Business Banking

11 types of business loans & how to choose

Business owners have plenty of choice these days when it comes to financing options. Here's the top 11 types of loans to consider based on your business needs.

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When it comes to types of business loans, entrepreneurs are often spoiled for choice. Your options as a borrower range from bank term loans to SBA loans, lines of credit, and everything in between.

The large variety of business loan options is a good thing because it means that there’s a credit facility for every financial need that your company faces. If, for example, you’re looking for a revolver loan, then you can go with a business credit card, a business line of credit or both.

On the other hand, if you want a large amount to finance an expansion project, it makes more sense to consider business term loans and SBA loans – specifically SBA 7 (a) and SBA 504 loans. The bottom line is, the right type of business loan depends on why and when you need the money.

Certain credit facilities, like short-term loans, take a short time to process, which makes them great for business emergencies. Others, like SBA loans, take up to 90 days and are not ideal if you’re dealing with an immediate cash flow crisis. Whatever the case, here are 11 different types of business loans and how they can help your business in various scenarios.

1. Business line of credit

Best for: managing cash flow, meeting short-term business needs and paying for unexpected business expenses.

A business line of credit is a revolving loan. Rather than receiving a lump sum of money, your business gets access to funds that you can draw upon as frequently as needed. You don’t have to use it, but it’s always there whenever you’re strapped for cash. Any amount you pay back goes into the account and you can borrow it again.

Learn in detail how a business line of credit works.

As a credit facility, a business line of credit is very flexible. You can use the proceeds for anything, from working capital, to boosting cash flow, purchasing inventory and anything in between. However, the lender will put a limit to how much you can draw from your credit line. High-limit business lines of credit offer a credit limit up to $250,000. You, however, only pay interest on the amount you have used, not the total amount available to you.

Pros of business line of credit

  • Boosts cash flow during a slow business season
  • Great for building business credit
  • You only pay for what you use
  • More flexible financing option than term loans

Cons of business line of credit

  • Requires a high credit score and revenue to qualify for
  • Can be quite costly owing to draw fees and maintenance fees

2. SBA loan

Best for: expanding your business or refinancing current loans. Since they can take up to 90 days to process, SBA loans are ideal if you don’t mind waiting a long time for funding.

The Small Business Administration (SBA) guarantees several types of business loans for companies with less than 500 employees and under $7.5 million in annual revenue. The agency doesn’t actually generate the loans. Instead, it backs them, allowing private lenders to originate SBA loans with minimal risk.

Because of that guarantee, SBA loan lenders often offer low interest rates that range from 1% to 11.25% depending on the loan amount, term of the loan, your business revenue, credit score and other factors.

Build business credit to qualify for better loan terms. Click here for a guide on how to do it.

SBA loan amounts start from $50,000 all through $5 million. The typically long terms (range from 10 to 25 years) mean that your monthly payments will be lower compared to other types of loans for business. This makes SBA loans friendly to your business cash flow.

That said, SBA-backed loans are extremely competitive and hard to qualify for. Financing takes time, too. Even if you qualify and get approved, you might not see funding for up to three months. On the upside, they have large amounts – particularly SBA 7(a) and SBA 504. You can use the proceeds for startup costs, expansion, equipment purchases, real estate, as working capital, and pretty much anything else. 

Pros of SBA loans

  • Have some of the lowest interest rates on the market
  • Carry small as well as large amounts of up to $5 million
  • Long repayment terms of up to 25 years
  • Some loans, including those issued under the Payment Protection Program, are up to 100% forgivable 

Cons of SBA loans

  • Long application process
  • Hard to qualify for 

3. Short-term loan

Best for: covering immediate business expenses like temporary cash flow gaps and emergencies.

Short-term business loans are ideal for resolving pressing financial issues. Whether you need to hire new staff, meet emergency expenses like a COVID-19 slump, repair a business equipment or what have you, a short-term loan can be a handy source of funds.

Qualification requirements are typically lenient and you may qualify even with bad credit. However, your business finances need to be in good shape and you should have been in business for at least one year. Some lenders will also require you to offer a personal guarantee and/or collateral. In that case, you would use your personal property, car, home etc. to secure the loan.

Of all the types of business loans, short-term loans are often approved the fastest, especially if you apply from an online lender. Once your application is approved, you may have the money in your business bank account in 24 hours or less.

Loan amounts are smaller and typically max out at $500,000. Repayment periods of short-term loans vary from lender to lender and depending on the amount, but expect anywhere between one and two years. Interest rates start from 8% and are usually fixed. 

Pros of short-term business loans

  • Loans are processed quickly
  • Simple and streamlined application process
  • Easier to qualify for compared to term loans
  • Can solve cash flow emergencies

Cons of short-term business loans

  • Require frequent payments, typically daily or weekly payments
  • Higher interest rates than other types of small business loans

4. Business term loan

Best for: acquiring working capital and expanding business operations by purchasing equipment, hiring staff etc.

When most entrepreneurs think of business loan options, they immediately think of a term loan. It has been a fan-favorite for decades because it’s a reliable credit facility. With lump sum amounts that range from $5,000 all through $2 million, business term loans can be lifesavers when you need cash up front. You’ll often get the cash in your business account within a few days.

Don’t have a business bank account? Here’s how to get one in a few simple steps.

Depending on the amount, the repayment period of a business term loan can be somewhere between 1 and 10 years. Interest rates – which are typically fixed – can dip as low as 6%. That, coupled with the long repayment term, makes term loans some of the most affordable types of business loans.

On the downside, traditional bank term loans are hard to qualify for because of stringent lending requirements. While requirements vary from lender to lender, the general rule is a credit score of 650 or above, at least one year in business, and annual revenue of at least $100,000.

Pros of business term loans

  • Provide funding for needed assets and equipment
  • Longer repayment terms translate to low monthly payments
  • Come with lower interest rates compared to other small business funding options
  • You get financing without losing equity
  • Typically offer high amounts

Cons of business term loans

  • Stringent requirements make term loans harder to qualify for
  • Often require collateral 

5. Merchant cash advance

Best for: short-term financing for a business that collects payments through credit cards, cash and checks instead of invoices.

A merchant cash advance (MCA) is ideal for your company if it can’t qualify for traditional business loan programs for one reason or another. Under this type of financing, your business receives upfront funding from a merchant cash advance lender and then you have to pay it back with a percentage of your daily sales.

Merchant cash advance is a pretty flexible type of business loan because you can use the proceeds for many different purposes. That includes financing cash flow gaps, seasonal costs, equipment repairs, business expansion and so on. MCAs are similar to short-term loans in the sense that they are often processed and approved quickly – usually within 24 hours.

MCA amounts range from $5,000 to $200,000. Since the lender gets a claim on your sales, the risk of loss (to the lender) is pretty minimal. This is why qualifying for a merchant cash advance is simple and doesn’t require lots of paperwork. On the flipside, MCAs carry a high interest rate of 18% and above.

Pros of merchant cash advance

  • Funding is fast
  • You can still qualify even with bad credit
  • Monthly payments are not fixed
  • Doesn’t require any collateral

Cons of merchant cash advance

  • Comes with high interest rates
  • Daily deductions for payments can cause a negative impact on cash flow 

6. Business credit card

Best for: making business purchases – including inventory, utilities, stationary etc. – on credit

Just like business lines of credit, business credit cards are a revolving loan. They work pretty much like personal credit cards, except you can only use a business credit card for business purchases.

While business credit card limits vary based on your company’s creditworthiness, you can get high-limit cards of up to $500,000. But they do come with high interest rates – typically between 8% and 24%. Some card companies entice small business owners with a 0% introductory rate, which can be great if you’re keen on saving costs of interest.

Another advantage of business credit cards is that they have minimal paperwork compared to other types of business loans. The requirements are generally relaxed as well. For example, you can qualify for a business credit card even if your company is a startup and hasn’t had enough time to make sales or build strong credit.

The icing on the cake? Most business credit cards earn rewards that you can redeem. Plus, it’s a helpful tool for building business credit. Qualifying for a business credit card is not hard, provided you have a good credit score of 680 or above.

Pros of business credit card

  • Provides easy access to ongoing financing
  • Easy to qualify for
  • Offers redeemable rewards
  • Helps build business credit

Cons of business credit card

  • Requires a personal guarantee
  • Can be costly because of high interest rates, annual fees and late payment fees 

7. Equipment financing

Best for: purchasing, upgrading and repairing equipment that is essential to running your business.

Equipment financing or equipment loan provides your business with repayable cash for purchasing machinery, equipment and other tools that you need to run the business. You can even use this type of loan to purchase accounting software or POS programs. Provided the item can equip your business for its needs, you can purchase it with an equipment loan.

The term of an equipment loan usually matches the expected life of the equipment. Additionally, the equipment you’re purchasing acts as collateral for the loan. Thus, this type of financing is known as self-secured. It’s one of the least risky business loan options for lenders. As such, they offer appealing terms, including interest rates that are as low as 7.5%.

Qualifying is not hard either. You can get approved for equipment financing if you have a credit score of 650 or above, annual revenue of at least $50,000 and up to one year in business. Depending on the amount, an equipment financing loan can take as short as 24 hours to complete. Generally, these loans max out at $5,000,000. The lower the amount, the faster it is to access.

Pros of equipment financing

  • You own the equipment outright
  • Spreads the cost of purchasing or upgrading business equipment
  • Self-secured, which means you won’t need to put up additional collateral
  • Boosts business productivity

Cons of equipment financing

  • Higher interest rates than term loans
  • Equipment can be outdated quicker than the length of the loan

8. Commercial mortgage

Best for: buying real estate like land or property for the business.

A commercial mortgage or commercial real estate (CRE) loan lets you borrow money that you need to purchase a property or land for your business. It may be retail space, a restaurant, new business location, office space, warehouse or any other type of property.

A commercial mortgage is especially helpful when you want to own property rather than lease/rent it. You can even use the proceeds of this loan to pay for construction costs when building a new business property or expanding an existing one. And if you already have a mortgage on your current business property, you can use a commercial real estate loan to refinance that mortgage and take advantage of lower interest rates.

Since it is a type of asset financing, commercial mortgage amounts and rates vary depending on the value of the property and your creditworthiness. However, amounts generally range from $250,000 all through $5 million. If you have a good or excellent credit score, you can get extremely low interest rates that dip below 4.5%. Repayment periods of commercial mortgages depend on the amount borrowed, but they can be in excess of 20 years. 

Pros of commercial mortgage

  • It’s self-secured, which means you won’t need additional collateral
  • Increases capital gains
  • You own the property outright, which can be better than renting and leasing
  • Lower interest rates and long repayment schedules make it affordable

Cons of commercial mortgage

  • Most require a substantial deposit
  • Fluctuating real estate prices can lower the value of the property

9. Accounts receivable financing

Best for: any small business that frequently deals with unpaid invoices

Only 63% of small business invoices are paid on time. While it may not be a big deal to large companies, delaying invoice payments can be a business killer to a small firm. Rather than sitting and waiting for held up funds, you can use those unpaid invoices to get accounts receivable financing.

Also known as invoice factoring, accounts receivable financing is a loan that your business gets against unpaid invoices. You basically sell those receivables to the lender, who in turn gives you up to 80% financing. That lender will then track down your debtors and collect the money owed to you.

The biggest advantage of accounts receivable financing is that you can get the money in as little as three days. And because it’s a self-secured type of loan, you can qualify without putting down any collateral, even if your credit is poor. The lender will be more interested in the credit of your debtors, not yours.

Want your customers to pay on time? The trick lies in creating an effective invoice. Here’s a guide for making small business invoices.

Pros of accounts receivable financing

  • Provides fast cash for your business
  • Easier to qualify for than most other types of business loans
  • Doesn’t need collateral
  • Frees you of the burden of tracking down invoices 

Cons of accounts receivable financing

  • Costly because you lose some value of your accounts receivable
  • You lose control over invoice collection

10. Startup loan

Best for: setting up a new business. This involves purchasing/leasing space, hiring employees, purchasing equipment and stocking inventory

All the aforementioned types of small business loans require you to have some business history. Whether it’s one or two years in business, minimum annual revenue, or business/personal credit, lenders will certainly set eligibility requirements. What if you’re just getting your business up and running and haven’t had enough tenure to generate any revenue or build credit? That’s where a startup loan comes in handy.

Designed to assist with the financial needs of a new company, startup loans provide amounts that range between $500 and $750,000. You’ll often get the funds in your account a few weeks after being approved for the loan. Oftentimes the lender won’t have restrictions on how you can spend the money. Thus, you can use it to lease office space, purchase inventory, acquire equipment, hire staff and meet the daily operation needs of the new company.

Interest rates for startup loans vary widely, but you can expect anything from 0% to 17%. The loan term depends on the amount and can be as long as 25 years. While the lender won’t base the underwriting process on your business history, they’ll almost certainly check your personal credit. A credit score requirement of 680 is standard, alongside a personal guarantee and/or personal collateral. The lender may also require a solid business plan that illustrates your understanding of the business and market.

Pros of startup loan

  • Provides money for setting up a new business
  • Doesn’t require you to give up equity as is the case with investor financing
  • Can help you build business credit from the get go
  • Easy to qualify for if you have good personal credit

Cons of startup loan

  • Might impact your personal credit
  • Can easily limit the creativity that comes with bootstrapping

11. Business acquisition loan

Best for: buying another business that presents a great opportunity for growth

Most types of business loans are flexible; i.e., you can use them for multiple purposes. That’s not the case with business acquisition loans. These are meant for only one purpose – buying an existing company or franchise.

As a business owner, you may acquire another company for various reasons. Perhaps you want to expand your product line or locations, gain a bigger market share, reach new niches, or increase your economies of scale. Whatever the case, you won’t always have acquisition money sitting around. So, when the opportunity to acquire the company presents itself, you may have to turn to a business acquisition loan.

Amounts range between $5,000 and $5 million while the term can run up to 25 years. That long repayment period, coupled with affordable interest rates that can go as low as 5.5%, makes acquisition loans fairly inexpensive. On the downside, they are not the fastest to access. It may take up to a month for the funds to reach your account.

Pros of business acquisition loan

  • Provide large amounts that can cover the entire acquisition
  • Some lenders don’t ask for collateral
  • Some acquisition loans are revolving, giving you access to funds over a long draw period
  • Low interest rates make them affordable 

Cons of business acquisition loan

  • Prolonged processing time
  • Hard to qualify for if you have bad credit

How to get approved for a business loan

Lenders and the various types of business loans have unique eligibility requirements. That said, the likelihood of getting approved for a business loan depends on your company’s revenue, its creditworthiness and your credit history. Below are the essential factors that a lender will evaluate when deciding whether or not you qualify for a business loan:

  1. Personal credit: lenders will always check your personal credit score and credit history before accepting you for a loan program. This is especially the case if you own a sole proprietorship, partnership or single-member LLC. Your credit score is a reliable gauge of your ability to properly manage personal debts, which in turn reflects on how well you can manage business debts. To easily get approved, you will want to build your personal FICO score to any value above 720. 
  2. Personal debt coverage: is your net personal income enough to pay all your debts? If so, then you’re less of a risk to the lender and they are likely to approve your business loan application. Otherwise, if your debts are more than your net income, then you’re more likely to default on loan payments. Look to lower your debt-to-income ratio before applying for a business loan.
  3. Personal debt utilization: having a personal debt won’t lock you out of a business loan. However, if you’re utilizing all (or almost all) the debt that’s available to you, then the lender is likely to decline your loan application. If, for example, you have a personal credit card limit of $10,000 and you’re using up to $9,000, then it means that your debt utilization ratio is 90%. You’ll want to push it downwards to 30% or lower before applying for a business loan.
  4. Business debt coverage: again, there’s no problem with your business having existing debt provided it makes enough net income to meet its debt obligations. If business obligations are almost equal to or exceed income, then lenders might not want to work with you. Consider paying off some of the debts first or growing revenue so that you have a positive cash flow.
  5. Business debt utilization: is your business using all or nearly all the debt allocated to it? If yes, then it has a high debt utilization, and this is likely to repel lenders. The rule of thumb is to ensure that your personal and business debt utilization ratios are under 30%.
  6. Business revenue: the amount of money that your business makes determines whether it has a healthy cash flow to pay off debts. If your revenue is growing relative to expenses, lenders are more likely to approve your loan applications. It means that your net income is growing and you can make enough money to pay back loans. In fact, most lenders will set a minimum annual revenue requirement for certain types of small business loans. While there’s no standardized figure, $100,000 is a decent ballpark to work with.

Did you know?

Lenders are more likely than not to approve your loan application if your business has a dedicated checking account. Improve your creditworthiness today by opening a Nearside business checking account in under 10 minutes.

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