Each of the best business loans out there has its own advantages, fees, and eligibility requirements, which can affect how you grow and manage your business. In this article, we’ll break down different key loan options and provide detailed insights to help you make informed funding decisions.
Key Insights
- Various loan types exist; understand options to choose the right financing for your business.
- Term/SBA loans suit established firms; lines of credit/invoice financing aid cash flow.
- Alternative loans serve specific needs or businesses ineligible for traditional financing.
- Loan choice depends on business factors; evaluate situation before deciding.
1. Term Loan
A term loan is a traditional business loan where you borrow a lump sum and repay it over a fixed period. Amounts and pricing vary by lender and credit profile; banks often price at prime + a margin, while many online lenders quote risk‑based APRs that can span from the low‑teens upward once fees are included. Terms commonly run 1 to 5 years (longer at some banks). Term loans may be secured or unsecured and often require a personal guarantee and/or a lien. Approval typically considers your business credit, revenue, time in business, and overall financial health.
Great for: Term loans are suitable for established businesses with strong credit and steady revenue that need substantial capital for long-term investments.
| Pros | Cons |
|---|---|
Can be used for any business purpose | Many term loans carry early repayment charges |
Repayments are predictable | Poor credit ratings may require collateral or a ‘blanket lien’ placed on your enterprise |
You can borrow larger amounts | |
Loans can be approved within a couple of days |
2. Line of Credit
A line of credit lets you borrow money when you need it, up to a set limit. You only pay interest on what you use, and once you repay, you can borrow again. Banks often review these yearly, while online lenders may want faster repayment, usually 6–12 months. Costs and approval times vary depending on the lender.
Great for: Line of credit loans can be suitable for businesses needing flexible, ongoing access to funds to manage cash flow, cover short-term expenses, or handle unexpected costs.
| Pros | Cons |
|---|---|
Flexible funding - available for emergencies | High penalties for missed payments |
Generally have faster approval times than business loans | May need to provide collateral |
Lower APR rates and high maximum borrowing amounts | |
Suitable for businesses with less-than-perfect credit |
3. SBA Loans
SBA loans are government-backed loans, ranging from $5,000 to $5 million, designed to help small businesses secure affordable financing. Although provided by commercial banks and online lenders, the SBA’s backing allows for lower APRs and longer repayment terms, making these loans more accessible. SBA loans can be used for various business purposes, but the application process is lengthy and detailed. There are several types of SBA loans: Microloans, offering up to $50,000 for new businesses, SBA 7(a) loans for general business needs, and CDC/504 loans for major asset purchases like equipment or real estate.
Great for: SBA loans can be suitable for small businesses seeking affordable, long-term financing for major investments or general business purposes, with patience for a lengthy application process.
| Pros | Cons |
|---|---|
| Lowest interest rates between 5% and 13% | The application process can take between 3 weeks and several months |
Long monthly repayment terms - up to 6 years for a microloan, 25 years for an SBA 7(a) loan, and 20 years for a 504 loan | Strong credit history required |
| Lower APR rates and high maximum borrowing amounts | |
Newer businesses qualify |
4. Invoice Factoring
Invoice factoring lets you turn unpaid invoices into quick cash by selling them to a factoring company. You usually get 70%–90% of the invoice upfront, and the rest (minus fees) once the customer pays. The factoring company often notifies your customer and collects payment. Fees are typically 1%–5% per month. Since approval depends more on your customers’ credit than your own, it can be easier to qualify than a traditional loan.
Great for: Invoice factoring can be suitable for businesses needing quick cash flow, especially those with unpaid invoices and lower credit scores.
| Pros | Cons |
|---|---|
| Fast approval time of just a few hours | Early repayment charges can be high |
| Easy eligibility without minimum credit scores or trading history | The factoring company collects payments from your clients, which could impact customer relationships. |
| Solves cash flow issues from tardy clients | If clients don’t pay, you may still be liable |
5. Equipment Financing
Although regular business loans can be used to purchase equipment, a dedicated equipment financing loan uses the items you buy as collateral against the loan. This lowers the average APR rates to 8%-30% and makes the loan open to businesses with poor credit ratings. You can use your equipment even while you are paying off the loan. Loan amounts depend on the value of the equipment, up to 100% of the cost of the item, and funding usually takes a couple of days to come through. Loan terms can be as many as ten years, though typically do not extend longer than that.
Great for: Equipment financing loans are suitable for businesses that need to acquire essential equipment, machinery, or technology without tying up large amounts of capital, particularly in industries like manufacturing, construction, healthcare, or transportation.
| Pros | Cons |
|---|---|
Businesses with less-than-perfect credit may qualify | As equipment depreciates, you could end up paying more than it’s worth |
| Equipment serves as collateral for the loan | Your equipment could be obsolete by the time you finish paying for it |
| Funding takes days to come through |
6. Invoice Financing
Invoice financing is a type of business loan where a company uses its unpaid invoices as collateral to secure a loan or credit line. Unlike invoice factoring, where you sell your invoices to a factoring company, invoice financing allows you to retain control of collecting payments from your clients. Fees for invoice financing typically range from 3% to 5% of the invoice value, with additional weekly fees (often around 1%) until the client pays. Approval for invoice financing is generally quick, sometimes within 24-48 hours, making it a fast way to improve cash flow without waiting for client payments.
Great for:
Invoice financing can work for businesses that need quick access to cash but want to retain control over their customer relationships and payment collections. It can work for companies with reliable clients who are slow to pay, such as those in industries like manufacturing, wholesale, or services. Businesses with outstanding invoices that are waiting for customer payments but have strong sales pipelines and cash flow constraints can benefit from this option.
| Pros | Cons |
|---|---|
Retain customer relationships | Invoice financing fees can add up |
Approval and funding can be fast | Potentially long contracts |
No need for collateral |
7. Merchant Cash Advances
A merchant cash advance (MCA) gives you quick cash upfront in return for a share of your future sales. It’s not a loan and can be expensive, since repayment happens daily or weekly from card sales or bank debits. MCAs are not loans; they use factor rates (often 1.2–1.5) rather than interest rates, which can make the effective cost high. Approval is fast with little paperwork, but the high cost can strain cash flow.
Great for: Merchant cash advances (MCAs) can work for businesses with high, consistent credit or debit card sales, such as retail stores, restaurants, or e-commerce companies, that need quick access to cash. They work for businesses that may not qualify for traditional loans due to poor credit or lack of collateral but have strong daily sales.
| Pros | Cons |
|---|---|
Payments are tied to a percentage of daily sales, so they adjust with your cash flow. | Oftentimes with confusing contracts |
No need for collateral | MCAs are not federally regulated |
8. Personal Loans for Business
Personal loans for business are unsecured loans based on your personal credit history, not your company’s finances. Loan amounts typically range from about $1,000 to $100,000, with APRs anywhere from 6% to 36%, depending on your credit. Some lenders restrict business use, while others allow it, so it’s important to review the terms. Funding is usually faster than a traditional business loan, but you’re personally responsible for repayment, which puts your own assets at risk.
Great for: Personal loans for businesses can work for new or small businesses that lack established credit histories and need quick funding. They're also suitable for entrepreneurs who prefer not to go through the lengthy process of traditional business loan applications.
| Pros | Cons |
|---|---|
Faster application and funding process compared to traditional business loans. | Usually have higher rates than an SBA loan or other business loans |
No business credit needed - Approval is based on personal credit | Can be costly if the borrower has a lower credit score |
Flexible use | There is a risk to personal assets if you default |
9. Business Credit Cards
Business credit cards give owners a revolving line of credit for everyday purchases such as supplies, travel, or inventory. Many cards offer a 0% introductory APR for 6–18 months, after which rates typically range from 17% to 29% or higher, depending on the card and your credit profile. Annual fees vary from $0 to $500+ for premium cards with added perks. Some cards also have no preset spending limit, with available credit adjusting based on your income and payment history. To avoid costly interest, it’s best to pay the balance in full each month.
Great for: Business credit cards can work for small business owners who need access to short-term credit for everyday expenses, like supplies, travel, or inventory, and want the convenience of paying off balances over time.
| Pros | Cons |
|---|---|
Easily available for day-to-day business expenses | High-interest rates: Unpaid balances can accumulate costly interest quickly |
Many cards offer cash back, travel points, or other business-related rewards | Credit limits may be too low for large purchases or long-term needs |
Builds business credit |
10. Microloans
Microloans are small loans designed to provide up to $50,000 for startups, small businesses, or underrepresented entrepreneurs. Microloans are typically offered by nonprofit organizations or government-backed programs, such as the SBA, with interest rates ranging from 8% to 13%. Repayment terms are generally between 1 and 7 years. Fees are often lower than traditional loans, and approval is relatively easy, with a focus on helping businesses with limited credit histories or fewer collateral options. It’s important to note that funds from an SBA microloan cannot be used to settle existing debts or to buy real estate.
Great for: Microloans can be suitable for startups, small businesses, and entrepreneurs who need a small amount of capital to grow, especially those who may not qualify for traditional loans due to limited credit or experience.
| Pros | Cons |
|---|---|
Great for businesses needing smaller sums of money | Maximum amounts may be too low for larger capital needs. |
Suitable for startups or businesses with limited credit history | Rates may be higher than some traditional loans |
Often provided by nonprofits or government programs with mentorship opportunities. |
11. Commercial Real Estate Loans
Commercial real estate loans finance the purchase, renovation, or construction of business properties. Loan amounts range from $250,000 to several million dollars, with terms typically between 5 and 10 years with longer amortization. Interest rates can vary based on the lender and the borrower’s credit, often ranging from 3.5% to 12%. Fees may include origination fees, appraisal fees, and closing costs. These loans require extensive documentation and take longer to approve, typically several weeks or even months.
Great for: Commercial real estate loans can be used by established businesses looking to purchase or develop property for their operations or refinance existing real estate loans.
| Pros | Cons |
|---|---|
Suitable for major real estate investments | Prepayment penalties may prevent paying loans back early |
Offers extended terms of up to 20 years | Extensive documentation and underwriting can take weeks or months |
Provides flexibility in how interest rates are structured | Typically requires 10% to 30% down, which may be difficult for some businesses |
Business Loan Types Ranked According to Business Size
Term Loans – Useful for large businesses needing substantial capital for long-term investments.
Commercial Real Estate Loans – Suitable for established businesses looking to purchase or develop property.
SBA Loans – Appropriate for small to medium-sized businesses seeking affordable, long-term financing for major investments.
Equipment Loans – Useful for small to medium-sized businesses needing to purchase expensive machinery or technology.
Line of Credit – Beneficial for small to medium-sized businesses needing flexible, ongoing access to cash for short-term expenses.
Invoice Financing – Suitable for small to medium-sized businesses with reliable clients and slow payments.
Invoice Factoring – Appropriate for small businesses needing quick cash flow, especially with unpaid invoices.
Merchant Cash Advances (MCAs) – Suitable for small businesses with high daily sales but poor credit.
Personal Loans for Business – Useful for small or new businesses that lack established credit histories.
Business Credit Cards – Beneficial for small businesses needing short-term credit for everyday expenses.
Microloans – Appropriate for startups and very small businesses needing small amounts of capital for growth.
Bottom Line
Selecting the right business loan is crucial for ensuring your business has the financial support it needs to grow and thrive. Each loan type, from term loans to equipment financing, offers distinct advantages depending on your business goals, credit profile, and cash flow requirements. By understanding the benefits and drawbacks of each option, you can choose the most effective loan for your specific situation, ensuring you have the necessary capital while managing repayment terms and costs effectively.
To learn more about any of these lenders or other top business loan providers, read our in-depth reviews.
