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Understanding Different Types of Small Business Loans

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Updated February 24, 2021
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Understanding Different Types of Small Business Loans; Small business owners have different options for small business loans.
Small business owners often rely on various types of business loans to help them manage cash flow, cover daily expenses, expand, remodel, or invest in equipment or property. Many factors contribute to the type of small business loan you choose, including your industry, how much cash you need, your business’s financials, and what you need funding for.With many business loan options to choose from, how can you decide which one is right for you? In this guide, we’ll break down each type of small business loan to help you choose the funding that will help you meet your business and financial goals.

Overview of Different Types of Business Loans

Since every small business has different needs, it’s important to understand the various small business loan options available so you can find a good match. The following table breaks down loan types to help you choose the best funding for your business.

Choosing the Right Loan for Your Business

As you consider different types of business loans, take time to assess your business. The following five questions can help you clarify your needs and qualifications so you can start to narrow in on the types of business loans that may be right for your operation:

1. What industry is your business in?

Certain types of small business loans are better suited for certain industries, and some lenders have rules about which industries they will lend to. For example, some lenders choose not to lend to cannabis companies, and some types of loans, like invoice factoring, are typically better suited for B2B operations. Check that potential lenders work within your industry before applying.

2. How much funding do you need?

Know how much money you need before choosing a loan type or a lender. If you are planning on making specific purchases or renovations, you may want to get pricing or estimates. This will show a lender that you understand your business needs and also help narrow your search to loans that match your funding needs. 

3. What are manageable loan terms for your business?

Loan terms can refer to different things. Most often, loan terms refer to how long the loan repayment period will last if you’re making timely payments to your lender. Ask yourself if your business is in a position to take on long-term loans, or if you should consider short-term options. A term loan, for example, sets a specific amount of time. If you have a 5-year loan term, that means you’ll be making regularly scheduled payments for five years. The term also affects your monthly payment.  Typically, the longer the term, the lower the monthly payment.Loan terms can also refer to additional features or business loan options that come with the loan. When you search for lenders, ask questions about additional terms and conditions on the loan to make sure it aligns with your needs and ability to pay. 

4. How soon do you need money?

How quickly you need funding may influence how expensive a particular type of business loan is for you. Typically, the faster you get the money, the more expensive the loan, due to interest rates and fees. Essentially, you pay extra for the convenience of getting the money quickly. If you’re able to wait, it may help you secure a less expensive loan. But if you need emergency funding, a loan that offers fast cash may be a preferable business loan option. 

5. What are the costs of different business loan types?

The cost of a small business loan goes beyond interest rates and monthly payments. While those are important in determining if you can responsibly pay back the loan, it’s also good to know if the type of business loan you choose has additional costs.These may include:
  • Origination fees
  • Prepayment penalties
  • Balloon payments
  • Late payment fees
  • Factoring fees
  • Monthly service fees
  • SBA guarantee fees
Do your research to ensure you understand all of the costs associated with the type of business loan you’re interested in so there aren’t any unpleasant surprises down the road.

Term Loans

Many of the business loan types available come in the form of term loans. With these loans you receive a sum of money upfront and agree to repay the funds, with interest, over a set period of time. Banks and alternative lenders offer term loans in varying amounts depending on the type of business loan, applicant’s qualifications, and terms and conditions. There are long- and short-term business loan options available. What you receive will depend on your business needs and qualifications. Typically, long-term business loans are more difficult to qualify for since they present more risk to the lender.Advantages: Predictable payments over the life of the loan and higher borrowing amountsDisadvantages: May require collateral to secure the loanWho it’s good for: Small businesses with good credit and a desire to expand Learn more about term loans

SBA Loans

An SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources like banks and some online lenders. The SBA has numerous loan programs with loan amounts up to $5 million available for everything from working capital to commercial real estate investments.Advantages: High borrowing amounts and low interest ratesDisadvantages: May be difficult to qualify and application process can be lengthyWho it’s good for: Borrowers with strong credit who don’t need cash quickly Learn more about SBA loans.

Business Line of Credit

A business line of credit is a type of business funding that gives borrowers access to cash, up to a set credit limit determined by the lender. Like a credit card, a credit line charges interest only on the money that you withdraw. Most lines of credit are revolving, while others may end after you’ve spent and paid off the full credit amount.Advantages: Flexible borrowing for short-term expensesDisadvantages: Lower borrowing limits and typically higher interest ratesWho it’s good for: Businesses that need funding for small ongoing expenses, assistance managing cash flow, or emergency expensesLearn more about business lines of credit.

Equipment Financing

An equipment loan can be used to purchase or upgrade necessary business equipment. The equipment acts as collateral for the loan, and the length of the loan is often equal to the expected lifespan of the equipment. Rates vary, depending on the type of equipment and your business’s qualifications.Advantages: Allows small businesses to build equity without having to put down additional collateralDisadvantages: Loan can only be used for the equipmentWho it’s good for: Small businesses that want to invest in equipment rather than leaseLearn more about equipment financing.

Merchant Cash Advance

Like a business line of credit, a merchant cash advance offers a borrower cash upfront, but payments are made by the lender receiving a percentage of future credit card sales. Automatic withdrawals can be set up directly from your bank account on a daily or weekly basis.Advantages: Fast cash, often within 24 to 48 hours of applyingDisadvantages: Frequent payments with potentially high fees; lack of regulatory oversight could result in undesirable lending practicesWho it’s good for: Borrowers that need but don’t qualify for emergency business loansLearn more about merchant cash advances.

Inventory Financing

Inventory financing loans are asset-based and used to purchase necessary inventory, maintain consistent cash flow, or support working capital. The inventory serves as collateral and lenders base financing on a percentage of the inventory’s value.Advantages: Helps prep for seasonal highs with no need for additional collateralDisadvantages: May require assessments (with fees)Who it’s good for: Small businesses with high inventory turnover or seasonal demandsLearn more about inventory financing.

Invoice Factoring

Invoice factoring allows you to get fast cash upfront in exchange for unpaid customer invoices, which the factoring company is then responsible for collecting. This type of business loan can help B2B companies that deal in customer invoices and irregular billing cycles maintain regular cash flow.Advantages: You don’t have to wait for customer invoices to be paid for access to business fundingDisadvantages: Can be costly and you don’t control collection practicesWho it’s good for: Small businesses that process invoices regularly and have customers who reliably pay their invoicesLearn more about invoice factoring.  

Online Business Loans

Online business loans are types of alternative business loans offered by lenders that aren’t traditional banks or credit unions. The types of small business loan products vary from lender to lender, but typically have a quick application and approval process.Advantages: Usually have a speedy application and approval processDisadvantages: May have higher costs than a traditional bank loan Who it’s good for: Small businesses who want more business loan options and faster fundingLearn more about online business loans.

Microloan

Microloans are business loans, typically for $50,000 or less, that are often given by nonprofit organizations or mission-based lenders. These can be great types of loans to start a business or for newer businesses in underserved communities. Advantages: Credit requirements tend to be low and microloans may come with additional services like counselingDisadvantages: Lower borrowing amounts typically with above-market interest ratesWho it’s good for: Startups and newer businesses that don’t have established business historyLearn more about microloans.

Commercial Real Estate Loan

A commercial real estate loan can help you buy the property you need for your business.A commercial real estate loan is used to purchase or improve a building or property that’s used for business purposes. Getting one may help a small business build equity.Advantages: Business loan options designed specifically for commercial real estate needsDisadvantages: Can be difficult to qualify forWho it’s good for: Established small businesses who want to transition from leasing to owning their commercial property or expand their businessLearn more about commercial real estate loans.

Working Capital Loan

Working capital loans are one type of funding available to small businesses.A working capital loan can be any type of loan product used to cover everyday expenses like payroll, monthly bills, and repairs. These are common loan types for small businesses that need assistance managing cash flow fluctuations as they build their business. Advantages: Quick access to funding for maintaining positive cash flow Disadvantages: Short-term and, depending on the type of financing, may be more costly than a longer-term optionWho it’s good for: Small businesses with seasonal revenue or ones that want to expand and need cash to handle daily expenses during growth Learn more about working capital loans.

Restaurant Loans

Restaurant loans can be helpful in starting, expanding, or supporting various aspects of a restaurant business. These types of business loans can be from traditional banks, alternative lenders, or P2P lenders, and they come in a variety of forms, including term loans, business lines of credit, equipment loans, etc.Advantages: Numerous business loan options to choose fromDisadvantages: You need financial stability to ensure repayment of long-term loan optionsWho it’s good for: Startups and established restaurants that want to expand, remodel, or manage cash flow during business fluctuations Learn more about restaurant loans.

Franchise Financing

Franchising loan options are offered by a number of sources, including traditional banks, online lenders, franchise financing companies, and sometimes even the franchisors themselves. These types of business loans can help to cover the many costs associated with opening a franchise location. Advantages: Loans may be easier to obtain than they are for an independent small businessDisadvantages: It may be expensive to start a business under a larger franchiseWho it’s good for: New franchise owners who need help covering franchise fees and other startup costs Learn more about franchise financing

Peer-to-Peer Lending

Peer-to-peer (P2P) business lending allows borrowers to get funding directly from other individuals (lenders), eliminating the need for a financial institution to act as a middleman. Borrowers and lenders can quickly connect using online platforms that facilitate the entire loan process. Advantages: Quick and easy access to funding that may be easier to qualify for; potentially lower APRs compared to traditional lendersDisadvantages: Less regulation compared to traditional loan types, and application review is based largely on personal credit scoreWho it’s good for: Small businesses that don’t qualify for other types of small business loansLearn more about peer-to-peer lending.

Alternative Lending Options

Alternative small business loans are any offered by lenders other than a traditional bank or credit union. This category  may include:
  • Crowdfunding
  • Angel investors
  • Venture capitalists
  • Contributions from friends and family
  • Grants 
Advantages: Many alternative business loan options are faster to get than traditional loansDisadvantages: Depending on the type of loan, borrowing limits may be lower and interest rates higherWho it’s good for: Small business startups or borrowers with poor credit who don’t qualify for a bank or SBA loanLearn more about alternative lending options.

Find Small Business Loans with Lantern Credit

Trying to figure out your best option for securing a small business loan can feel overwhelming. We’re here to help you spend less time on the loan search and application process so you can spend more time taking care of your business. How? You can easily compare lenders who match your business goals and qualifications so you can quickly secure the capital you need. Then, once you’ve got cash in hand, you can focus on actually getting down to business.
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612. SoFi Lending's NMLS number is 1121636. NMLS Consumer Access. SoFi Lending Corp. operates this Lantern website in cooperation with Even Financial Corp. ("Even"). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lenders' and/or partners' conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page.SOLC21019

About the Author

Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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