9 Types of Business Loans: Find Your Best Option

Nearly every small business will require extra capital at some point—whether to boost existing cash flow, bring on new employees, or grow the business to the next level. There are numerous small business loan options to choose from, each with its own unique qualification requirements, interest rates, and terms.

Below, we’ll dive into the details explaining the different types of business loans as well as some of the top lenders. But first, you can find a summarized version in the following table.

1. Term Loans

With a business term loan, you borrow a set amount of money upfront and pay it back, with interest, on a specific repayment schedule. A variety of lenders offer term loans, including banks and online/alternative lenders.

If you have strong credit and can afford to wait for financing, we recommend applying for a bank loan, which is likely to have the most desirable rates, terms, and amounts. If your credit isn’t strong, however, you may try applying with a short-term lender.

Reasons why you might use a term loan include:

• Buying real estate
• Acquiring another business
• Investing in remodeling or renovating commercial space
• Planning long-term business expansion

Top options for business term loans:

*Rates based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received.

2. Business Lines of Credit

One of the other most well-known types of business loans is a business line of credit (BLOC). With a BLOC, the lender gives you access to a specific amount of money that you can draw from at any time as needed. The credit line resets after you pay your balance in full (similar to a credit card).

Lines of credit are available from different types of lenders. Banks typically offer the best interest rates, while online lenders tend to offer short-term lines of credit for younger businesses and business owners with lower credit scores. (If you fall into this category, you may want to explore our guide to startup loans with no credit check.)

Business lines of credit can create a cushion in case of a cash flow emergency, and come in handy when you need money quickly. BLOC are offered in two types: secured and unsecured. For secured lines, you have to put down some assets as collateral. (If you’re interested only in loans that don’t require collateral, check out our list of the best business loans with no collateral).

Small businesses can benefit from BLOC for any of the following:

• Paying for recurring operating expenses
• Tiding over cash flow while waiting for customer payments
• Covering seasonal cash flow droughts
• Paying for unexpected situations or emergencies

Top options for business lines of credit:

*Rates based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received.

3. SBA Loans

The U.S. Small Business Administration (SBA) doesn’t itself provide business loans; instead, it partially guarantees loans that banks and other lenders extend to small businesses. By partially guaranteeing the loan, the SBA eliminates some risk and encourages lenders to make loans to small business owners.

SBA loans are a great product for small businesses, and outside of a traditional bank loan, they are some of the best sources of capital. New and established businesses can apply for SBA loans, but there are different SBA loan programs for different business needs.

The standard SBA 7(a) loan is a good option for business owners who need working capital or want to expand or acquire a business. An SBA 504 loan is ideal for business owners who want to finance the purchase of equipment or real estate or make upgrades to existing property.

It’s also important to note that even though SBA loans are designed to help small business owners who can’t qualify for traditional bank loans, they still require that you meet high qualifications, including strong business financials, solid credit history, and a few years in business.

4. Equipment Financing

A type of asset-based business loan, an equipment loan is a potential fit if you’re looking for money to acquire equipment or machinery (or even technology). Instead of paying for expensive equipment outright, you can take an equipment loan to fund the purchase.

Equipment financing is available to established and new businesses. Even business owners with lower credit scores are typically able to qualify for equipment financing because the equipment itself secures the loan. This means you don’t need to put up any additional physical collateral.

Equipment loans can be fairly low-interest business loans. You can use equipment financing to purchase a range of equipment types, which can include computers, appliances, and vehicles that you use in the course of business.

Top options for equipment financing:

5. Invoice Financing

Another type of self-collateralizing loan for businesses is invoice financing, also called accounts receivable financing. With this type of loan, you use your outstanding invoices to get a cash advance from a lender. The unpaid invoices act as collateral for the advance.

With invoice financing, a lender advances you a percentage of your total invoice amount, possibly up to 90%. You can use the advance to cover business expenses while you wait for your customers to pay their outstanding invoices. During that time, the lender will typically charge a weekly fee. Once your customer pays the invoice, you pay back the loan plus fees.

Overall, invoice financing is a great option if you have cash flow problems as a result of billing several customers, all of whom pay at different times. You can use the advance to cover payroll, rent, and other operating expenses.

Top invoice financing option:

6. Commercial Real Estate Loans

If your business wants to acquire commercial property—such as a retail shop, office building, or manufacturing facility—you’ll likely want to opt for a commercial real estate loan. 

Commercial real estate loans can take on different structures depending on the lender you work with and the amount of financing you need. Banks typically provide commercial real estate loans with longer repayment terms and lower interest rates.

Ultimately, the size of your commercial real estate loan will depend on a factor called loan-to-value (LTV). LTV is a comparison of the size of the loan versus the value of your commercial property. A typical LTV for commercial real estate loans is 75% or 80%. For example, if your building is valued at $100,000, you might get a maximum amount of $80,000 and have to provide the rest as a business loan down payment from your own funds.

7. Microloans

In some cases, your small business may need just a small injection of cash to reach that next goal. Microloans are a type of small business loan typically amounting to $50,000 or less. These loans can be used for working capital, expansion, or startup costs, and the qualification requirements generally aren’t too stringent.

Many microloans come from nonprofit lenders that provide capital to early-stage businesses because they want to help underserved entrepreneur communities and aid the local economy where the business is located. Although any business owner can apply for these loans, they are especially well-suited for veteran, female, and minority business owners.

Additionally, there is an SBA microloan program that’s meant for businesses looking for loans up to $50,000. The SBA partners with community-based nonprofit lenders to make these loans.

Top microloan option:

8. Personal Loans for Business Use

One popular option for funding is using a personal loan for business purposes. Both banks and online lenders offer personal loans. These loans are largely based on your personal credit score and business revenue. Ideally, your credit score should be above 650 to qualify for the best interest rates.

Although these loans are called personal loans, you can use them for business purposes. One thing to note, however, is that these loans are for smaller amounts of capital (typically up to $50,000). If you need a large amount of money, this can help you get there, but you’ll need to combine this loan with other sources of startup funding.

In addition to personal loans, there are other ways to tap into personal finances for business purposes. For instance, if you’re a homeowner, you might be able to use a home equity loan for business purposes.

9. Merchant Cash Advances

With a merchant cash advance, a lender grants you an advance of capital in exchange for a portion of your daily credit and debit card sales. 

The benefit of this type of small business loan is that repayment can flex with your cash flow: when business is slow, you pay back less, and when business is booming, you pay back more. Alternatively, you can opt for fixed payments, regardless of your sales earnings. The downside, however, is that a merchant cash advance is the most expensive type of business financing on the market. APRs on a merchant cash advance can approach 100% or even higher.

Therefore, if you’re considering a merchant cash advance, you should be certain that your cash flow can handle it and that there aren’t any other types of business loans you might qualify for. In other words, this type of loan should be your last resort.

Top merchant cash advance options:

Now that you understand the many types of business loans available to you, learn how to apply for your first small business loan.