Search

Understanding Different Business Loan Types

Understanding the benefits of different types of business loans is key to creating a sustainable business and efficient operation. We’ll drill down into 14 types of business loans and try to make your decision easier.

Financially Reviewed by Somer G. Anderson

Selecting the right type of loan for your small business requires careful consideration. You may find yourself overwhelmed with the sheer volume of qualifying requirements, including loan-to-value ratio assessments, your credit score, and time in business. A loan-to-value ratio is an assessment related to the risk of lending that lenders look at before approving a loan. Selecting an inappropriate business loan type may mean poor value or undesirable interest terms 

As an illustration of the above, a startup business loan requires several years of financial history, the owner’s stake in the business, and credit history. Whereas applying for a business acquisition loan presents fewer time-constraining aspects, i.e. an existing cash flow and a credit history. As we move through defining these various options of business finance support, you’ll develop a broad understanding of the best option for you.

A Quick Overview of The Different Business Loan Types

As you consider the types of business financing for your business, you’ll find that there are several factors to consider. Regardless if you need startup funding or commercial real estate funding, we’ll help you understand the different borrowing options and their requirements. 

Loan Type

Recommended Use

Typical Amounts

Terms and Rates

Business Acquisition Loan

Tailored for purchasing businesses

$5,000 - $5 million

Facilities can be revolving or 10 to 25 years; Interest rates vary

Business Lines of Credit

May be used for office supplies, salaries, or other business expenses

$10,000 - $100,000 and above

Linked percentage; unsecured and secured loans offered

Commercial Real Estate Loans

Ideal for purchasing company assets and upgrading profit-generating buildings

$100,000 - $500 million

Between 75 - 85% LTV; term is 20 to 30 years, interest rates vary

Equipment Financing

Suited to businesses that require equipment but wish to spread out the payments over a period of time.

$3,000 - $5 million

Between 8% and 30% interest; up to 7 years repayment term

Franchise Financing

Ideal for expanding business or raising capital

Dependant on franchise

LTV ranges of 70% to 85%

Merchant Cash Advance

Raising capital for cash flow

$5,000 - $200,000

Interest rates from 18%; 4 to 6 months receivables; 1.2 to 1.5 factor rate

Microloans

Utilized for smaller business payments

Typically up to $50,000

Usually 6 years fixed term; 9% to 16% 

SBA Loans

Accessible to all businesses and individuals who need finance options

$500 -  $5.5 million

Repayment terms vary interest rates 8% to 13%; 2 years financials, debt schedule, and a business license.

Secured Business Loans

Specific to businesses with assets that can be collateralized.

Values vary depending on the venture.

Interest rates are generally lower than unsecured loans.

Unsecured Business Loans

No collateral is required but may require a personal guarantee.

Values vary depending on the requirement

High-interest rates; Short repayment term

Startup Business Loans

Designed for new businesses

$500 - $750,000

0% to 17% interest; up to 25-year term

Short-Term Loans

Ideal for starting a small business or funding needs

$5,000 - $2 million

1 to 5 years; Interest starts at 6%

Businesses that require fast access to funds

$ values are determined by the applicant

90+ day invoices excluded; 10% to 25% interest rate; additional fees apply

The 13 Most Popular Types of Small Business Loans

The table above highlights specific points of the loans we’ll cover but is by no means a complete representation. As a business owner, you know the value of cash flow and the bargaining power that comes with it. These loan options provide different mechanisms to access and repay borrowed funds. We shall elaborate on their particular benefits, limitations, and challenges below. 

1. Business Acquisition Loan

Acquisition of an existing business is a considerable task to undertake as an individual and a multinational organization. This is due to the length in the process when initially applying for the loan, and finally, the performance of the loan. The requirements for application may seem daunting and range from your strategy for the business, the valuation of the business, and also negotiating the agreement. Business acquisition loan requirements and the available amounts vary depending on the lender you choose. Some are guaranteed by the SBA, providing an incentive for this loan type.

ProsConsUses
  • Higher lending amount: You can apply for up to $5 million in funding.
  • Loan repayment term: When funds are approved, your repayment term may be up to 25 years.
  • Favorable interest rates: Due to possible SBA guarantees on these loans, interest rates tend to be lower.
  • Financial records: You’ll be required to provide personal and business account statements for previous years.
  • Time intensive process: Due to the due diligence that you must perform, time frames may be lengthy.
  • Best suited to the acquisition of existing businesses.

Are you interested to know more about business acquisition loans? Read our full review.

2. Business Lines of Credit

A business line of credit is a broad term that includes secured and unsecured lending and also, but not limited to, invoice factoring, based on the credit card process, but with a few notable differences. Typically, a fixed repayment term is attached to this product, making interest rates competitive.  

ProsConsUses
  • Favorable interest: facilities are offered at rates starting from 4.66%
  • Revolving facility: You have access to available funds when necessary
  • Time-sensitive: These facilities can be opened in a relatively short time frame
  • Repayment term: There’s a fixed repayment term meaning that some lenders may not allow early settlement.
  • Credit amount: The credit lines aren’t as high as other lending options.
  • Use this as a cash flow injection while waiting for invoices to be settled.
  • Travel and tourism sector.

Are you interested to know more about business lines of credit? Read our full review.

Best Small Business Line of Credit Lenders in 2021

3. Commercial Real Estate Loans

Commercial real estate lending is typically tailored to corporations and businesses that own income-generating property assets. Applying for these business loans requires careful consideration and adequate time. Typically, they offer longer payment terms and lower interest rates.

ProsConsUses
  • Amortization periods: Repayment of the borrowed sum is amortized over a longer term than the repayment term.
  • Financing amount: Lending amounts are higher due to the value placed on a property.
  • Ownership details: The property forms part of the collateral for the lending contract.
  • Loan-to-value: Typically, these ratios are lower than when accessing residential property loans.
  • Business expansion: These lending structures are tailored for expanding business operations. 

Are you interested to know more about commercial real estate loans? Read our full review.

4. Equipment Financing

Often businesses find that machinery and software-based equipmnet develop your businesses production and performance levels. These items can be expensive to purchase, and obtaining a small business loan will accelerate the process. Business owners with lower credit scores can apply as the equipment provides the collateral against the funded amount. This type of financing option is a famous asset-based avenue.

ProsConsUses
  • Asset ownership: You’re the owner of the financed asset, meaning you can add equity.
  • Interest rates: Competitive interest rates are available for higher credit score applications.
  • Collateral lifespan: Equipment devalues as it’s utilized, which decreases its value.
  • Asset ownership: The business owns the equipment making it a financial asset.

Are you interested to know more about equipment financing? Read our full review.

5. Franchise Financing

Franchises provide you with established business processes and a track record. Applying for a business loan from the franchisor is an option. Loans amounts vary greatly through franchisors. Some may provide between 25% and 100% of the loan amount, and others may only require your first repayment after the first year of operation.

ProsConsUses
  • Varying terms: Loan terms are flexible, and you can delay repayments.
  • Common practice: The majority of franchisors offer debt solutions for new franchisees with workable payment plans.
  • Partial funding: Most funding requests are partially granted, leaving a shortfall.
  • Potential franchisees with good credit scores will benefit the most as franchisors look to raise capital and expand their footprint.

Are you interested to know more about franchise financing? Read our full review.

Franchise Financing

6. Merchant Cash Advance

Cash advances for businesses provide funding to existing businesses with cash flows that warrant a loan. Although the premise is that you are advanced cash, merchant advances are technically loans set against the business's credit and debit card sales. 

ProsConsUses
  • Documentation requirements: The necessary paperwork for this funding is minimal.
  • Business operation requirements: These loans are provided to businesses that have been in operation for as little as three months.
  • Cash availability: Funds are deposited into your account as a lump sum.
  • Interest rates: Rates are calculated using a factor rate and apply an annual percentage rate, which is the highest among loans.
  • Only use this loan option once you have exhausted all other avenues and business emergencies as repayment rates are exorbitant. 

Are you interested to know more about merchant cash advances? Read our full review.

Merchant Cash Advance Guide For Small Businesses

7. Microloans

Microloans are small business loans limited to $50,000 or less. The typical interest rate for microloans is between 12% and 18%. This finance option is a popular offering due to the low loan amounts. Microloans are provisioned by non-profit companies and other philanthropic organizations.

ProsConsUses
  • Interest rate: Annual percentile rates are between 12% and 18%. 
  • Additional services: Business support services may be included to assist new businesses.
  • Funding amount: Limited to $50,000.
  • Loan term: Repayment terms are usually six years.
  • Entrepreneurs and small business owners are ideally placed to access these opportunities.

Are you interested to know more about microloans? Read our full review. 

8. SBA Loans

The Small Business Administration offers business loan assistance through government-endorsed guarantees to small business applicants. Typically, the SBA offers three programs with varying terms. Versatility is a core function of the SBA, providing an environment for small business owners to flourish. Loans can be used to purchase business property, including furniture and fixtures. 

ProsConsUses
  • Repayment terms: Depending on the SBA loan purpose, you can qualify for up to 25 years to repay.
  • Interest rates: We noted some of the lowest rates available for loans, between 8% and 13%. 
  • Time frames: Processing of payouts can be time-consuming as due diligence must be performed.
  • These government-backed guarantees are geared toward encouraging banks to lend to new business owners and people with below-average credit scores.

Are you interested to know more about SBA loans? Read our full review.

9. Secured Business Loans

Secured business loans require collateral to be offered by the borrower to offset the lender’s risk. Subsequently, borrowers with lower credit scores apply for these types of loans. Any asset owned by the borrower can be ceded as collateral when needed.

ProsConsUses
  • Annual percentage rate: Your interest rate on these loans are lower due to the attached collateral 
  • Loan disbursement: Funds are allocated in a shorter period
  • Limited liability: The applicant may be required to sign a personal liability document should a default occur.
  • Secured loans can be used to purchase company vehicles and other business-related assets.

Are you interested to know more about secured business loans? Read our full review. 

10. Unsecured Business Loans

Unsecured loans don’t require any collateral. This means that the applicant has a good credit score and a favorable business track record. These business loan types provide lower interest rates. Applicants are typically required to sign a personal guarantee.

ProsConsUses
  • Loan terms: No collateral asset is required when applying for these loans.
  • Potential clients: Unsecured loans are typically afforded to small business owners who don’t have available assets.
  • Liability: It’s standard practice for potential borrowers to complete a personal guarantee.
  • Interest rates: Interest rates can rise substantially due to the absence of collateral.
  • These funds can be used as you please to fund your business expenditures.

Are you interested to know more about unsecured business loans? Read our full review.

Unsecured Business Loans

11. Business Startup Loans

Startup loans are directed at funding new and emerging business ventures. These loans are critical for small businesses to purchase items for working capital. Working capital items included are office furniture, equipment, and other business expenses. You can find these opportunities through the SBA, equipment financing loans, microloans, and the like. 

ProsConsUses
  • SBA options: The SBA provides a 7(a) loan that guarantees a portion thereof.
  • Many loans: Various options exist to source funding, which provides many interest rate options and repayment terms.
  • Personal liability: When applying for these loan options, and may attract a higher APR.
  • Interest rates: Annual percentage rates can skyrocket due to increased risk.
  • The utilization of this funding is intended for businesses operating for less than two years.
  • You may direct these funds to business expansion.

Are you interested to know more about startup business loans? Read our full review.

12. Short-Term Loans

Short-term loans are characterized by their amortized repayments, including a percentage of interest, over the fixed term. You can access them from banks and via other lending institutes. Depending on the applicant’s credit history, interest rates can be highly competitive.

ProsConsUses
  • Timely payouts: Depending on the lender, you can access funds within a few days.
  • Interest portion: Interest rates are mostly lower with this borrowing because of the repayment term.
  • Scheduled payments: These repayments are fixed and make forecasting and planning uncomplicated.
  • Business profitability: These loan options often require a track record of business performance.
  • Processing fees: As with most lenders, processing these loans has fees for the origination of the loan, penalties, etc. 
  • These loan avenues present you with quick and efficient access to funding.

Are you interested to know more about short-term loans? Read our full review. 

Best Short-Term Business Loans for 2021

13. Invoice Factoring

If you find that you need a quick injection of cash flow with fast processing times, invoice financing will be a great idea. This option forms part of asset-based lending. The basic idea is that you sell your outstanding invoices to a lender, who, in turn, provides a cash advance. The outstanding invoices act as collateral. The borrowed sum is a percentage of the total outstanding invoice sum.

ProsConsUses
  • Payout timelines: Cash is made available swiftly, as unpaid invoices are sold for collection.
  • Paperwork: The documentation for this loan is minimal as no business plan or tax statements are required.
  • Interest payable: The interest rates on these loans can range between 10% and 25%, rendering this an expensive option.
  • Risk determination: Risk exposure is calculated on the financial strength of your client and not your business.
  • If you have exhausted all other funding options, this may be the right loan for your business.

Are you interested to know more about invoice factoring? Read our full review. 

Invoice Factoring for Small Businesses

Additional Loan Types

Bottom Line

The Small Business Administration provides millions of dollars of funding-guarantees to companies intent to continue operations, or to startup. Various niches and industries benefit from these business loan types

The landscape for creating a business is more accessible now than it ever has been. Almost three-quarters of American small businesses will require funding at some stage. There’s a loan available for every business, and many lenders and types of loans available for your business.