Types of Small Business Loans: Compare Options

Small businesses often need to borrow cash to fund everything from advertisement campaigns and new equipment purchases to payroll and utility payments. Different types of loans may be suitable for you depending on your business financing needs.

Small business loans can range from a few thousand dollars and reach into the millions, while funding times can be as soon as the next day or take as long as three months.

Make sure to research the different types of loans such as term loans, Small Business Administration loans, business lines of credit, invoice financing, and microloans as well as their providers in order to find the financing option that’s right for your business.

1. Term Loans

About: With high maximum amounts and online accessibility, term loans have become one of the most widely used methods to finance a business.

Similar to a personal loan, borrowers receive the entire amount of the loan at one time, and repay the amount with interest over a fixed period. Additionally, because term loans are often provided by online lenders, they have the potential to fund faster than through a traditional bank.

Recommended Use: Term loans are best to use for large purchases where it’s ideal for the borrower to spread the payments out across a period of time.

Best For: New machinery for a construction site, Factory or other production line, Real estate expansion, Vehicle purchases

Pros: 

  • Fast funding with an online lender, with funding times of of just a few days instead of a few months with a traditional lender
  • Entire amount is disbursed at once which assists with immediate investments
  • If you need to borrow more than $250,000, you may be eligible for an amount of up to $1 million
  • Can be repaid over a fixed period of time

Cons:

  • Higher rates and fees with online term loan lenders than with traditional banks
  • May have higher interest rates than other forms of loans
  • Some term loans require a personal guarantee or collateral, putting your assets at risk in case you default

Compare small business term loans

Funding Options APR Range/Loan Amount How To Qualify Great Option For
  
APR Range/Loan Amount:
$2,000 - $150,000
9.00% - 40.00%
How To Qualify:
640+ Personal Credit Score
$25,000+ Annual Revenue
1+ Year In Business
Great Option For:
Borrowers With Good Credit
Veteran-Owned Businesses
Startups
  
APR Range:
$50,000 - $400,000
10.00% - 25.00%
How To Qualify:
680+ Personal Credit Score
$500,000+ Annual Revenue
2+ Years In Business
Great Option For:
Borrowers With Good Credit
Short & Medium-Term Financing
  
APR Range:
$5,000 - $200,000
30.00% - 70.00%
How To Qualify:
550+ Personal Credit Score
$200,000+ Annual Revenue
1+ Year In Business
Great Option For:
Quick Cash
Newer Businesses
Bad Personal Credit
  
APR Range:
$5,000 - $500,000
Short Term Loans:
As low as 9% Simple Interest
Long Term Loans:
As Low As 9.99% AIR
How To Qualify:
500+ Personal Credit Score
$100,000+ Annual Revenue
1+ Year In Business
Great Option For:
Quick Cash
Newer Businesses
Short-Term Financing
  
APR Range:
$25,000 - $500,000
7.4% - 36.00%
How To Qualify:
660+ Personal Credit Score
No Minimum Annual Revenue
2+ Years In Business
Great Option For:
Established Businesses, Not Sole Proprietors
Good Personal Credit
  
APR Range:
$5,000 - $2 million
6.00% - 24.00%
How To Qualify:
620+ Personal Credit Score
$120,000+ Annual Revenue
6+ Months In Business
Great Option For:
Equipment Financing
Competitive Interest Rates
  
APR Range:
$5,000 - $300,000
9.80% - 35.70%
How To Qualify:
620+ Personal Credit Score
$50,000 Annual Revenue
1+ Year In Business
Great Option For:
Good Personal Credit
Works With All Entities Including Sole Proprietors

2. Business Lines of Credit

About: Instead of borrowing one lump sum all at once, you can also choose to use a business line of credit. This type of small business loan allows you to use funds as you need them, as long as they’re within your given credit limit. Because you only use what you need, you only pay interest on the money you’ve used.

To take out a business line of credit, you should have excellent credit, a high and verifiable income and an established credit report with no recent derogatory remarks.

Recommended Use: A line of credit can be a good option for managing large and recurring expenses.

Best For: Financing recurring material expenses, Making regular payroll payments, Paying for consistently ongoing operations or projects, Seasonal businesses

Pros:

  • Use funds as you need them as opposed to borrowing one lump sum
  • Only pay interest on what you use
  • Typically unsecured so no collateral necessary

Cons:

  • High eligibility requirements including good credit and source of income
  • Possible additional costs including withdrawal and maintenance fees

Compare business lines of credit

Funding Options APR Range/Loan Amount How To Qualify Great Option For
  
APR Range/Loan Amount:
$2,000 - $100,000
6.50% - 35.00%
How To Qualify:
600+ Personal Credit Score
$25,000+ Annual Revenue
1+ Year In Business
Great Option For:
Good Personal Credit
  
APR Range/Loan Amount:
$5,000 - $100,000
13.99% - 36.00%
How To Qualify:
600+ Personal Credit Score
$100,000+ Annual Revenue
1+ Year In Business
Great Option For:
Quick Cash
Newer Businesses
  
APR Range/Loan Amount:
$5,000 - $250,000
15% - 78%
How To Qualify:
600+ Personal Credit Score
$120,000+ Annual Revenue
6+ Months In Business
Great Option For:
Startups
Larger Credit Lines
  
APR Range/Loan Amount:
$1,000 - $100,000
10.10% to 79.80%
Loan Term:
No Minimum Credit Score
$50,000+ Annual Revenue
3+ Months In Business
Great Option For:
Quick Cash
Poor Credit
  
APR Range/Loan Amount:
$2,000 - $250,000
24.00% - 99.00%
Loan Term:
560+ Personal Credit Score
$50,000 Annual Revenue
1+ Year In Business
Great Option For:
Quick Cash
Poor Credit

3. SBA Loans

About: SBA loans are offered by traditional banks and other lenders but guaranteed by the Small Business Administration. The SBA guarantee makes these loans more difficult to qualify for than other loans or lines of credit. However, the rates and fees may be significantly lower.

Their repayment periods are not based on the amount that you are borrowing and are instead based on intended usage, with typical loan terms set between seven and 25 years.

Recommended Use: These loans can be a good option for borrowers who are willing to wait up to a few months for funding, and businesses who already have large, existing debts to expand or refinance.

Best For: Major equipment purchases, Real estate expansion, Business debt consolidation, Marketing campaign expenditures

Pros: 

  • Possibility of lower rates and fees
  • Some of the highest standard business loans available, with amounts of up to $5 million
  • Long repayment terms

Cons:

  • Difficult to qualify for
  • Repayment terms based on usage over loan amount
  • Extensive and detailed application process
  • Longer time to fund than online loans

SBA Loan Options

Funding Options APR Range/Loan Amount How To Qualify Great Option For
  
APR Range/Loan Amount:
$30,000 - $350,000
6.50% - 8.75%
How To Qualify:
675+ Personal Credit Score
$100,000+ Annual Revenue
3+ Years In Business
Great Option For:
Borrowers With Good Credit
SBA Loans
Low Rates

4. Equipment Loans and Financing

About: Unlike more general loans, an equipment loan is issued specifically for the purpose of purchasing new equipment for your business. These types of loans can be ideal for business owners because the loan term is typically dependent on the life span of the purchased materials. Additionally, the equipment is often the collateral for the loan, so borrowers don’t have to put their personal assets at risk.

Recommended Use: These loans are best for businesses that want to directly own their equipment, or purchase vehicles or large machinery.

Best For: Machinery, Factory and construction equipment, Company vehicles

Pros:

  • Repayment term is based on life of the equipment
  • Equipment is loan collateral, instead of personal assets
  • Allows borrower to own their equipment outright
  • Allows borrower to build equity on equipment
  • Possibility of lower rates with excellent credit

Cons:

  • Possibility of a large down payment, which may not be an option for all borrowers
  • Repayment term may outlast the life of the equipment

Compare equipment loans for small businesses

Funding Options APR Range/Loan Amount How To Qualify Great Option For
  
APR Range/Loan Amount:
$2,000 - $150,000
9.00% - 40.00%
How To Qualify:
640+ Personal Credit Score
$25,000+ Annual Revenue
1+ Year In Business
Great Option For:
Borrowers With Good Credit
Small Equipment Financing/Purchases
  
APR Range:
$10,000 - $350,000
10.00% - 25.00%
How To Qualify:
650+ Personal Credit Score
$150,000+ Annual Revenue
1.5+ Years In Business
Great Option For:
Borrowers With Good Credit
Established Businesses
  
APR Range:
$5,000 - $500,000
16.70% - 99.40%
How To Qualify:
500+ Personal Credit Score
$100,000+ Annual Revenue
1+ Year In Business
Great Option For:
Quick Funding
Borrowers With Bad Credit
  
APR Range:
$25,000 - $500,000
7.40% - 36.00%
How To Qualify:
620+ Personal Credit Score
No Minimum Annual Revenue
2+ Years In Business
Great Option For:
Established Businesses, Not Sole Proprietors
Good Personal Credit
  
APR Range:
$5,000 - $2 million
6.00% - 24.00%
Loan Term:
585+ Personal Credit Score
$75,000+ Annual Revenue
6+ Months In Business
Great Option For:
Equipment Purchases - Quick Funding
  
APR Range:
$30,000 - $350,000
8.53% - 9.83%
Loan Term:
600+ Personal Credit Score
$50,000 Annual Revenue
2+ Years In Business
Great Option For:
Established Businesses
SBA Loans

5. Invoice Factoring

About: Getting your clients to make swift payments can sometimes be challenge. If your business has several unpaid customer invoices and you need immediate funding, an invoice factoring company can send you that cash while you wait.

Using one of these services allows you to sell the invoices to the company, so that after the company pays you, they collect the payment directly from the customer once that invoice is paid.

Recommended Use: Invoice factoring services are best for companies that that have unpaid invoices with immediate financial needs. These can also be a good option for companies who are struggling to qualify for traditional business loans.

Best For: Good source of fast cash for companies with clients with long invoice repayment terms, ranging up to 90 days, Filling in gaps between customer payments

Pros:

  • Easier to qualify for than other options
  • Fast funding time

Cons:

  • Higher average cost than traditional loans
  • Business no longer has a say in how invoices are collected

6. Personal Business Loans

About: If you need a loan of less than $100,000 for your small business, you can use a personal loan instead of a business loan. As qualifying for a small business loan can be more difficult for startups and other new companies, this may be a good option to take for smaller investments.

Recommended Use: Personal small business loans are good for new companies and startups who have owners willing to act as the sole borrower. These work well for down payments or managing an immediate financial need.

Best For: Real estate down payment, Equipment down payment, General business expenses

Pros:

  • Easier to get than a business loan
  • Can be more flexible because they are attached to an individual person
  • Fast funding due to online lenders

Cons:

  • Borrower puts their personal credit at risk
  • Higher costs than other business loans
  • Small loan amounts

7. Merchant Cash Advance

About: Similar to a term loan, a merchant cash advance provides a set amount of money, disbursed at the same time. However, instead of making the payments directly from a bank account, you repay the advance through fixed, regular withdrawals from a bank account or by withholding a portion of your daily debit or credit sales.

Recommended Use: Merchant cash advances are good for businesses that are having trouble getting approved for other forms of financing and have immediate funding needs. Additionally, businesses should have a high volume of credit card sales in order to manage the repayment process.

Best For: Immediate financial needs, Merchandise purchases, Rental payments, Inventory expansion

Pros:

  • Easier to get approved for than traditional loans
  • Quick to fund

Cons:

  • May have higher overall cost than traditional loans
  • Difficult to repay if the business does not have a steady stream of credit or debit transactions

8. Peer To Peer Lending

About: Peer-to-peer lending is done through an online service that matches borrowers with qualifying lenders.

Recommended Use: Peer-to-peer lending is ideal for borrowers who have trouble getting qualified with traditional lenders, but want to pay lower rates than they would with an online lender.

Best For: Real estate down payment, Equipment down payment, General business expenses

Pros:

  • Easier to qualify for than traditional loans
  • Lower rates than online lenders
  • Quick to fund
  • Easy to compare multiple rates with a P2P service

Cons:

  • Higher rates than business loans
  • Shorter repayment periods
  • Lower possible loan amounts

9. Invoice Financing

About: Unlike invoice factoring, you do not have to directly sell your invoices to a company in order to get funding. Instead, the invoices are used as collateral to ensure that you repay the advance on time.

Recommended Use: This type of financing is ideal for businesses with immediate who do not qualify for term loans with lower rates, but who do not want to sell their invoices outright.

Best For: Filling in gaps between customer payments, Fast cash and immediate needs such as payroll

Pros:

  • Quick to fund
  • Business retains more control than with invoice factoring
  • Larger amounts available than with personal and some P2P loans

Cons:

  • Higher cost than traditional business loans
  • Business risks losing invoice control if the advance defaults

Compare invoice financing for small businesses

Funding Options APR Range/Loan Amount How To Qualify Great Option For
  
APR Range/Loan Amount:
$20,000 - $5 million
15.00% to 68.00%
How To Qualify:
530+ Personal Credit Score
$100,000+ Annual Revenue
3+ Months In Business
Great Option For:
Larger Invoices
  
APR Range/Loan Amount:
$1,000 - $100,000
10.10% to 79.80%
Loan Term:
No Minimum Credit Score
No Minimum Annual Revenue
Need To Use Online Accounting Software
Great Option For:
Smaller Invoices
Poor Credit

10. Business Credit Cards

About: Similar to a business line of credit, a business credit card allows you to only take out as much as you need, within the given credit limit. Additionally, you can repay the card in accordance with what you take out, while meeting minimum monthly payments. Businesses often use credit cards to fund cyclical expenses such as utility and rental payments and travel.

Recommended Use: Business credit cards are best for businesses that already have an established history and verifiable revenue.

Best For: Office supplies, Employee travel expenses, Utility payments, Rental payments

Pros:

  • Only use what you need
  • Repayment is according to use
  • Possible purchasing perks

Cons:

  • Must meet minimum monthly payments
  • Higher fees than traditional loans

11. Short-Term Business Loans

About: Short-term business loans are term loans with shorter repayment periods. They must typically be repaid within one year of the initial loan disbursement. However, most are repaid within 90-120 days.

Recommended Use: These types of loans are best for seasonal or retail businesses that have immediate financial needs and want to borrow without making a long-term repayment commitment.

Best For: Inventory expansion, Payroll payments, Filling in the gaps while waiting for an invoice payment

Pros:

  • Businesses can borrow without making long-term repayment commitments
  • Potentially lower rates than some long-term loans
  • Quick to fund

Cons:

  • Smaller loan amounts
  • Borrower is obligated to repay loan within a short period of time

The Benefits of a Small Business Loan

A small business loan can help you fund expenses that you wouldn’t otherwise be able to pay for out of pocket. This can mean hiring new employees, purchasing new equipment or expanding your real estate. They can also help you fill in financial gaps and meet immediate needs while you wait for customer payments or other forms of revenue.

How to Qualify For a Small Business Loan

What is your credit score?
Your personal credit score will have an impact on your small business loan application, especially if you are taking out a personal loan to fund your company’s needs.

How long have you been in business?
A proven track record of on-time repayments of other loans, as well as an extensive business history will help you with your approval rates. However, if you’re just starting out, there may still be plenty of lending options for you; many lenders also take the quality of your business plans into consideration when evaluating your application.

Annual income?
Both your personal annual income and your company’s annual revenue will be taken into account when you apply for a loan. The higher your income and company’s revenue are, the higher your chances of approval are.

Cash flow?
Lenders typically look for a minimum annual sales stream of $50,000 or more.

What financial documents will lenders need for a small business loan application?
Before you apply, you’ll need a few financial documents handy.

Business bank statements
You will need a statement that shows all of your business’ transactions which have occurred over a certain period of time, usually for a period of three months.

Balance sheet
You should also have a statement including all of the assets and liabilities attached to your business.

P & L
Many lenders may also ask for a comprehensive P & L, or profit and loss statement detailing the revenue, cost and expenses incurred during a given period of time.

How to Apply For a Business Loan?
Before applying for a business loan, you should have your personal credit report, as well as documents pertaining to your company’s finances available. Additionally, some lenders may ask you for a comprehensive business plan with your application. You should also already know roughly how much you want to borrow, and for what purpose. While online lenders may have simple web applications to fill out, more traditional loans may require applying in-person or over the telephone.

Learn more about how to qualify for a small business loan.