The 6 main types of business loans are SBA loans, business lines of credit, invoice factoring or financing, business term loans, equipment financing, or a merchant cash advance option. Learn about the pros and cons of each type of business loan and we’ll provide our recommended lender for each type of loan.
1. SBA Loans
The USA’s Small Business Administration partially backs loans that range from $5,000 up to $5 million to help out small businesses, although the loans are actually provided by online lenders and commercial banks. The government backing makes APR rates lower since lenders have greater confidence that they’ll get their money back. SBA loans can be used for almost any business purpose and have low APR rates and long repayment terms, but the application process is long and time-consuming.
There are a few different types of SBA loan. Microloans lend up to $50,000 to new businesses while SBA 7(a) loans cover a number of business purposes and CDC/504 loans are used for purchasing major assets like large equipment or real estate.
|Lowest interest rates between 5% and 13%
|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
|No long time in business to qualify
Recommended lender: Torro
Torro is a lender for all types of SBA loans. Its application and approval process is fast, with funding coming through within as little as 48 hours. Torro requires no collateral and offers loans from Loan Amount: $10K-$2M for both startup and existing businesses.
2. Business Term Loan
With a traditional business loan, you can borrow a lump sum of money between $1,000 and $500,000 and repay it over the next several years. Repayment terms are usually between 1and 5 years, although there are lenders that offer both longer and shorter terms. Average interest rates are between 7% and 30%. Business term loans can be used for any purpose and don't require collateral. They are based on your business’ credit score, average yearly or monthly revenue, and overall financial health.
|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
3. Business Line of Credit
A business line of credit is comparable to a credit card, but it's open to businesses with lower credit ratings. You'll be approved for a maximum amount of credit which you can draw on whenever you need. Once you've repaid the money you can withdraw more, only paying interest on the money you borrow. Time to funding is short, with many businesses getting approval within a day. Average APR rates are 7% to 25%, and repayment terms are usually between 6 months and 1 year, but exact terms vary depending on your business’ revenue and credit score.
|Flexible funding - available for emergencies
|High penalties for missed payments
|Fast approval times
|May need to provide collateral
|Lower APR rates and high maximum borrowing amounts
|Suitable for businesses with less than perfect credit
Recommended lender: OnDeck
OnDeck offers two flexible financing options: a line of credit available up to $100,000 and a term loan, available up to $500,000. You can apply online in just a few minutes or call directly and speak to a loan specialist. Rates start as low as 9.99% APR for term loans and 13.99% for lines of credit. Decisions are made within minutes and you can receive money in as fast as 24 hours.
4. Invoice Factoring
With invoice factoring, or invoice financing, you sell your unpaid invoices in exchange for an advance of between 60-90%. The company collects the invoice amount from your client before paying you the remaining percentage, minus its fees. Some companies advance the entire amount and then charge a flat weekly fee while you repay the loan.
Others take a percentage of the invoice every week until your client pays up. If you repay a full advance, terms are usually 1 6 months with a fee of up to 12%, while when fees are taken, they are around 3% plus an extra 1% for every week until the customer pays their debt. It’s easy to qualify for invoice financing since your invoice is the collateral on the loan, so your credit rating and business history aren’t so important.
|Fast approval time of just a few hours
|Early repayment charges can be high
|Easy eligibility without minimum credit scores or trading history
|Solves cash flow issues from tardy clients
Recommended lender: Fundbox
Fundbox advances you 100% of your unpaid invoices, leaving you to communicate with your client directly for payment in full. Repayment terms are 12 or 24 weeks with APR rates from 4.66%+. There's no penalty for early repayment, and maximum loan amounts range from Loan Amount: $1K-$150K .
5. Merchant Cash Advance
Merchant cash advances give you a lump sum in exchange for a set percentage of your daily credit card transactions. Instead of regular APR rates, multiply your loan amount by a factor rate, typically 1.14 to 1.48, to discover the total amount you owe. The equivalent in APR begins at 15% but can go into triple digits. Similarly, there isn’t a fixed loan repayment term; you keep paying until you’ve paid off the total amount.
The time that takes depends on what percentage of your transactions you pay and how much you made each day. Average repayment terms last 8 or 9 months, but can be as low as 4 months or as long as 18. Merchant cash advances are suitable for businesses with poor credit and/or short trading histories that might not qualify for other business loans. Approval is fast – within a day or 2– and maximum loan amounts reach $250,000.
|Suitable for businesses with poor credit scores and short trading history
|Interest rates are very high
|Fast approval times
|Lump sum amounts when you need it
Recommended lender: Torro
Torro's application and approval process is fast, with funding coming through within as little as 48 hours. Torro requires no collateral and offers loans from Loan Amount: $10K-$2M for both startup and existing businesses.
6. 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% to 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 long as the equipment is still usable but are typically around 5 years.
|Businesses with less than perfect credit
|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
Recommended lender: BlueVine
BlueVine serves equipment financing for businesses with 6+ months in business and a minimum credit score of Minimum Credit Score: 625. Application is typically reviewed and approved within 24 hours, with rates as low as 15.00%.
Choosing the right type of business loan for your company’s needs can be the difference between success or failure. Now, you have all the information you need about the pros and cons of the various types of business loans. Whether you’re seeking to buy new equipment, solve your cash flow issues, or fund a new business venture, you can be sure to pick one that is right for your business.
To learn more about any of these lenders or other top business loan providers, read our in-depth reviews.