Getting a small business off the ground is tough work. Capital can be tricky to find and raise. That’s why many small business owners take advantage of business loans to get their companies up and running.

What are the types of business loans available to you, and what is the best type of loan for your business? To help narrow down your options and make informed decisions, read on as we explore 9 different kinds of business loans that could help grow your business.

What Types of Loans are Available for Small Businesses?

Getting a business loan to help grow your small business can provide long-term benefits that you may not be able to achieve without taking on added capital. With the right loan and financial support, you can pay for important investments like new equipment and technology upgrades that will improve productivity and help your business stay competitive.

There are many different ways to access capital for your business. Let’s look at the top 10 business loans:

1. Term Loan

The term loan is perhaps the most basic, common, and flexible small business loan. It's simply an amount of cash issued in a lump sum that the borrower repays over a fixed amount of time, usually in monthly installments. Term loans can be used for virtually any aspect of your small business, including equipment, marketing, or everyday expenses.

Term loans are the traditional bank loans you hear about when people discuss getting a loan for their business. Interest payments on term loans are tax-deductible, and the term can be extended if needed. Because term loans are so common, there are lots of variations related to structure, duration and collateral requirements.

The largest downside to a term loan for younger businesses is that you will likely have to personally guarantee the loan. This means your personal credit profile will affect loan availability just as much as the profitability of your business.

2. Business Line of Credit

This setup is essentially a business credit card, minus the card. Usually linked to a checking account, a business line of credit comes with a limit set by the issuing bank. A business can borrow money up to that limit. After the borrower repays the debt, they can again take out cash against that limit.

A business line of credit is great when the owner isn’t sure exactly how much money they need. That’s because interest is charged only on the amount they withdraw, unlike a term loan where interest applies to the total amount. It can also be helpful for highly seasonal businesses that may need some extra cash to cover expenses in the off-season.

A business line of credit is usually unsecured, so collateral isn't needed. However, it can be hard to qualify for one, and the low-interest rates can be offset by extra fees on undrawn funds. A line of credit can be useful to get through cashflow crunches if you resist the urge to overuse credit.

3. Small Business Administration (SBA) Loan

SBA loans are issued jointly by a bank and the federal government. The SBA provides a partial guarantee of the loan, allowing banks to give better terms to borrowers and to lend to borrowers who otherwise might not qualify for a loan. They’re attractive to many business owners because of their relatively low cost and interest rates compared to other small business loans. They also usually have longer loan durations than a traditional term loan, which can help with cash flow.

SBA loans today come in three main types:

7(a) Loans

The most common SBA loan is the 7(a) loan. 7(a) loans are basically just term loans with better cost profiles. You can use a 7(a) loan in various ways for your business, including business expansions, purchasing supplies, equipment and working capital. 7(a) loans are also used by individuals looking to purchase an established business for themselves.

504 Loans

The SBA 504 loan is used explicitly for real estate, heavy machines and equipment. They are much more restrictive than 7(a) loans, but in exchange they have much lower interest rates - often as much as 5% lower. If you need a loan to purchase physical assets, the 504 program may be a great choice for you.

Certified Development Companies (CDCs) offer 504 loans. CDCs are non-profit entities that promote economic development. The loan breakdown is 50% from a lender, 40% from a CDC and 10% from the business owner, but every loan term will vary.

Microloans

SBA microloans are used for a smaller cash boost, and you can use them for start-up costs or young companies. The SBA fully funds SBA microloans. The microloans are generally for lower-income and underserved populations and communities.

You can borrow up to $50,000 through the SBA microloan program with an interest rate of 6%-9%. Lenders do require collateral, but often you can use the item needing the loan (i.e., equipment) as collateral. Many SBA lenders don’t require credit history as long as you use collateral.

4. Equipment Financing

Equipment financing helps a business owner buy or replace equipment without having to pay for large items all at once upfront. The owner can pay in monthly installments for major equipment, which is used as collateral.

Equipment financing is helpful because it keeps a business operational without a big cash dump burden. It's also a tax benefit because you can write off the full cost of the equipment in the first tax year. On the downside, the lender can repossess the equipment in case of default – but the owner’s other personal or business assets aren’t threatened.

Equipment financing is often offered by traditional banks, but the equipment manufacturer may have their own financing program as well. Think of it the way a car dealer would give you a loan to buy a car from them. If you're exploring a large equipment purchase, ask the manufacturer/dealer if they have any captive financing programs available.

5. Merchant Cash Advance

In a merchant cash advance, the owner borrows money against expected sales in the future, essentially offering credit card sales as collateral. The owner repays the debt through daily credit card transactions or via weekly transfers of cash from their bank account.

This kind of financing comes with a high risk simply because future success is never 100% predictable. The interest rates can be extremely high. However, in some cases, the lender may agree to adjust the borrower's payments downward during times when business is slow.

6. Accounts Receivable Financing

There are two kinds of financing (technically not “loans”) that use unpaid customer invoices as instruments to get quick cash.

Invoice Factoring

With invoice factoring, the business owner collects a certain number of long-standing, unpaid invoices and sells them to a factoring company for 80% to 90% of the total amount due. The factoring company then takes over collection activities on the outstanding invoices, if needed.

Invoice Financing

Instead of selling the invoices, invoice financing allows companies to borrow against accounts receivable invoices issued to their customers. The business is still responsible for collecting the invoices.

Both of these financing agreements can be more expensive than loans or other instruments, but they may be available when more traditional financing is not.

One issue with invoice factoring is that the owner cedes control of debt collection to a third party. That might cause some unhappiness from loyal customers. With invoicing financing, customers never know their invoices are being used as collateral, but the business owner still must collect on the invoices.

7. Working Capital Loan

A working capital loan is a helpful financial solution for business owners to access short-term cash flow to help manage their day-to-day operations and seize unexpected opportunities. Business owners can use working capital loans to fund their near-term needs, such as inconsistent revenue cycles, managing expenses seasonality, and unexpected inventory needs.

This type of loan is advantageous due to its flexibility and utilization of current assets so that a business owner can quickly address time-sensitive issues that would be difficult or impossible with other forms of financing. Working capital loans allow small business owners the fiscal stability needed to pursue new opportunities and achieve desired growth goals.

8. Loan Crowdfunding

Loan crowdfunding is an innovative way to get the financial support you need to grow your business. It works by allowing people like your community, friends, fans to invest small amounts of capital into a loan for your business, with loan payments returning to lenders as the loan is repaid over time. This can be useful for businesses that don't have access to more traditional sources of financing, as it provides an alternate avenue for acquiring funds and managing risk.

The downside of loan crowdfunding is the cost. Interest rates are usually much higher than traditional loans, with APRs climbing as high as 50%. These loans can be a solution for companies without other access to capital, but be mindful of how much you'll pay before signing up for one.

9. Personal Loan for Business

Especially when starting a company, an owner can use a personal loan to finance a business. Most banks won’t offer a business loan to businesses with no history of operations, so a personal loan can stand in its place.

This approach can create a significant risk to one’s personal assets, and qualifying for this loan can be tough. Most personal loans are capped at $50,000, as microloans are. A personal loan is an option for business owners with good credit scores.

Which Loan Is Right for Your Business?

Make sure any loan you decide on fits the specific financial goals of your business and won't result in unmanageable debt. If you aren't looking to purchase equipment, an equipment loan won't be the right fit. When looking to grow your business, it's important to consider the different business loans available to you and which will help you achieve your goals.

Make an Honest Evaluation of Your Business

How would a potential lender view your business at first look? How strong are its credit score and debt-to-equity ratio? Can it afford the monthly payments with the income it generates? Be thorough and candid about the state of your business.

Examine the Interest Rate and Repayment Terms

Weigh the interest rate and terms of repayment in conjunction with each other. A high-interest rate may seem unsightly on paper, but it might not be a deal-breaker if the repayment terms are favorable. Get clear on the term length, payment schedule, and whether you can pay the loan off early without penalty.

Ask About Application and Administrative Fees

Some lenders charge a fee to apply for a loan. They may also charge fees for application-related functions like running a credit check or having collateral appraised. Make sure you know how much of these expenses you’re responsible for.

Don’t Rush

Even if you consider your business to be in emergency mode, don’t rush any part of your decision-making. Weigh your options as deliberately and slowly as you can – making the wrong choice too quickly can be disastrous. Speak with a Lending Advisor to evaluate your options quickly and determine the best course of action for your business.

Find the Right Loan for Your Business

There are plenty of options for loans and financing available to small businesses of all kinds. Take time to understand each one relevant to your business before deciding. At FundingTrail, we are here to help you better understand your options. If you need expert advice on what type of funding to consider for your business growth, let us know and we are happy to answer your questions!