As a small business owner, you know how imperative it is to have access to ample cash flow. Whether you own a new business and need funding to improve your operations or are a business veteran that requires funding for an expansion project—the need for financing will always be top of mind.
However, once you identify how you’d like to use funding, you’ll quickly realize that there are many different business financing options to consider. From small business loans to merchant cash advances to business credit cards, you should research and weigh your options prior to making a decision.
In this blog post, we’ll review the various types of loans and other funding options available to entrepreneurs. By the end of this post, you should feel comfortable selecting the type of small business financing that best fits your business’s unique needs.
Types of small business loans
Business loans are a type of financing offered by lenders specifically intended for business expenses. Typically, once the business loan funds are released to the recipient, they’re required to repay the financing on a set schedule. However, loan amounts, repayment terms, and interest rates/fees vary by lender and loan type.
Here are the most common types of small business loans worth exploring.
1. Bank loans
Most business owners turn to traditional banks at the start of their search for additional financing. It makes sense as a first option, thanks to the generally lower interest rates and favorable loan terms they offer. However, bank loans typically come with tedious paperwork, long approval processes, and are often difficult to qualify for.
If your business hasn’t been operational for some time, traditional banks may be apprehensive to provide you with a loan offer. Even if they approve your application, the approved loan amount may take weeks or months to hit your bank account. Due to this, business owners with urgent financing needs typically benefit from pursuing other loan options.
Bank financing overview
Here is what you can expect when pursuing financing from a traditional bank. Keep in mind that these are averages and the actual details of your loan will depend on the lender and if you go with a larger bank or credit union.
- Loan amount: $150,000-$600,000+
- Interest rates: 5%-13%
- Repayment terms: 3-30 years
- Turnaround: 3-6 months
2. Term loans
If a larger loan amount from a traditional bank doesn’t make sense for your business, the next best option is a term loan. Term loans are smaller amounts of financing paid back on a short-to-mid-term repayment schedule with a fixed or floating interest rate. Many business owners turn to loans from alternative and online lenders instead of banks because they’re easier to qualify for, come with more flexible terms, and have a faster turnaround time.
One of the most notable benefits of working with an online lender is that they’ll look at your business’s overall financial health, including your monthly sales, credit score, time in business, industry, and other factors. Plus, most lenders will allow you to use funding however you see fit, unlike banks or SBA lenders.
Term loan financing overview
Here is what you can expect when pursuing financing from an online bank or alternative lender. Due to the nature of these loans, you can expect a shorter repayment period, slightly higher interest rates, and potentially less restrictive requirements.
- Loan amount: $20,000-$250,000
- Interest rates: 7%-30%
- Repayment terms: 1-5 years
- Turnaround: 1-3 months
3. Equipment loans
Business equipment can be costly, and many business owners struggle to afford it without taking out a loan. Due to this, it can be beneficial to pursue equipment financing, which is a loan that can be used solely for equipment investments.
Once they receive an equipment loan, they can make investments such as:
- Repair broken equipment
- Purchase new equipment
- Upgrade equipment to new models
- Lease equipment
If you want to invest in business equipment, this can be an excellent loan program to consider. However, if you also need funding for other business costs, such as rent or inventory, you may be better off pursuing a traditional business loan. With an equipment loan, you’ll only be able to use financing for approved equipment purchases or repairs.
Equipment financing overview
Here is what you can expect when taking out financing for equipment upgrades and purchases. More than likely you can expect this type of financing to be offered from the manufacturer or distributor when purchasing or leasing the equipment. These terms will wildly vary based on the manufacturer, the connected financing organization, the cost of the equipment, and your own financial status.
- Loan amount: $10,000-$500,000+
- Interest rates: 2%-20%
- Repayment terms: 1-25 years
- Turnaround: 2-14+ days
4. Inventory loans
Almost every type of small business requires inventory, whether it be items you sell for profit, raw materials, or items needed to maintain your business operations. Often, affording inventory can be costly, which is why some business owners benefit from taking out an inventory loan.
Like equipment loans, inventory financing is meant for business owners that need financing to pay for business inventory. Therefore, you can’t use this funding for other expenses, like payroll or marketing costs.
Once you receive inventory financing, you can purchase inventory without cutting other necessary expenses from your budget.
Inventory financing overview
Inventory financing is designed to be a short-term financing option that is fully reliant on the inventory value and your own creditworthiness. This will dictate how much funding you’ll receive as well as the interest rate you’ll take on.
- Loan amount: Up to 100% of the inventory’s liquidation value
- Interest rates: 4%-90%
- Repayment terms: 3-12 months
- Turnaround: 10-120+ days
5. Commercial real estate loans
Affording commercial real estate for your business can be expensive. Often, business owners struggle to afford commercial real estate while also paying for other business expenses. Due to this, they benefit from taking out a commercial real estate loan.
Typically, this type of business loan is used to finance an income-generating property, such as:
- Apartment complexes or other living communities
- Office space
- Shopping malls
Most commercial real estate loans come in large loan amounts because real estate projects are expensive. Therefore, if you don’t need funding for a construction project or to purchase an expensive real estate property, you’ll be better off pursuing another type of financing.
Commercial real estate financing overview
The options you have when seeking out financing specifically for the purchase of commercial real estate are surprisingly vast. That means the total amount and terms will vary based on the lender you work with. Here is what you can generally expect.
- Loan amount: $50,000-$5,000,000+
- Interest rates: 3%-17.5%
- Repayment terms: 1-30 years
- Turnaround: 14-30+ days
6. Personal loans
In some cases, business owners may consider pursuing a personal loan to afford business expenses. Although personal loans are often easier to qualify for and come with a faster funding process, taking out a personal loan can hurt your personal credit.
In addition, you likely won’t get approved for as large of a funding amount as you would with a small business loan, and you won’t be able to build your business credit score. To learn more, check out this comprehensive guide to personal loans and business loans.
Personal financing overview
Personal loans will vary greatly in how much you can take out and the exact terms you’ll be locked into. They’re often unsecured, meaning you won’t need collateral, and you’ll typically be working with a traditional lender or online organization that offers term loans. Here’s what you can expect.
- Loan amount: $1,000-$50,000
- Interest rates: 6%-36%
- Repayment terms: 1-5 years
- Turnaround: 1-3 months
7. SBA loans
The Small Business Administration (SBA) provides financing options and other services to small business owners nationwide. Although the SBA doesn’t directly provide financing to business owners, they work directly with banks and approved SBA lenders to guarantee loans.
It’s important to note that SBA loans are only provided to business owners that prove that they’ve been unable to qualify for traditional funding methods. Therefore, if you haven’t applied for other funding options and been rejected, you won’t qualify for an SBA loan.
SBA financing overview
While there are several types of SBA loan programs, here’s what you can typically expect when financing through the SBA.
- Loan amount: $2,000-$5,000,000
- Interest rates: 3%-13%
- Repayment terms: 5-25 years
- Turnaround: 1-6 months
There are numerous SBA loan programs to choose from, including:
SBA 7(a) loan
This is the most popular SBA loan program because it provides flexibility to business owners and comes in amounts of up to $5 million. To qualify for this SBA loan option, you’ll need to be a U.S.-based, for-profit business.
SBA 504 loan
The SBA 504 loan is typically more challenging to qualify for than the 7(a) loan, but they usually have fewer fees than other SBA financing options. Also, no additional collateral is required to qualify.
There are some usage restrictions if you take out an SBA 504 loan, and funds can only be used for the following:
- Purchasing or improving existing buildings or land
- Building new facilities or improving existing buildings
- Purchasing new equipment
- Paying off previous debt that incurred from these purchases
If your business is located in a declared disaster area, you can receive low-interest financing from the SBA to recover and rebuild your business.
In addition, the SBA provided disaster loans to business owners affected by the COVID-19 pandemic. Business owners with 500 or fewer employees qualified for the COVID-19 Economic Injury Disaster Loan (EIDL). This month, the SBA announced that borrowers could defer their loan payments for a total of 30 months from the inception of their loan.
This loan program is meant for business owners with urgent funding needs, as it comes with an accelerated funding timeline. Once you submit your completed application and receive SBA approval, you could receive financing within 36 hours.
Although there are many benefits to taking out an SBA Express Loan, they aren’t the right funding option for every business owner. Notably, because of the loan’s high credit score requirement, and extensive paperwork.
The SBA provides funds to community-based non-profit, non-traditional lenders. These microloan intermediary lenders allow borrowers up to $50,000 in business funding. Because there are different microlenders, interest rates, and maximum loan amounts will vary. However, the maximum loan term is six years, and the average microloan amount is about $13,000.
Other types of business financing
In addition to small business loans, there are other types of financing available to business owners. They vary in funding type, amount, terms, and usage. We’ll explain how some common business financing options work in the sections below.
1. Invoice financing
A common pain point for many small business owners is chasing down customers to pay their unpaid invoices. However, by working with an invoice financing company, you can receive the money that your business is owed immediately.
Once you receive invoice financing, the outstanding customer invoices will be considered collateral. When the invoices are paid, the loan is repaid, with interest. The result is that your business will have funds available to pay for monthly expenses such as rent payments, employee salaries, and office supplies.
Invoice financing overview
Since the invoice serves as your collateral with this type of financing, the terms and turnaround time should be relatively short. However, this will also make the terms highly variable and dependent on your specific situation.
- Loan amount: Up to 100% of the invoice value
- Interest rates: 15%-35%
- Repayment terms: Until the customer pays the invoice
- Turnaround: 1-30 days
2. Merchant Cash Advances
If your business accepts frequent credit card payments, it will be easy for you to qualify for merchant funding. Once approved, you’ll receive lump-sum financing that can be used for any business expense. In exchange, the cash advance provider will take a portion of your future credit card sales.
Merchant Cash Advance overview
Merchant Cash Advances are a quick and flexible way to gain fast access to necessary cash. However, the terms and overall credit impact can be incredibly detrimental if not dealt with quickly.
- Loan amount: $2,500-$500,000
- Interest rates: 10%-350%
- Repayment terms: 3-36 months
- Turnaround: 1-14 days
3. Business credit cards
Typically, it isn’t difficult for business owners to secure a business credit card. Having a business credit card on-hand will enable you to make purchases up to a set credit limit. If you can responsibly maintain your business budget, avoid overspending, and pay off your balance on time, credit cards can be a valuable financing tool.
However, if your credit card balance goes unpaid, you’ll run the risk of hurting your credit score and accumulating unnecessary debt.
4. Business lines of credit
Many business owners benefit from taking out a line of credit because they’re a flexible source of financing. Once you are approved for a credit line, you’ll be able to borrow as much or as little as you’d like, if it doesn’t exceed your credit limit.
Unlike other types of funding, you’ll only pay interest on the amount you borrow. If you decide to apply for a secured business line of credit, you’ll have to put up an asset like your property or inventory as collateral. The lender may seize this asset if you default on your business loan.
Although you may be able to take out an unsecured business line of credit, a business lender can still require a personal guarantee or lien on your business assets.
Business line of credit overview
A business line of credit is fully reliant on the standard terms a given organization offers and your business performance. That means you have a wealth of options to choose from and there’s likely one available that fits the needs of your business. Here’s what you can generally expect.
- Loan amount: $1,000-$150,000
- Interest rates: 10%-36%
- Repayment terms: Weekly payments from 6-18 months
- Turnaround: 1-3 days
5. Angel investors
Angel investors are typically wealthy individuals that trade capital for equity in small businesses. These investors provide working capital to the business owner, in exchange for a percentage of the company in the form of a stick or convertible debt.
If you want to maintain control of your business, working with an angel investor may not be your best option. However, if your primary focus is gaining capital, you might not mind sharing ownership with an angel investor.
Many startup business owners access funding by creating crowdfunding campaigns. Once they create their campaigns, people can donate funds to the business. Typically, the business owner will specify how the funds will be used to achieve business growth. In many cases, donors will receive some sort of reward in exchange for their donation, such as early access to products or a small gift.
Business owners can create crowdfunding campaigns on websites such as:
There are many business grant programs available from federal agencies, local and state governments, and private resources. Once you apply for and receive a grant, you’ll have funding to use for your business. In some cases, there are usage restrictions depending on the grant program. However, the most notable advantage of taking out a grant is that you don’t have to repay the funding.
Consider all your financing options
Now that you understand the various funding options available to small business owners, you should take time to consider your business’s financial goals. Review your business plan, consider existing debt and expenses, and take time to research lenders. Once you take the time to consider these factors, you can be confident in your ability to start the business financing process and effectively manage funding.