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5 Types of Loans for Small Business Owners

Looking for financing that can help boost business growth? We’ve compiled a list of 5 common business loans entrepreneurs use so you can weigh your options and find the best fit.

Term Loans

With a term loan, you receive a total dollar amount upon approval that you repay over a designated period to the lender. Term loans can be extended by traditional banks or online services. They typically have either fixed or variable interest rates and can be used for a variety of purposes like working capital, debt refinance, or commercial real estate.

  • Short-Term Loans

Short-term loans are unique because they must be paid back over a relatively short period, ranging anywhere from several weeks to a maximum of 3 years. They also often require daily or weekly interest payments. You might receive your funds as soon as a day after applying, but the cost for this convenience can be prohibitive; with high interest rates and constant payments, you might find that these loans negatively impact your business’s overall cash flow.

  • Medium-Term Loans

Medium-term loans are more flexible and often used for larger loan amounts. Note that the approval process and time to funding can be longer than for short-term loans. Because medium-term loans can be taken out for several years, typically within the 5-10 range, they mean lower monthly payments.

  • Long-Term Loans

Long-term loans are the most affordable option because you can pay them back over 10 years or more. This means that rates and monthly payments are the lowest and have the least impact on your business’s cash flow.

  • SBA Loans

SBA loans are a type of long-term loan backed by the Small Business Administration (SBA). The SBA is a US government agency that providesresources to boost American small business growth. In addition to low monthly payments and rates, SBA loans come with a variety of benefits like no prepayment penalties and reduced risk. One of the most common disadvantages is that the process can be lengthy and complicated. That’s where SmartBiz comes in to help.

SmartBiz works to match your application with the lender from our marketplace that’s most likely to approve it. If you prequalify, SmartBiz can help you apply for an SBA 7(a) loan and if approved by one of our bank partners, the funds can help you boost your cash flow by investing directly back into your business. SmartBiz helps make the application process fast and secure.

Other SBA-funded options not offered through SmartBiz include CDC/504 loans, most commonly used for purchasing commercial real estate, and microloans for amounts up to $50,000.

Business Lines of Credit

A business line of credit allows you to borrow funds up to a limit based on your credit, typically smaller than a term loan. You only pay interest on the amount you use, and you can continue borrowing as necessary until you reach the set maximum. These loans are usually unsecured, meaning that you won’t have to provide collateral to qualify.

Business credit cards are revolving lines of credit. The main distinction is that they don’t terminate once the predetermined limit is reached and function like personal credit cards, with varying spending rewards and offers depending on the lender. Learn more here: 5 Business Credit Card Myths.

Merchant Cash Advances

A merchant cash advance (MCA) is most often used by small businesses that accept credit and debit card sales. You receive a specific sum in advance that is repaid either by a percent deduction from daily transactions or through daily or weekly payments.

Keep in mind that MCAs often lead to extremely high annual percentage rates—even the minimum within the range can be several times larger than term loan annual percentage rates (APRs), and can reach up to well over 300%.

Equipment Financing

Equipment loans are term loans specifically intended for purchasing equipment for your small business. The product you plan on purchasing acts as collateral for the loan, and the term usually matches the expected duration for the equipment.

SBA loans through SmartBiz can cover equipment purchases. Learn more about how you can use your funds here.

Invoice Factoring and Financing

Invoice factoring is not a loan in the traditional sense. Instead, you sell your customer invoices to a factoring company in exchange for a specified sum. They take care of collecting the payments, which means you can receive funds more quickly.

Invoice financing is slightly different. You maintain control of your invoices, because instead of selling them to a factoring company, you use them as collateral when applying for a short-term cash advance.

Knowing what’s out there is important when it comes to growing your small business. We believe an SBA loan through SmartBiz is a great fit for entrepreneurs who want to thrive. Check out our TrustPilot profile and Business Stories page to get to know the entrepreneurs we’ve worked with!

Are you ready to find out which financing option you are approved for? Get Started!

The information provided through this article is for educational purposes only. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

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