Small Business Loans: Which Type Is Best for Your Business?

Starting or growing a small business often requires financing beyond your personal savings. Unlike consumer loans for cars or homes, business loans allow you to invest in your company’s growth by purchasing inventory and equipment, expanding operations, hiring employees, or covering operating expenses. 

But with so many types of small business loans out there, you may feel pressure to choose wisely. After all, you need financing that aligns with your goals and cash flow. It’s an important decision that requires thorough research.

No matter where you are on your business journey, a loan tailored to your situation exists. Read on to explore the different types of small business loans and which can give you the funds you need to take your business to the next level.

Types of small business loans

Here are the eight types of small business loans and what you should know about each. 

Type of small business loan	Best for
Traditional term loan	Established businesses needing a large sum of cash
Equipment financing	Buying equipment and machinery
SBA loan	Getting the lowest interest rates or longest repayment periods
Line of credit	Covering ongoing or unpredictable expenses like payroll and inventory
Business credit card	Everyday business expenses and earning rewards
Invoice factoring	Selling unpaid invoices for immediate cash
Hard money loan	House flipping when you need quick funds
Business personal loan	Newer businesses that don’t qualify for traditional financing

Traditional term loan

Traditional term loans are the most common type of business loan. They are designed to help you cover big, one-time expenses, like hiring new employees, expanding operations, or purchasing office space. 

These term loans provide you with a lump sum of capital that you repay in fixed monthly payments, which makes budgeting easier. You’ll find them at nearly every small business lender. This means you can take the time to really shop around and find the best deal. 

But you often need a strong credit history to qualify—at least a score of 650 or higher. You may find slightly more lenient requirements with a secured term loan, but you’ll need to put up collateral to get one.

Equipment financing

An equipment financing loan helps you purchase tangible assets that allow you to run your business—such as machinery, vehicles, or other equipment. 

These loans are secured, with the assets you acquire serving as collateral. For instance, if you buy a commercial oven for your restaurant, the oven guarantees the loan. However, if you default, you risk losing the equipment. 

You also often need a down payment for an equipment financing loan, although some lenders offer equipment financing with no down payment.

SBA loan

SBA loans are generally for businesses with a solid track record but that lack the collateral or credit history to secure a conventional loan. These loans are backed by the U.S. Small Business Administration and often have better interest rates and repayment periods up to 25 years.

There are various SBA loan types, so working with SBA-approved lenders can streamline the process and help you determine the best type. However, be prepared for a comprehensive application process and slower funding timelines than non-SBA options.

Line of credit

A line of credit may be ideal if your business faces ongoing or unpredictable expenses. It’s akin to a credit card; you’re given a credit limit and can draw funds as needed, paying interest only on the amount borrowed. 

This flexibility makes a line of credit best for managing cash flow or covering operational costs like supplies and payroll. Rates are generally lower than credit cards, and making on-time payments can help build your business credit rating.

While typically unsecured, larger lines of credit may require collateral. 

Business credit card

A business credit card is great for earning rewards on everyday business expenses. It operates like a personal credit card, so you have a set credit limit from which to borrow repeatedly. 

A business credit card can help you build a business credit score like a line of credit. However, if not managed well, the high interest rates could harm your financial health.

Invoice factoring

Invoice factoring is for businesses that need cash now and can’t afford to wait for customers to pay their invoices. It’s a form of financing where you sell your unpaid invoices at a discount to a third-party factoring company for immediate funds. 

Invoice factoring can be particularly useful if you have long payment terms and must bridge short-term financial gaps. 

However, you may pay more if your customers are viewed as risky. You may incur additional fees or be forced to buy back the invoice from the factoring company if your customers fail to pay.

Hard money loan

House flippers often use hard money loans when they need quick financing for a real estate deal and can’t secure a traditional loan due to credit issues or time constraints. It’s a short-term, asset-based loan where you use the property as collateral, much like a mortgage. 

Hard money loans are typically issued by private investors or companies, not banks. They tend to have higher interest rates than traditional business loans and may require a larger down payment. 

Business personal loan

A business personal loan is essentially a personal loan used for company purposes. It can be particularly helpful for new businesses needing money without investing in personal savings. 

However, using personal loans for business has drawbacks. 

For instance, you could damage your personal credit score if your business fails to make timely payments. Also, you may get approved for a smaller borrowing amount than you would for a traditional term loan, which could limit how quickly your business can scale. 

What type of small business loan is best for me?

As you sort through your loan options, prioritize those with the lowest interest rates and best repayment terms you’re eligible for. Also, take time to calculate the total cost of the loan, including fees, to make an informed decision. 

At the end of the day, the best small business loan for you is one you can comfortably repay. Here are our recommendations:

• SBA loans are a top choice if you’re eligible because they have lower interest rates and clear repayment terms. But they can take months to get. 
• A business line of credit or term loan might be appropriate if you need immediate funding. Some online lenders fund these loans in just a few days. 
• Hard money loans and invoice financing are generally last resort options. They provide quick access to cash. But the convenience comes with higher interest rates, making them difficult to manage.

Do your research, compare the costs and benefits of the various options, and consider working with a certified financial planner specializing in small businesses.

Jim McCarthy

CFP®

How to get a small business loan

Before you apply for a small business loan, research the top small business loan lenders [link to best small business loans when live] to know where to find the best rates and terms. 

Typical eligibility requirements include:

• A minimum credit score (650 or higher)
• A certain amount of time in business (usually at least one to two years)
• A minimum revenue (usually around $8,000 to $10,000 per month)

Once you’ve chosen a lender and gathered your documents, you’ll complete an application. Common documents required for a loan application include:

• Business plan
• Financial statements
• Personal and business tax returns
• Bank statements
• Business licenses and articles of incorporation

Some lenders fund loans in as little as one to two business days, while others take a few weeks.  Review any loan offers you receive before accepting them to ensure you can comfortably manage the payments.

If done properly, borrowing money to start, develop, and expand your small business can greatly enhance your long-term financial picture. Conversely, taking on business debt can hurt your long-term financial condition if the business does not succeed.

Jim McCarthy

CFP®

Alternatives to small business loans

If a small business loan isn’t right for you—or if you want to apply for a loan in conjunction with other strategies—explore these options:

Bootstrapping

Rather than taking on debt to fund your business, bootstrapping is where you find creative ways to operate on a shoestring budget. This could involve cutting costs, using your personal savings, or asking friends and family to chip in. 

Crowdfunding

Crowdfunding is where you raise funds by taking preorders, running rewards-based campaigns, and offering equity to people in your network. How successful you are at crowdfunding hinges on the size of your network and how good of a marketer you are. 

Grants

There are federal, state, and nonprofit grants you can apply for to get funding for your business. The best thing about grants is they don’t need to be repaid. 

Programs are competitive, but there are grants for all situations—young entrepreneurs, people of color, women, veterans, businesses dedicated to social causes, and more. Start your search on sites like Grants.gov. 

Investors

Another option is to channel your inner “Shark Tank” and look for investors. Whether you go the venture capitalist or angel investor route, you’ll typically sell partial ownership in your business in exchange for funds. 

But the upside is that you get an influx of money that often doesn’t need to be repaid like a traditional loan. 

FAQ

How long does it take to get approved for a small business loan?

The approval time for a small business loan can vary based on the type of loan, lender, and the borrower’s financial health. Due to detailed credit and financial evaluations, traditional bank loans may take several weeks to a few months to process. 

Online lenders can often process applications faster, sometimes offering decisions within a few days and funding within a week if approved. SBA loans, known for their favorable terms, tend to have a longer approval process, ranging from a few weeks to several months.

Do SBA loans come from the government or private lenders?

SBA loans are issued by private lenders but are backed by the U.S. Small Business Administration (SBA), a federal agency. 

The loans come from banks, credit unions, and other financial institutions, but the SBA guarantees a portion of the loan. This guarantee reduces the risk to the lender and can make it easier for small businesses to get approved for financing. 

The SBA’s involvement helps businesses obtain more favorable terms than they might otherwise qualify for, including lower down payments, longer repayment terms, and more competitive interest rates. 

However, the application process for SBA loans can be more stringent and time-consuming, requiring extensive documentation to meet the lender’s and the SBA’s criteria.

Can I get a small business loan with bad credit?

Yes, getting a small business loan with bad credit is possible, but your options may be more limited, and the cost of borrowing could be higher. Some lenders specialize in lending to businesses with less-than-perfect credit scores, understanding that credit score is not the sole indicator of a business’s financial health. 

Alternative lenders and certain types of loans, such as short-term or merchant cash advances, may have less stringent credit requirements. Improving your credit score, providing collateral, and demonstrating strong business financials can also help secure a loan.

Are there specific small business loans for startups?

Yes, certain small business loans are designed for startups. They may be harder to qualify for due to the inherent risks associated with new businesses. SBA loans, particularly the SBA 7(a) and Microloan programs, are popular among startups for their lower rates and favorable terms. 

Some online lenders and nonprofit organizations also offer loans tailored to startups, focusing on business potential rather than extensive financial history. These loans might require a solid business plan, personal guarantees, or collateral.

What’s the difference between secured and unsecured small business loans?

The main difference between secured and unsecured small business loans is the collateral requirement. 

A secured loan requires the borrower to offer assets, such as real estate, equipment, or inventory, as collateral to back the loan. This reduces the risk for the lender, often resulting in lower interest rates and better terms for the borrower. 

An unsecured loan does not require collateral, making it a higher risk for the lender. 

So, unsecured loans may have higher interest rates, shorter repayment terms, and require a stronger credit history.

Do any small business loans not require collateral?

Many small business loans don’t require collateral, particularly those from online lenders, and for smaller loan amounts. Unsecured business loans, business lines of credit, and business credit cards are common examples where collateral is not often required. 

However, these loans may have higher interest rates or more stringent credit requirements to mitigate the lender’s risk. Some lenders may also require a personal guarantee: a commitment from the business owner to repay the loan personally if the business can’t.