8 Types Of Small Business Loans & How They Work

Loans give you the money you need to invest in your business and help it succeed. But they’re not always easy to understand. With so many different types of small business loans and lender options, how do you decide what’s best for you?

We’ve got you covered. Below, you’ll find the best types of business loans for any financial situation or business need. So you can figure out what ones you qualify for and start the process of securing funding today. We’ll even provide you with financing options to try.

Easy, right?

What Are the Different Types of Small Business Loans?

Before we get started, it’s important to understand just how comprehensive small business loans are. You can use the funds for anything from equipment to payroll, inventory to marketing, and more.

The best small business loans for your business depend on your needs, situation, and timing. So keep that context in mind while you browse the options.

1. Term Loan

Term loans are the most common form of business financing. You receive a set amount of money upfront from a lender that you then pay back, with interest, over a predetermined period.

Here’s some basic information about term loans:

• Typical loan amount: $25,000 - $600,000

• Typical loan term: 1-5 years

• Typical loan rate: 7-30%

Both online lenders and banks (local, regional, and online lenders) can provide term loans, which means there is no shortage of lenders. Because of this, it can feel overwhelming to start the process.

To make it easier, consider using an online loan solutions marketplace, like Lendio. There, you can easily compare your options based on your qualifications and funding needs.

Or, if you’re in need of cash quickly, use an online lender such as Biz2Credit who can offer you loans in as fast as 24 hours.

Term loans are best for businesses that...

• Need more significant amounts of cash.

• Want faster application processes.

• Are looking for fewer requirements than traditional bank loans.

• Have a strong credit and business history.

2. SBA Guaranteed Loan

In addition to term loans, there are also government small business loans that are guaranteed by the Small Business Administration (SBA). These loan types typically offer the best terms and conditions out of the various loan types.

However, they’re also highly competitive, require an excellent credit score and business history, and come with different requirements and purposes. So make sure you review them carefully to understand your options— the 7(a) loan program is a good place to start.

Here’s some basic information about SBA guaranteed loans:

• Typical loan amount: up to $5 million

• Typical loan term: 5-25 years

• Typical loan rate: dependent on the prime rate

Similarly to term loans, local banks, regional banks, and national banks are all lenders for SBA guaranteed loans. To compare your options, try the SBA Lender Match tool.

SBA Guaranteed loans are best for businesses that are…

• Well-established with a strong credit and business history.

• Flexible to wait longer periods of time for your cash flow.

3. Business Lines of Credit

A line of credit is a specific amount of money that you can borrow when you need it that you then pay back over a predetermined time frame. Unlike traditional term loans, these are flexible funds that allow you to borrow as much or as little money as you need depending on your credit limit.

The biggest difference between a term loan and a business line of credit is that you only pay interest on the amount you borrow, and you have the flexibility to draw the money when necessary. With term loans, you receive a lump sum upfront that you pay back once.

Here’s some basic information about business lines of credit:

• Typical loan amount: up to $250,000

• Typical loan term: 6 months – 2 years

• Typical loan rate: 7 – 25%

Because there are so many lenders, try using an option like Fundbox that offers you fast, easy and credible access to credit lines.

Business lines of credit are best for businesses that…

• Want flexible financing to cover immediate cash flow needs.

• Are smaller or new and don’t meet the necessary collateral or business history to qualify for a term loan.

4. Equipment Loans

Equipment loans are specific to helping purchase, upgrade or replace equipment. You can use funds for electronics, medical devices, industrial equipment, phones, cars, trucks, and other physical equipment required to help run and operate your business.

Here’s some basic information about business lines of credit:

• Typical loan amount: up to $5.5 million

• Typical loan term: 5-6 years

• Typical loan rate: 4 – 40%

Your credit score, business history, and value of the equipment will determine your rates. Like the other loans on this list, there are a variety of lenders out there, from small credit unions to big banks and more.

Start by talking to your own bank to see what’s available and try using an online lending marketplace to help you compare your options.

Equipment loans are best for businesses looking for physical equipment financing.

5. Invoice Factoring

Invoice factoring is a type of business loan that turns your unpaid customer invoices into cash by selling your invoices to a factoring company. The factoring company then collects payment directly from your customers. With this option, you’re likely to receive 60-95% of the invoice value due to fees.

Here’s some basic information about invoice factoring:

• Typical loan amount: up to 100% of the invoice value

• Typical loan term: 30-90 days

• Typical loan rate: 3-5% + 1% per week until invoice is paid

There are a variety of solutions that offer invoice factoring, but they’re not all created equal.

For the best terms and benefits to your business, try a company like Fundbox that allows you to continue to work with your customers directly rather than transferring the communication to the factoring company. They also pay you the full invoice amount upfront rather than a partial payment.

Invoice factoring is best for businesses with a cash flow gap caused by slow-paying customers or those who want to provide customers a longer payment time.

6. Invoice Financing

Financing your invoices is regularly confused with factoring your invoices. Here’s the difference: Invoice financing allows you to borrow money against your uncollected invoice payments. Instead of leaving invoices unpaid due to slow-paying customers or other variables, you can use an invoice financing service to pay for outstanding invoices in advance.

You’re not selling your unpaid invoices to a third-party factoring company. Instead, you remain in control of all your invoice payments and borrow to pay off the invoices you choose.

Here’s some basic information about invoice financing:

• Typical loan amount: up to 100% of the invoice value

• Typical loan term: 1-12 weeks

• Typical loan rate: .5% of invoice value

There are plenty of companies who offer invoice financing, so do a thorough search to get the best options for your business. Lendio and Fundbox are good places to start.

Invoice financing is best for businesses that

• Need to maintain steady upfront cash flow with irregular invoice payments due to slow or irregular customer payments.

• Don’t want to turn their invoice payments over to a third-party factoring company and pay the management fees associated with factoring.

7. Microloans

Microloans are exactly that—small loan amounts of typically $50,000 or less.

Here’s some basic information about them:

• Typical loan amount: Up to $50,000

• Typical loan term: 1-6 years

• Typical loan rate: 7%

Most microloans come from nonprofit lenders or lenders that provide business lines of credit, such as Accion Opportunity Fund. These types of lenders provide financing to entrepreneurs and businesses in their early stages. Anyone can apply for these loan types, but they are mainly suited for female and minority-owned businesses.

There is also an SBA microloan program.

Microloans are best for new businesses or established businesses that are looking for a smaller amount of cash flow.

8. Personal Loans

A personal loan can be used for business purposes for new companies with no established business history or established credit. They’re typically for small amounts of $35,000 or less.

Because these loans are connected to you personally, your personal credit score determines eligibility for this loan type. So it’s best to be careful about how much you borrow and how many loans you take out.

Here’s some basic information about personal loans:

• Typical loan amount: Up to $35,000

• Typical loan term: 3-5 years

• Typical loan rate: 6% - 35% APR

Both banks and online lenders offer personal loans, so start with a bank you have a relationship with to explore your options.

Personal loans are best for new businesses or those who might not be able to secure funding otherwise.

What types of small business loans are best for you?

Now that you have a sense of what kind of loans are available for small business owners, you can choose the one that fits your needs. If you have an accountant, chat through the options with them and start the process. Your best business is just a few clicks away.