12 Types of Business Loans: Compare and Understand Your Best Options

Camino Financial21 Feb 2024
12 Types of Business Loans: Compare and Understand Your Best Options
Looking for the best type of business loan? There are many different options available for small businesses, but their characteristics vary widely. As a business owner, it's essential to secure not just the finances you need but with the most ideal terms for your business specifically. Naturally, it can be hard to decide which one is right. In this guide, we'll take a deep dive into the various types of financing options so you can make the most informed choice!
Table of Contents
1. Best types of small business loans for businesses
a. Microloans
b. Personal loans
c. Startup loans
d. SBA loans
e. Business line of credit
f. Invoice factoring and invoice financing
g. Merchant cash advances
h. Equipment financing loan
i. Inventory financing loan
j. Business credit card
k. Working Capital Loans
l. Commercial real estate loans
2. What is a business loan?
3. How to choose the best type of loan for a business
4. FAQs

Best Types Of Small Business Loans For Businesses

Business Term Loans

Term loans are an excellent financing option if you're looking for a lump sum of money repayable in fixed installments. One of their main benefits is that, because most have fixed terms, the loan has a strong element of predictability. Both business interest rates and the loan term depend on the lender. This last one can range from as little as $10,000 to $5000,000 or even more. Business term loans finance property purchases, business acquisitions, equipment buys, and expansions. Most traditional lenders require the business owner to provide collateral to secure the loan. Consequently, there is a need to pledge your house or other property as security. The lender has the right to sell the collateral if you don't repay the loan.
#DidYouKnow Camino Financial doesn’t require you to pledge collateral. It is better to get an unsecured business loan
There are 3 types of business term loans:
  • small term
  • medium term
  • long term
Which one you get will depend on the amount you need and how much time you need to repay it. Most entrepreneurs consider term loans as a great source of financing because the requirements are easy to meet. Pros: 
  • Long-Term Financing: Business term loans provide long-term funding, which can support significant investments and expansions.
  • Predictable Payments: These loans come with fixed interest rates and structured repayment schedules, making it easier for businesses to budget.
  • Diverse Use: Businesses can utilize them for various needs, like equipment purchase, expanding operations, or refinancing existing debt.
  • Builds Credit: Responsible repayment of term loans can help businesses build a positive credit history, which can be beneficial for future financing.
  • Lower Interest Rates: Compared to some other financing options, business term loans often offer lower interest rates.
Cons:
  • Collateral Requirements: Lenders may require collateral, which can put business assets at risk if the loan isn't repaid.
  • Strict Qualifications: Meeting the eligibility criteria for business term loans can be challenging, especially for startups or businesses with weak financials.
  • Long-Term Commitment: These loans represent a long-term financial commitment, and early repayment might not always be cost-effective.
  • Interest Costs: While interest rates may be lower, the overall interest costs on long-term loans can be substantial.
  • Potentially Lengthy Approval Process: Obtaining approval for business term loans can take time due to the thorough underwriting process.
Apply for a business loan today

Microloan

As their name suggests, these loans for business owners are usually for small amounts, repayment terms are very short, and the borrowers must pay back the loan and interest within one to three years. The amount and interest rates depend upon the nature of your business and how long you have been in operation. Companies that have been around longer could get lower rates. And if you can offer some form of collateral, you could be eligible for a quick approval and more funding. Microloans help entrepreneurs expand businesses, purchase inventory, or buy equipment. Pros:
  • Startups Access: Accessible for startups lacking traditional loan options.
  • Credit Score Based: Benefits those with good credit.
  • Flexible Use: Covers various startup costs.
  • Alternative Funding: Suits startups not meeting traditional lender criteria.
Cons:
  • Not Business-Specific: Intended for minor expenses, not startups.
  • Personal Financial Risk: Merges personal and business finances.
  • Limited Capital: May not meet all startup needs.
  • Higher Costs: Often pricier than business loans.
  • Repayment Pressure: Terms may not match business revenue timelines.

Personal loans (to start a business or for startups)

It's hard to get a bank or a traditional financial institution to lend you any money if you want to start a business. They prefer to advance funds to companies set up a year or more ago and have a successful operating history. However, startups looking for funding do have some other options. You can approach a lender for a personal loan and invest in in your business. This is not the best course of action to follow, but you can explore it if you have no other choice. The lender approves personal loans based on your credit score, and you can use the money in any way you want. That includes starting a business. But strictly speaking, this funding source is for minor expenses.

Use personal loans for startups unable to meet banks' minimum business age requirements.

Pros: Cons:
  • Not Business-Focused
  • Personal Financial Risk
  • Limited Funding
  • Higher Costs
  • Repayment Misalignment

Startup loans

Startup loans, popular for early-stage business financing, cover essentials like rent and inventory, and aid in growth efforts.

They build credit history but defaulting risks future credit. Ideal for entrepreneurs with solid ideas but limited initial funds.

Pros:
  • Startup-Focused: Meets specific needs of new ventures.
  • Initial Capital: Funds startup costs like office space and inventory.
  • Growth Support: Finances activities like hiring and market expansion.
  • Credit Building: Establishes business credit history.
  • Launch Assistance: Ideal for entrepreneurs needing initial capital.
Cons:
  • Credit Risk: Defaulting can hurt personal credit and future borrowing.
  • Higher Costs: May have higher interest rates or fees.
  • Repayment Pressure: Obligations start regardless of business success.
  • Eligibility Requirements: Some loans have strict criteria.
  • Financial Risk: Early debt can be risky without quick returns.

SBA loans

SBA loans carry the lowest interest rates in the industry among all the types of business loans offered by banks.
#DidYouKnow The U.S. Small Business Administration is a government agency set up to help small business owners.

SBA loans fall into several categories. Here's a quick description of some of the different types of loans that the SBA offers:

SBA 7(a) loans

You can use a 7(a) loan when real estate is part of a business purchase or for short and long-term working capital. An SBA 7(a) loan can be for up to $5 million with terms of up to 10 years. Although interest rates vary, a 7(a) loan can have an annual interest rate in the 5% to 11% range. Pros:
  • Low Rates: SBA loans offer industry-low interest rates.
  • Government Backed: Supported by the U.S. Small Business Administration.
  • High Loan Limits: Up to $5 million available.
  • Versatile: Funds for various purposes, including real estate and working capital.
  • Long Terms: Up to 10 years for manageable repayments.
Cons:
  • Strict Eligibility: Challenging criteria for some businesses.
  • Variable Rates: Interest rates range from 5% to 11%.
  • Complex Application: Lengthy, documentation-heavy process.
  • Government Rules: Must comply with specific regulations.
  • Collateral/Guarantees: Some loans require additional risk.

CDC/504 Loan Program

These types of loans available for small businesses are available through Certified Development Companies (CDCs), which are nonprofit organizations regulated by SBA. Loan maturity extends up to 25 years, and borrowers can use the money to buy buildings, land, and machinery. However, you can't use a 504 loan for purchasing inventory or funding working capital. A funding limit of $5 million applies to these loans. We mentioned that SBA loans are the cheapest option, and the 504 loans have a price significantly lower at 2% to 3%. Pros:
  • Long-Term Repayment: Maturities up to 25 years reduce financial pressure.
  • Low Interest Rates: 2% to 3% rates, among the most affordable for small businesses.
  • Asset Purchase Focus: Ideal for buying long-term assets like buildings and machinery.
  • SBA Regulated: Oversight by Certified Development Companies and SBA.
  • High Funding Cap: Up to $5 million for major investments.
Cons:
  • Restricted Fund Use: Not for inventory or working capital.
  • Complex Process: Time-consuming application involving CDCs and lenders.
  • Collateral Needed: Financed assets often required as collateral.
  • Specific Eligibility: Excludes some businesses based on size or type.
  • Prepayment Penalties: Possible penalties in early loan years.

SBA Microloans

The loan limit is $50,000 and is typically provided to entrepreneurs for business expansion, repair, and rebuilding. SBA Microloans are generally available at rates between 8% and 13%. You can also use SBA Microloans to fund working capital or purchase inventory, but you can't use the money to pay existing debt or buy a property. A word of caution about SBA loans: although the interest rates are low, the requirements are highly stringent. Also, it could take months to get your loan approved.

Business line of credit

This small business loan is very flexible. A business line of credit provides you with a sum you can draw on when you need funds. The lender only will charge interest only on the amount that you borrow. Of course, its flexibility can come at a cost. Business lines of credit are expensive, and interest rates can be high. Be prepared to pay an annual rate as high as 25% or even more. Additionally, lenders usually charge a recurring fee for the line of credit, increasing the overall cost. You should use a line of credit as a short-term source of finance. Don't deploy the funds to buy equipment or for your other long-term needs.

Pros:

  • High Flexibility: Allows flexible fund usage to manage cash flow.
  • Interest on Borrowed Amount: Interest charged only on borrowed funds, cost-effective for short-term needs.
  • Immediate Access: Provides quick access to capital for unexpected expenses.
  • Revolving Credit: Repaid funds become available again for ongoing funding.

Cons:

  • High Interest Rates: Rates can be very high, exceeding 25%, making it expensive.
  • Recurring Fees: Lenders may charge ongoing fees, increasing the cost.
  • Not for Long-Term: Unsuitable for long-term investments like equipment purchases.
  • Mismanagement Risk: Flexibility can lead to fund mismanagement if not used carefully.
  • Debt Accumulation: Frequent tapping without timely repayments can lead to debt accumulation.
#DidYouKnow The purpose of a loan for businesses is to help you invest in your business; you can’t use them for personal reasons.

Invoice factoring and invoice financing

These two types of small business financing are similar. Both help companies generate cash against their unpaid invoices. Let's understand the difference between Invoice Factoring and Invoice Financing:
  • Invoice factoring: A business that has unpaid invoices can sell them to a factoring company. The factoring company would pay the business immediately after deducting its fees. Subsequently, the factoring company would collect money from the customers.
  • Invoice financing: Here, a sale doesn't take place. Instead, the invoices act as collateral. The company that's providing invoice financing would advance a sum secured by unpaid invoices. The responsibility for collecting invoice payments is with the business that has received the finance.
The fees that a factoring company charges are 1% to 6% of the invoice value. Remember that this percentage is for an invoice payable in 60 days. So, the APR would be about 6% to 35% or even more. Invoicing financing companies are equally expensive. The companies providing the funds don't usually pay the entire invoice value as an advance. Instead, they typically hold back a margin of about 10% to 30%. Apply for a business loan today Pros:
  1. Control Over Collections: Businesses maintain control over customer payment collection, preserving relationships.
  2. Flexibility: Choose the amount and which invoices to finance.
  3. Immediate Liquidity: Quick access to capital from unpaid invoices for cash flow.
Cons:
  1. Expensive: Similar to invoice factoring, it can have high-interest rates.
  2. Partial Payment: Typically, businesses advance only 70% to 90% of the invoice value, not the full amount.
  3. Collateral Requirement: Invoices serve as collateral, and businesses must repay regardless of customer payment timing.

Merchant Cash Advances

Getting approval for a merchant cash advance (or MCA) it's relatively easy; companies that find it challenging to qualify for other loans tend to gravitate towards this type of business loan financing.

However, only businesses with large volumes of credit card sales are eligible for merchant cash advances. Here's how a merchant cash advance works: An MCA lender provides funds that are repayable against future credit card sales.

The lender calculates repayments as a percentage of daily card sales. Between 20% and 40% of the amounts paid by customers go directly to the lender, and you pay interest on these amounts. We mentioned that it's an expensive way to raise money. A recent report on Forbes.com points out that merchant cash advances can carry an annual interest rate of up to 250% (sometimes even more!). Yes, you read that right. In addition to the principal, you might pay interest rates as high as 250 percent! Fortunately, other types are cheaper. If you're considering a merchant cash advance to raise money for your business, we'd like to offer you a far better option. Small business loans from Camino Financial are far cheaper. Anybody meeting the minimum requirements can apply. All you have to do to determine if you prequalify is to complete a short online application. Pros:
  • Easy Qualification: MCAs are easy to qualify for, even for businesses ineligible for traditional loans.
  • Quick Funds Access: Fast approval process provides rapid capital access.
  • Based on Credit Card Sales: Repayments align with daily credit card sales, matching revenue flow.
  • Flexible Repayment: No fixed monthly payments, beneficial for businesses with fluctuating sales.
Cons:
  • Extremely High Rates: MCAs can have interest rates exceeding 250%, making them very expensive.
  • High Credit Card Sales Required: Limited to businesses with substantial credit card sales.
  • Daily Deductions: A portion of daily card sales goes to the lender, impacting cash flow (20% to 40%).
  • Debt Cycle Risk: High costs may lead to a cycle of debt, requiring additional advances.
  • No Early Repayment Benefit: Unlike traditional loans, early repayment often doesn't offer financial benefits.

Equipment Financing loan

As its name implies, an equipment loan provides funds for buying vehicles, machinery, computers, and other types of equipment. These loans work in the following manner:
  • The equipment that you buy serves as the collateral for the loan. If you can't repay, the lender has the right to seize the equipment and sell it.
  • The loan's term usually matches the life of the equipment. So, if the machinery you acquire has a life of, say, 5 years, the loan term would also be 5 years.
  • Interest rates usually aren't very high. Expect to pay between 8% and 30% annually.
Equipment financing is one of the types of loans for businesses that are relatively easy to qualify for. That's because the equipment acts as security for the loan. Pros:
  • Specific Purpose: Tailored for equipment purchase, ideal for businesses needing vehicles, machinery, or technology.
  • Collateral-Based: Equipment serves as collateral, making qualification easier.
  • Matched Terms: Loan term aligns with equipment lifespan, matching repayment to asset utility.
  • Tax Benefits: Possible tax deductions on interest and depreciation of financed equipment.
  • Preserves Cash Flow: Acquire equipment without paying the full cost upfront, preserving working capital.
Cons:
  • Seizure Risk: Lender can seize equipment if the loan can't be repaid, disrupting business.
  • Variable Interest Rates: Rates (8% to 30%) can be high based on creditworthiness and market conditions.
  • Equipment-Only Use: Funds must exclusively finance equipment purchases, not other business expenses.
  • Obsolescence Risk: Equipment may become obsolete before the loan term ends, especially with advancing technology.
  • Upfront Costs: Some agreements may require a down payment, challenging for cash-strapped businesses.

Inventory Financing loan

Retailers and wholesalers use inventory financing to pay for products they will stock and sell later. The lender often collateralizes the funds. If the borrower doesn't pay, the lender has the right to seize the inventory and sell it to recover its money. Inventory financing is often a good option for companies that want to purchase stock for the busy season. In addition, it allows them to update their product lines to meet customer demand. One of the negatives of inventory financing loans is that they aren't cheap. Lenders increase interest rates as the risk of default can be high. These types of business loans have another downside, as well. For example, borrowers might have to pay a processing fee when signing the loan agreement. Pros:
  • For Retailers and Wholesalers: Designed for businesses needing inventory, suitable for retailers and wholesalers.
  • Seasonal Stocking: Allows buying stock for peak seasons to meet customer demand.
  • Product Line Updates: Helps businesses align product lines with trends.
  • Secured Loan: Inventory often used as collateral, making loan acquisition easier.
Cons:
  • High Interest Rates: Elevated rates due to default risk increase costs.
  • Seizure Risk: Lender can seize inventory if the loan isn't repaid, impacting operations.
  • Additional Fees: Borrowers may face extra costs like processing fees.
  • Inventory-Dependent: Funding linked to inventory value, limiting financing if values are low.
  • Limited Use: Funds restricted to inventory purchase, not for equipment or working capital.

Business Credit Card

Business credit cards offer advantages like cashback and points, useful for regular purchases. However, they have high interest rates and fees for late payments. The credit limit might be lower compared to other financing options, and they don't provide lump sum money like loans. They're best for day-to-day expenses or emergencies, while other business loans are better for larger expenses. Pros:
  • Rewards and Cashback: Offers cashback and rewards for savings.
  • Usage Flexibility: No usage restrictions, suitable for various purchases.
  • Convenience: Quick and easy for day-to-day business expenses.
  • Builds Credit: Helps build business credit history.
Cons:
  • High Interest Rates: Balances can accrue over 22% interest if not paid in full.
  • Additional Fees: Late fees and delayed payment charges can increase costs.
  • Limited Credit: Lower credit limit compared to other options, no lump sum.
  • Risk of Misuse: Easy use may lead to overspending, affecting finances and credit scores.
  • Not for Large Expenses: Best for regular expenses, not significant investments.

Working Capital Loans

Working capital loans are loans that you can use to finance the day-to-day operations of your business. This can include inventory, payroll, cash flow, and other operating costs and cover gaps in funding, which can help businesses keep their doors open and continue running smoothly. Pros:
  • Operational Funding: Ideal for day-to-day operations, including inventory, payroll, and cash flow management.
  • Funding Gap Coverage: Bridges shortfalls to maintain smooth operations.
  • Flexibility: Offers versatile fund usage for various operational needs.
  • Supports Growth: Helps finance growth and expansion plans.
  • Quick Access: Often provides rapid access to capital for immediate needs.
Cons:
  • Short-Term: Designed for short-term needs, not suitable for long-term or major investments.
  • Interest Costs: Interest rates can add significant loan costs.
  • Debt Obligation: Increases business debt, impacting financial stability if not managed well.
  • Qualification Criteria: Some businesses may struggle to meet criteria, especially with weak financial history or low credit scores.
  • Mismanagement Risk: Unwise use may lead to dependency on such loans for operational expenses.

Commercial real estate loans

Commercial real estate loans are a specific type of financing designed for acquiring or refinancing properties used for business purposes. This category includes various forms of commercial real estate loans, each tailored to different kinds of properties such as office buildings, retail spaces, or industrial warehouses. Unlike residential mortgages, commercial real estate loans typically come with higher interest rates and often require a larger down payment Pros:
  • Property Acquisition and Refinancing: Ideal for purchasing or refinancing commercial properties like office buildings, retail spaces, or warehouses.
  • Tailored Financing: Various loan types are available, each tailored to different kinds of commercial properties, offering flexibility for specific business needs.
  • Potential for Appreciation: Investing in commercial real estate can lead to property appreciation, offering long-term financial benefits.
  • Asset Ownership: Provides a path to property ownership, which can be a valuable asset for the business.
Cons:
  • Higher Costs: Higher interest rates and substantial down payment increase expenses.
  • Complex Process: Involves a complex, financially scrutinized process.
  • Property Value Risk: Risk of property value depreciation due to market fluctuations.
  • Long-Term Commitment: Represents a long-term financial commitment.

What Is a Business Loan?

A business loan is a type of financing specifically designed to meet the needs of businesses. You can use them for various purposes, including expanding your business, purchasing inventory or equipment, or covering operating costs. Banks and other financial institutions offer this product, and they usually come with terms and conditions that are specific to businesses.

Examples of business loan

Some examples are term loans, SBA loans, invoice factoring, equipment financing, and lines of credit.

How to Choose the Best Type of Loan for a Business

Now that we've discussed all the types of business loans, you're probably wondering which one is the best. The answer depends on what you need the money for. If you need to buy a specific piece of machinery, that could be the most appropriate choice. Equipment financing loans usually have low rates of interest. Additionally, getting approved for an equipment loan is relatively easy. SBA loans provide another excellent option. They are low-cost, and the upper limit is a generous $5 million. However, the approval process is both lengthy and cumbersome. Term loans offer the best of all worlds. They are available at reasonable interest rates. Plus, this loan has prepayments fixed and predictable. Plus, you can use the money for any business purpose like buying equipment, purchasing inventory, or paying the expenses for expanding into new territory.

The Best Small Business Loan Is A Camino Financial Loan

Business loans can provide entrepreneurs the cash to buy equipment, expand into new territory, or pay for their day-to-day expenses. If you require a business loan, we are an excellent option. Learn here how Camino Financial loans work! Our loans are one of the best business loans in the market. We offer funds at the best available rates and terms. Our loan specialists will do their utmost to help you raise the cash you need. Apply for a business loan today

FAQs

How do small business loans work?

Small business loans offer entrepreneurs an excellent option for raising money for their companies. They can provide you with the money to take your business to the next level. The lender transfers you the cash you applied for, and you have to repay over some time (plus interest rates and maybe other fees).

What are the general requirements for business loans?

If you need a business loan, the lender would require details about your business and yourself. Most lenders also stipulate that your monthly sales should be above a specified threshold and that you should have a FICO credit score that meets their minimum requirements.

Where to loan money for my business?

There are many places where you can get a business loan for your company. Some examples are:
  • Banks and credit unions
  • SBA lenders
  • online lenders
Depending on your financial institution, you can choose from a range of different types of business loans.

How much do banks loan to small businesses?

You can get a loan amount of up to $750,000 (or even $1M) with big banks if you have a good credit score and fulfill the requirements.

What are the types of business financing?

There are many different types of loans available for small businesses and entrepreneurs. The most common sources of business financing include loans from banks, venture capital, and angel investors. Loans from banks are the most common type of business financing.

Who are the best lenders for business loans in the market for small businesses?

There are many good lenders in the market for small businesses. Some of the best include (but are not limited to) Kabbage, OnDeck, and Funding Circle. Each of these lenders has different requirements and application processes, so it's important to do your research before applying. It's also important to remember that not all lenders are equal - some offer better terms or interest rates than others.
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