There are a variety of loan options that suit different business needs. Here’s an overview of nine types of small business loans.
1. Term loans
Term loans are one of the most common types of small business loans and are a lump sum of cash that you repay over a fixed term. The monthly payments will typically be fixed and include interest on top of the principal balance. You have the flexibility to use a term loan for a variety of needs, such as everyday expenses and equipment.
2. SBA loans
Small Business Administration (SBA) loans are enticing for business owners who want a low-cost government-backed loan. However, SBA loans are notorious for a long application process that can delay when you will receive the funding. It can take up to three months to get approved and receive the loan. If you don’t need money fast and want to benefit from lower interest rates and fees, SBA loans can be a good option.
3. Business lines of credit
Similar to a credit card, business lines of credit provide borrowers with a revolving credit limit that you can generally access through a checking account. You can spend up to the maximum credit limit, repay it, then withdraw more money. These options are great if you’re not sure of the exact amount of money you’ll need since you only incur interest charges on the amount you withdraw. That’s compared to a term loan that requires you to pay interest on the entire loan — whether you use part or all of it. Many business lines of credit are unsecured, which means you don’t need any collateral.
4. Equipment loans
If you need to finance large equipment purchases, but don’t have the capital, an equipment loan is something to consider. These loans are designed to help you pay for expensive machinery, vehicles or equipment that retains value, such as computers or furniture. In most cases, the equipment you purchase will be used as collateral in case you can’t repay the loan.
5. Invoice factoring and invoice financing
Business owners who struggle to receive on-time payments may want to choose invoice factoring or invoice financing (aka accounts receivable financing). Through invoice factoring, you can sell unpaid invoices to a lender and receive a percentage of the invoice value upfront. With invoice financing, you can use unpaid invoices as collateral to get an advance on the amount you’re owed. The main difference between the two is that factoring gives the company buying your invoices control over collecting payments, while financing still requires you to collect payments so you can repay the amount borrowed.
6. Commercial real estate loans
Commercial real estate loans (aka commercial mortgages) can help you finance new or existing property, like an office, warehouse or retail space. These loans act like term loans and may allow you to purchase a new commercial property, expand a location or refinance an existing loan.
Microloans are small loans that can provide you with $50,000 or less in funding. Since the loan amounts are relatively low, these loans can be a good option for new businesses or those that don’t need a lot of cash. Many microloans are offered through nonprofits or the government, like the SBA, though you may need to put up collateral (like business equipment, real estate or personal assets) to qualify for these loans.
8. Merchant cash advances
Like traditional cash advances, merchant cash advances come at a high cost. This type of cash advance requires you to borrow against your future sales. In exchange for a lump sum of cash, you’ll repay it with either a portion of your daily credit card sales or through weekly transfers from your bank account. While you can often quickly obtain a merchant cash advance, the high interest rates make this type of loan a big risk. Unlike invoice financing/factoring, merchant cash advances use credit card sales as collateral, instead of unpaid invoices.
9. Franchise loans
Becoming a franchisee can help you achieve your goal of business ownership quicker and easier than starting from the ground up, though you’ll still need capital. Franchise loans can provide you with the money to pay the upfront fee for opening a franchise, so you can get up and running. While you’re the one taking out the loan through a lender, some franchisors may offer funding to new franchisees.
When you go to submit an application for a small business loan, you’ll need to have both personal and business information handy. Expect to enter some or all of the following information:
- Personal information (like your name and address)
- Tax identification number (which is either your employer identification number (EIN) or social security number (SSN), and sometimes both)
- Business name
- Business address and phone number
- Industry type and company structure
- Years in business
- Number of employees
- Annual business revenue
- Estimated monthly spend
During the application process, you may need to submit documentation, like your business plan, financial statements, bank statements and tax returns. There’s also a good chance that your personal credit score will be pulled, so a lender can gauge your creditworthiness.
You typically need at least a fair/average credit score (580 to 669) to qualify for a small business loan, but it will vary depending on the lenders.
If your personal credit score is good/very good (670 to 799) or excellent (800 to 850), you’ll have even better odds. As with most financial products, the higher your credit score, the better interest rates and fees you’ll receive.
Lenders focus on your personal credit score when setting minimum credit score requirements, however they may also check your business credit score. But lenders don’t state any requirements for business credit scores.
Yes, in most cases you, as the business owner, are personally liable for a business loan. When you take out a business loan, you’ll typically need to put up collateral, which can range from business property and vehicles to personal assets like your own car or home. In the unfortunate event that your business goes bankrupt and you can’t repay your loan, you may also lose personal assets.