What are the different types of business loans for small businesses?

Finding the right financing can make or break your small business. In fact, a recent QuickBooks small business report found that 65% of small business owners plan to make a capital investment in their business in the next year, highlighting the need for accessible funding. Whether you're launching a startup, expanding operations, or managing cash flow gaps, understanding your loan options helps you make informed decisions that support your business goals.

This guide breaks down common types of business loans available to small businesses. We'll explain how each works, who they're best for, and what to consider before applying.

Term loans

Term loans are a traditional form of business financing. You receive a lump sum upfront and repay it over a fixed period with regular payments that include principal and interest.

How do term loans work?

When you secure a term loan, the lender provides the full loan amount immediately. You then repay it according to a predetermined schedule (typically monthly) over a set term ranging from one to 10 years or more.

Key characteristics include the following:

• Fixed or variable interest rates
• Predictable payment schedules
• Loan amounts that can range from thousands to several million dollars
• Terms ranging from one to 25 years

Who should consider term loans?

Term loans work well for businesses that need substantial capital for specific purposes and can commit to regular payments. They're ideal for funding major expansions, refinancing existing debt, or making large, one-time investments, such as purchasing equipment or real estate.

SBA loans

Small Business Administration (SBA) loans are partially guaranteed by the federal government, which makes them less risky for lenders. This guarantee can make them more accessible for small businesses. Popular SBA programs include 7(a) loans for general financing, 504 loans for major fixed assets, and microloans for smaller amounts.

What is an SBA 7(a) loan?

The SBA 7(a) program is the most popular SBA loan option, offering versatile financing for various business needs. These loans are flexible and can be a great source of capital for established businesses.

Features include:

• Maximum loan amount: Typically $5 million.
• Terms: Up to 10 years for working capital and up to 25 years for real estate.
• Use of funds: Can be used for working capital, equipment purchases, owner-occupied real estate, business acquisitions, or certain debt refinancing.

What is an SBA 504 loan?

SBA 504 loans specifically finance major fixed assets like real estate, heavy machinery, and large construction or renovation projects. They involve a three-party 50‑40‑10 structure: Typically, a bank funds about 50% of the project, a Certified Development Company (CDC) funds up to 40% through an SBA‑backed debenture, and the borrower contributes at least 10% as a down payment.

Features include:

• Maximum loan amounts: The CDC/SBA portion is up to $5.5 million in many cases, with total project costs higher once the bank portion is included.
• Terms: Long‑term, fixed‑rate financing (often 10-25 years) for the CDC/SBA portion.
• Use of funds: Purchase, construction, or renovation of owner‑occupied commercial real estate and large equipment.

Because of the low down payment and long fixed term, 504 loans are often used for owner‑occupied buildings and major expansions where you plan to stay in the property for the long haul.

What is an SBA microloan?

Microloans provide smaller amounts of capital to startups and businesses in underserved communities. The maximum microloan amount is $50,000, but the average is around $13,000. These often come with valuable business training and support.

SBA does not lend directly; instead, it funds nonprofit intermediaries that then make and service microloans and often provide training and technical assistance.

Features include:

• Maximum loan amount: $50,000, with average loans around $13,000.
• Terms: Up to six years, with interest rates set by the intermediary within SBA guidelines.
• Use of funds: Working capital, inventory, supplies, furniture, fixtures, and equipment (but not real estate or paying existing debts).

What are the typical requirements for an SBA loan?

SBA loans must satisfy both the lender’s underwriting standards and SBA program rules, so the bar is higher than for a simple bank term loan. In exchange, you may get longer terms, smaller down payments, and greater flexibility in how you use the funds.

Lenders and SBA typically look for the following:

• Eligible small business: Your business must be a for-profit entity operating in the U.S. or its territories. It also needs to meet the SBA's size standards and use the loan for approved business purposes (e.g., not for passive real estate investments or gambling).
• "Credit elsewhere" test: You must show that you can't get similar financing from other sources on reasonable terms without an SBA guarantee. This includes considering the personal resources of the business owners.
• Credit history: Lenders will check the personal credit scores of the owners, which must generally be strong. They'll also review your business's credit history if it's available.
• Cash flow: Lenders will analyze your business's historical or projected cash flow to ensure you can afford the loan payments on top of your regular operating expenses.
• Personal guarantee: Any individual who owns 20% or more of the business is usually required to provide an unlimited personal guarantee. Every SBA loan requires at least one guarantor.
• Collateral: Lenders are expected to secure the loan with collateral. This can include business assets and, if necessary, personal assets like real estate, especially for larger loan amounts.

Business lines of credit

A business line of credit provides flexible access to funds up to a predetermined limit. You only pay interest on what you actually use, making it a powerful tool for managing cash flow.

How does a line of credit work?

Think of a business line of credit like a credit card for your business. You're approved for a maximum amount, draw funds as needed, repay them, and can borrow again—all within your credit limit. This revolving credit replenishes as you repay.

What are the best uses for a line of credit?

Lines of credit excel at managing short-term financial needs. They are excellent for:

• Covering seasonal cash flow fluctuations
• Paying for unexpected expenses
• Handling short-term working capital needs
• Bridging gaps between receivables and payables

What’s the difference between secured and unsecured lines of credit?

Secured lines of credit are backed by collateral, such as inventory or receivables. They often have higher credit limits and lower interest rates. Unsecured lines of credit require no collateral but typically have lower limits, higher rates, and require a stronger credit profile.

Equipment financing

Equipment financing allows you to purchase or lease business equipment while spreading the cost over time. The equipment itself typically serves as collateral for the loan.

How does equipment financing work?

The lender provides funds specifically to purchase equipment. You make regular payments over the loan term, and the equipment serves as security. If you default, the lender can repossess the asset. Lenders may offer financing for up to 100% of the equipment's cost, with terms that align with the equipment's useful life.

What types of equipment can you finance?

You can finance a wide array of business assets, including:

• Manufacturing machinery
• Commercial vehicles and transportation equipment
• Restaurant and food service appliances
• Medical and dental equipment
• Construction equipment
• Office technology and computers
• Agricultural equipment

Equipment loans vs. equipment leases

With a loan, you own the equipment at the end of the term. With a lease, the lessor owns it, though you may have an option to purchase.

Invoice financing and factoring

Invoice financing turns your outstanding invoices into immediate working capital rather than waiting 30, 60, or 90 days for customer payment. This is a great way to improve your cash flow.

What is invoice factoring?

With invoice factoring, you sell your unpaid invoices to a factoring company at a discount. The factor pays you a large percentage of the invoice value upfront (typically 70-90%) and then collects payment directly from your customers. Once your customer pays, you receive the remaining balance minus the factor's fee.

What is invoice financing?

Invoice financing, also known as accounts receivable financing, uses your receivables as collateral for a loan or line of credit. Unlike factoring, you retain control of your collections and maintain your direct customer relationships. The fees are also typically lower than with factoring.

Merchant cash advances (MCA)

A merchant cash advance (MCA) provides upfront capital in exchange for a percentage of your future credit card sales or daily bank deposits.

How do merchant cash advances work?

An MCA provider gives you a lump sum based on your typical monthly revenue. You repay it through a fixed percentage of daily credit card transactions or automatic bank withdrawals. Repayment continues until the advance plus fees is paid in full.

How are MCA costs calculated?

MCAs use factor rates instead of interest rates. A factor rate of 1.3 means you repay $1.30 for every dollar borrowed. For example, a $50,000 advance with a 1.3 factor rate would result in a total repayment of $65,000. While fast, this form of financing can be very expensive and should generally be considered only where the return on investment justifies the high cost.

In some states, “commercial financing disclosure” or “small‑business truth‑in‑lending” laws now require MCA providers to give standardized cost disclosures, including total financing cost and an estimated APR or similar annualized rate, to help you compare MCAs with traditional loans.

Commercial real estate loans

Commercial real estate (CRE) loans finance the purchase, construction, or renovation of business property. These are large, long-term loans secured by the property itself. Lenders will closely evaluate the property's income potential, your business financials, and your down payment.

Many CRE loans, including SBA 504 and some 7(a) loans, are limited to owner‑occupied properties where the business uses most of the space, rather than pure investment real estate.

How to choose the right business loan

Selecting the appropriate financing requires a careful evaluation of your business needs and financial standing. With so many options, it's essential you find a solution that helps, not hinders, your business.

Assess your financing needs

Start by clearly defining why you need the funds:

• Purpose: What exactly will you use the funds for? Is it for inventory, expansion, or covering payroll?
• Amount: How much capital do you actually need? Be precise to avoid borrowing too much or too little.
• Timeline: When do you need the funds, and how quickly can you realistically repay the loan?
• Impact: What return on investment do you expect from this financing?

Evaluate your qualifications

Different loan types have varying requirements. You need an honest assessment of your business's health; accounting software tools can help you get a clear picture of your finances. Lenders will examine:

• Personal and business credit scores
• Time in business
• Annual revenue and profitability
• Available collateral
• Existing debt obligations
• Your industry and business model

Compare the total costs

Look beyond the headline interest rate to understand the true cost of borrowing. Consider:

• APR: The Annual Percentage Rate includes interest and most fees, giving you a more complete picture of the cost.
• Origination fees: These are upfront costs for processing the loan, typically 1-6% of the loan amount.
• Ongoing fees: Some loans come with monthly or annual maintenance fees.
• Prepayment penalties: Be aware of any costs associated with paying the loan off early.
• Total repayment amount: Calculate the full amount you will pay back over the life of the loan, including principal, interest, and all fees.

Consider the repayment structure

Match the loan's repayment schedule to your business's cash flow. Some short-term loans require daily or weekly payments, which can be difficult for businesses with fluctuating revenue. Monthly payments may be more manageable. Ensure your revenue cycle can consistently support the required payment schedule. Strong cash flow management is essential.

Final thoughts

The right business loan depends on your unique circumstances, goals, and financial situation. Term loans and SBA loans offer affordable, structured financing for established businesses with strong credit. Lines of credit provide flexible working capital management.

Take time to understand each option's requirements, costs, and implications. Prepare thorough documentation, compare multiple lenders, and choose financing that aligns with both your immediate needs and long-term business strategy. Thoughtful financing can provide the capital you need while keeping your business on solid footing.