to large | Businesses that need to finance big equipment purchases |
| Commercial real estate loan | Medium to large | Businesses that want to open a physical location |
1. Term loan
Term loans are the standard option for both established businesses and startups. They meet individual expenses and are repaid over time — usually five or more years. You can use a term loan for many costs, such as buying new equipment or expanding your business. They may be secured or unsecured.
Most banks and online lenders offer business term loans. The amount you can borrow depends on your industry, the purpose of the loan and your business’s financial status. And because it is such a common loan option, there is likely a term loan with rates and terms to fit your business’s needs.
Pros
- Widely available from banks and online lenders
- Loans to cover various business expenses
Cons
- Most lenders require high revenue and a personal guarantee
- May have higher interest rates for startups and newer businesses
Who this is best for
Term loans are best for businesses with large, one-time expenses to cover.
2. Line of credit
Lines of credit are similar to business credit cards but are meant for larger expenses than you can cover with the typical credit card. A business line of credit will likely have a higher funding limit than a card, which makes it ideal for midsize expenses.
With a line of credit, you will have a set credit limit and a draw period — a period during which you can borrow money. Until the draw period is over, you can borrow, repay and borrow again for as long as you need. You may also be able to renew your line of credit after your draw period ends.
With some lenders, only interest payments are due during the draw period. After, you will be required to pay back what you owe.
Lines of credit are available from banks and online lenders and are a common way to cover expenses. And while they don’t have fixed repayment terms like a term loan, the ability to continually borrow makes them a solid choice for businesses needing to make frequent purchases.
Pros
- Line of credit resets as you repay
- Flexible repayments based on how much you spend
Cons
- Lack business credit card rewards
- Draw period limits time to spend funds
Who this is best for
Businesses that have regular, variable expenses can take advantage of lines of credit. They are more flexible than term loans and may offer better rates than business credit cards.
Bankrate insight
3. Merchant cash advance
A merchant cash advance (MCA) is a short-term funding option offered by online lenders, such as PayPal. The amount you receive is based on your credit card sales rather than your business’s credit score or total revenue. Like invoice factoring and invoice financing, you receive a lump sum to cover issues with cash flow. Then, you repay it with a percentage of daily credit card sales.
A merchant cash advance company charges a factor rate instead of interest, and the fees are significant. MCAs are easy to access, have short terms and are designed for businesses that lack other funding options. But the high fees mean you may take on more debt than your business can handle. Before you borrow, exhaust all other funding options.
Pros
- Quick funding based on credit card sales
- Lump sum covers small gaps in cash flow
Cons
- High fees
- Repayment terms may be less than one year
Who this is best for
Merchant cash advances are expensive, so they should only be used if your business needs quick access to working capital and does a significant amount of its sales through credit cards.
Bankrate insight
The 2022 Small Business Credit Survey found that only 7 percent of small business respondents applied for merchant cash advances.
4. Invoice factoring
With invoice factoring, you use the amount due from your customers as collateral to cover small gaps in cash flow. Specifically, it involves selling your invoices directly to a lender for a lump sum in exchange for between 70 percent and 90 percent of the total invoice amount. Once the invoice is paid, the lender will send you the remaining amount minus fees and sometimes interest.
These short-term options offered by online lenders tend to be pricey.
Pros
- Faster access to cash than many other types of business financing
- Doesn’t impact your credit score
Cons
- Steep fees and factor rates cut into your profits
- If your clients aren’t creditworthy, this may not be an option for you
Who this is best for
If you have bad credit or you’ve had trouble getting another business loan, you might consider this option. However, invoice factoring is best used as a short-term solution if you need money quickly since the fees can be exorbitant.
5. Invoice financing
Similar to invoice factoring, invoice financing uses your accounts receivables — unpaid money owed to you by clients — as collateral for an advance. It’s slightly different, however, because the lender advances you up to 85 percent of the total amount, which you’ll need to repay (plus fees) once the invoice is paid by your client.
The fees you pay are significant, but it may be worth it if your invoices aren’t due for 60 or 90 days and you need money to cover expenses in the meantime.
Pros
- Quick turnaround for unexpected gaps in cash flow
- Fees may depend on amount advanced
Cons
- High fees based on when your client repays
- Advances are typically for 85 percent of invoice or less
Who this is best for
Invoice financing is best for businesses that do not qualify for traditional business loans. Because it is convenient and quick, you will pay a significant fee when you use an invoice financing company.
6. SBA loan
SBA loans — loans backed by the U.S. Small Business Administration — are some of the most sought-after loans. These three programs meet different business needs:
- 7(a) loans. These are good for businesses looking for working capital up to $5 million. Depending on the loan amount and the lender, 7(a) loans may be secured or unsecured.
- 504 loans. Meant for major purchases, 504 loans are secured by property — either commercial real estate or equipment.
- Microloans. Your business can borrow up to $50,000 for costs associated with expansion and growth.
- Community Advantage loans. Provides loans up to $350,000 to underserved businesses that can’t get access to traditional financing.
You can use the SBA Lender Match Tool to compare options and find a lender that will fit your business. The government caps interest rates and fees on SBA loans, so it’s easier for your business to repay the loan while your company continues to grow.
Pros
- Backed by the SBA and run by lenders across the nation
- Competitive rates for each loan program
Cons
- Difficult to qualify for
- Lengthy application process
- Takes longer to receive funds
Who this is best for
SBA loans are among the most popular types of small business loans, but they have an involved application process. Even so, they are a good option for working capital, big expenses or growth opportunities. Most business owners will likely benefit from applying. And since many banks are registered as SBA lenders, there is little difference between an SBA 7(a) loan and a traditional bank loan.
Bankrate insight
In the 2022 Small Business Credit Survey, 34 percent of small businesses applied for business loans, while 23 percent applied for an SBA loan or line of credit.
7. Microloan
Microloans are designed for newer businesses just starting to grow. The average microloan is around $13,000, according to the SBA, although amounts range up to $50,000. They are repaid within a few years and function as working capital.
The SBA runs one popular microloan program, although several nonprofits, alternative and online lenders and some banks also offer microloans. Microloans have fairly low rates — between 8 to 13 percent for an SBA microloan.
Pros
- Designed for working capital and small expenses
- Most backed by the SBA
Cons
- Funding limited to less than $50,000
- Some microloans are geared at startups or founders from underserved communities, so your business may not qualify
Who this is best for
Since microloans are meant to cover small expenses or be used as working capital, they are good for very new businesses that need a boost in funding to get ahead.
Bankrate insight
8. Equipment financing
Equipment financing runs the gamut from funding inexpensive point-of-sale systems to earthmoving equipment. They are widely available and secured by the property you buy — similar to auto loans or commercial mortgages.
The amount you can borrow depends on what you need to finance. Most banks and online lenders are flexible, so you should be able to get financing that covers the full cost of equipment. Equipment loans are typically repaid in fixed monthly installments — though some lenders may offer quarterly or weekly payments.
Interest rates are based on your business’s finances and revenue and your personal credit history. The equipment you buy also plays a role. Since these loans are secured, interest rates tend to be lower.
Pros
- Competitive interest rates
- Repayment terms and loan amounts based on equipment
Cons
- Larger loan amounts mean higher monthly payments
- Equipment may need to be inspected by lender
Who this is best for
Because equipment loans are secured by the property you finance, they tend to have lower rates than their unsecured counterparts. This makes them a good option for big purchases your business needs to operate.
Bankrate insight
- Best equipment loan for startups: Creditfy
- Best equipment loan with low revenue: Funding Circle
- Best equipment low for large amounts: SMB Compass
9. Commercial real estate loan
For businesses that want to invest in a brick-and-mortar location, commercial real estate loans are the solution. Most are available through banks, and your business can use funding to either purchase property outright or lease a space. While it depends on your business’s needs and location, you may be able to borrow up to $5 million.
Commercial real estate loans are similar to mortgages and have repayment terms to match. Expect to repay your loan over 10 to 20 years, and interest rates tend to be low because the real estate acts as the loan’s collateral. You can also explore SBA 504 loans, which are also backed by the U.S. Small Business Administration and come with competitive interest rates.
Pros
- Typically low interest rates
- Long repayment terms for large loans
Cons
- Meant for established businesses with high revenue
- May have a more involved application process and property inspection
Who this is best for
A loan for commercial real estate allows you to purchase or lease property. If your business isn’t at this stage but needs funding, you can explore equipment loans and term loans secured by property.
Unsecured vs. secured types of business loans
As you’re exploring the different types of business loans, you may notice that some are secured while others are unsecured. So, what’s the difference? If a loan is secured, you’ll need to put up collateral — such as equipment, real estate or inventory — to back the loan. If you default, your lender can seize that collateral.
In comparison, unsecured loans don’t require collateral. They’re usually reserved for borrowers with stronger credit scores because lenders believe these types of borrowers will repay their debts, as they have in the past. Lenders can offer both types of loans and sometimes have secured and unsecured versions of the same product.
Bottom line
The best loan option depends entirely on how your business will use its financing. However, some convenient options come at a high cost. Consider traditional options like SBA loans, term loans and equipment loans before turning to short-term funding. If your business already has an account with a bank, see what it offers. An established relationship may give you access to lower rates and more competitive terms.
Frequently asked questions about types of business loans
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The needs of the small business determine which loan option is best. For example, an equipment loan would be ideal if a small business needs to purchase equipment. However, a line of credit could be better if a business plans to use the funds to cover larger, short-term expenses.
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The most popular type of SBA loan is the 7(a) loan. In the 2023 fiscal year, the SBA approved shows approvals of 57,3562 7(a) loans, equaling $27.5 billion in funding. In comparison, 5,924 504 loans were approved, equaling $6.4 billion in funding.
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Microloans are a popular option for starting a business. They offer up to $50,000 to new businesses needing capital to cover startup costs and small expenses. The best business loans for startups can also provide funding for new businesses. Business loans for startups typically have lower time in business and annual revenue requirements, making them more accessible for brand-new businesses.
