What Are the Different Types of Business Loans and Which One Is Right for You?

Small businesses use a handful of loan types to solve distinct cash needs: long-term growth, short-term working capital, asset purchases, or smoothing customer payment delays. Picking the right product reduces financing cost and the risk of cash-flow stress. Below I describe the common loan types, when each fits best, key pros and cons, and how to prepare to apply.

Note: information here is educational and current as of 2025. For program-specific rules and rates, consult the U.S. Small Business Administration and the Consumer Financial Protection Bureau (CFPB) linked below. This is not personalized financial advice—contact a financial professional for tailored recommendations.

Common types of business loans (how they work and when to use them)

1) Term loans (bank & online)

  • What they are: Lump-sum loans repaid over a fixed term (monthly or quarterly payments). Offered by banks, credit unions and many online lenders.
  • When to use: One-time investments (expansion, acquisition, refinancing other debt).
  • Pros: Predictable payments, competitive rates for well-qualified borrowers, possible long terms for major investments.
  • Cons: Qualification can require strong credit, collateral, and detailed financial documentation. Online lenders are faster but often pricier.

2) SBA-backed loans

  • What they are: Loan programs partially guaranteed by the U.S. Small Business Administration (SBA), such as 7(a), CDC/504 and microloans. The guarantee reduces lender risk and can improve terms for small businesses.
  • When to use: Acquisition, long-term equipment or real estate, or when you need lower down payment and longer amortization.
  • Pros: Longer terms, lower down payments, competitive rates compared with many alternative lenders. See more at FinHelp’s deep dive: SBA Loans 101: Are They Right for Your Business? and the SBA site (sba.gov).
  • Cons: Longer approval and documentation timeline; strict eligibility and personal guaranty requirements.

3) Business line of credit

  • What it is: A revolving credit facility that lets you borrow up to a set limit, repay, and borrow again—interest charged only on borrowed amounts.
  • When to use: Managing seasonal inventory, bridging short-term cash-flow gaps, or covering unpredictable expenses.
  • Pros: Flexible, only pay interest on what you use. Lower cost than repeated short-term loans when managed properly. More on lines of credit here: Business Line of Credit.
  • Cons: Lenders can reduce or revoke lines; variable-rate interest can rise. Some lines have maintenance or draw fees.

4) Equipment financing and leasing

  • What it is: Loans or leases secured by the equipment being purchased; lender’s collateral is the equipment.
  • When to use: Buying machinery, vehicles, or technology when you want to preserve working capital.
  • Pros: Easier approval for asset-backed borrowing; predictable payments tied to the useful life of equipment. See FinHelp’s primer: Equipment Financing 101 for Small Businesses.
  • Cons: Limited to equipment purchases; if you default, the lender can repossess the equipment.

5) Invoice financing (factoring and receivables lending)

  • What it is: You borrow against unpaid invoices. Two main forms: recourse/non-recourse factoring (selling receivables) and invoice discounting (loans secured by receivables).
  • When to use: B2B businesses with long customer payment cycles that need immediate cash.
  • Pros: Fast access to working capital; approval driven by customers’ creditworthiness rather than yours. Read more: Invoice Financing.
  • Cons: Fees can be higher than traditional loans; factoring may transfer collections responsibility and affect customer relationships.

6) Merchant Cash Advances (MCAs) and revenue-based financing

  • What it is: Upfront cash in exchange for a portion of future credit/debit card sales (MCA) or a share of future revenue until a fixed amount is repaid.
  • When to use: Retail or restaurant businesses with steady card sales that need very fast cash.
  • Pros: Fast funding and flexible payments tied to revenue.
  • Cons: Costly—effective annualized rates can be much higher than loans; daily/weekly payments can pressure cash flow.

7) Microloans, purchase-order financing, and specialty products

  • Microloans: Small-dollar loans (often nonprofit or CDFI lenders) for startups and very small businesses.
  • Purchase-order financing: Funds manufacturers or suppliers based on purchase orders.
  • Specialty: Real-estate bridge loans, export finance, or startup venture debt—each serves narrow needs.

How to decide which loan type fits your business

Use this three-step framework I use in practice when advising clients:

  1. Define the purpose precisely: growth capex, working capital, payroll, inventory, equipment or smoothing receivables. Different problems have different optimal solutions.
  2. Map cash-flow: estimate best- and worst-case monthly cash flows to confirm the business can service payments under stress.
  3. Match term to asset life: use long-term loans for long-lived assets, short-term or revolving credit for working capital, and receivables-based products when invoices back the need.

If your need is short-term and recurring (seasonal inventory), a line of credit or invoice financing usually fits best. For long-term investments like buying property, an SBA CDC/504 or commercial mortgage is generally better.

Documents and preparation checklist (what lenders will want)

  • Business plan or executive summary explaining the use of proceeds and repayment plan.
  • Historical financial statements (profit & loss, balance sheet) and recent bank statements (typically 3–24 months depending on lender).
  • Tax returns (business and often personal) for 2–3 years.
  • Accounts receivable aging report and outstanding invoices (for invoice financing).
  • Equipment quotes or purchase orders for asset-backed loans.
  • Ownership documents, business licenses, and lease agreements.

In my practice, early organization of these documents reduces approval time and strengthens negotiating position.

Typical costs and rate expectations (illustrative)

Interest rates and fees vary by lender, loan type, borrower credit and collateral. As of 2025: well-qualified borrowers using secured bank term loans or SBA programs may access single-digit rates, while alternative online lenders, invoice financers and merchant cash advances often charge higher effective costs because of fees or factor rates. Always ask for APR or effective annual cost and compare total repayment, not just headline rate (Consumer Financial Protection Bureau guidance).

Common mistakes and how to avoid them

  • Choosing the cheapest monthly payment without matching term to asset life. Lower monthly payment that stretches too long can mean much higher total interest.
  • Over-borrowing. Only take what you need; excess debt increases default risk.
  • Ignoring covenants and fees. Understand late fees, prepayment penalties and covenant triggers before signing.
  • Using MCA or high-cost short-term products for long-term needs—this is expensive and unsustainable.

Quick decision checklist

  • Is this for one-time asset purchase or recurring cash-flow? (Asset → term loan/equipment; recurring → line of credit or invoice financing)
  • How soon do you need funds? (Immediate → online lender, MCA, or factoring; weeks/months → bank/SBA)
  • Can you provide collateral? (Yes → cheaper secured options; No → unsecured lines or alternative lenders)

FAQ — Short answers

  • How do SBA loans differ from bank loans? SBA loans use a government guarantee to expand access and improve terms for small businesses; banks underwrite to similar standards but without SBA guarantee.
  • Will my personal credit be checked? Usually yes, especially for small businesses or new ventures; lenders often require personal guarantees.
  • Can I use a business loan for personal expenses? No — using business loan proceeds for personal use can violate loan covenants and create legal/tax issues.

Final thoughts and next steps

Match the product to the need, gather documentation early, and run conservative cash-flow stress tests. Compare offers on total cost (APR or effective rate), not just monthly payment. If you’re unsure, start with a trusted lender or a financial advisor and consider small pilot borrowing rather than a large, long-term commitment.

Internal resources: For deeper reading on specific options, see FinHelp’s guides on SBA loans, business lines of credit, and invoice financing.

Authoritative sources and further reading:

Professional disclaimer: This article is educational and not individualized financial advice. Loan products, eligibility, and rates change; consult lenders and financial professionals before committing to any financing.