Overview
Business owners have many loan choices. Picking the right one affects cost, speed, and long‑term flexibility. This guide explains the main types of business loans, who they suit, typical terms, documentation you’ll need, common pitfalls, and practical tips I use when advising clients.
In my practice (15+ years advising small businesses and helping more than 500 clients), I’ve seen the right loan accelerate growth and the wrong loan create cash‑flow strain. Use this article to match your business situation to the most appropriate loan type.
Authoritative sources: U.S. Small Business Administration (sba.gov) and Consumer Financial Protection Bureau (consumerfinance.gov).
Quick reference: Common loan types
- Microloans
- Traditional bank term loans
- Lines of credit
- Equipment financing and leasing
- Invoice financing (factoring)
- Merchant cash advances (MCAs)
- Short‑term and bridge loans
- Business credit cards
- SBA‑backed loans (7(a), 504, Community Advantage, Express)
Microloans
What they are: Small, often nonprofit or community lender loans intended for startups or underserved entrepreneurs. The SBA Microloan program caps loan size at $50,000 and typically makes smaller loans within that limit (SBA Microloan Program, sba.gov).
Who they fit: New businesses with limited credit history, sole proprietors, and entrepreneurs who need modest sums for inventory, tools, or a short runway.
Typical terms: Loan amounts under $50,000; term lengths vary by lender. Collateral and personal guarantees are common.
Pros: Easier to qualify than bank loans; community lenders often provide technical help.
Cons: Smaller amounts and sometimes higher rates than bank loans; local availability varies.
Related FinHelp article: Microloan Programs for Early-Stage Startups: What to Expect (https://finhelp.io/glossary/microloan-programs-for-early-stage-startups-what-to-expect/).
Traditional bank term loans
What they are: Fixed principal with scheduled repayments (monthly/quarterly) and set terms. Typically used for larger investments—equipment, expansion, real estate.
Who they fit: Established businesses with documented revenue, strong cash flow, and good business or owner credit.
Typical terms: Amounts from roughly $50,000 to millions; terms from 1 to 25+ years depending on purpose (real estate vs working capital). Banks favor lower interest rates but require extensive financial statements and collateral.
Pros: Lower interest rates and longer terms than alternative lenders.
Cons: Slower application process and stricter eligibility.
Lines of credit
What they are: Revolving credit where you draw funds up to a limit and pay interest only on what you use. Useful for working capital, inventory cycles, and seasonal businesses.
Who they fit: Businesses with fluctuating cash flow that need flexible access to funds.
Typical terms: Revolving terms can be 6–12 months (renewable) or open lines; interest rates vary by lender and borrower credit.
Pros: Flexibility, only pay interest on used funds.
Cons: Can have renewal risk; unused capacity may be reduced if performance weakens.
FinHelp link: How to Position Your Business for a Line of Credit Approval (https://finhelp.io/glossary/how-to-position-your-business-for-a-line-of-credit-approval/).
Equipment financing and leasing
What they are: Loans or leases where the equipment itself secures the loan. Payments are structured to match useful life of the asset.
Who they fit: Businesses that must buy machinery, vehicles, or specialized equipment.
Typical terms: Loan or lease terms commonly match the equipment lifespan (2–7 years for many assets).
Pros: Preserves working capital since equipment serves as collateral; potential tax benefits (consult your CPA).
Cons: Default can mean repossession; leased equipment may have restrictions.
Invoice financing (factoring)
What it is: A lender or factor advances a percentage of outstanding invoices to give immediate cash. The factor collects payment from your customers and pays the remainder minus fees.
Who it fits: B2B firms with long invoice cycles that need working capital quickly.
Pros: Improves cash flow without adding term debt; approval focuses on your customers’ credit.
Cons: Fees can be high; collection relationships shift to the factor in some arrangements.
Merchant Cash Advances (MCAs) and short-term loans
What they are: MCA provides a lump sum repaid via a percentage of daily card sales or fixed debits. Short‑term online loans offer quick funding for 3–18 months.
Who they fit: Businesses needing immediate capital and with strong card sales or predictable short-term revenue.
Pros: Fast approval and funding.
Cons: Very expensive compared with bank loans; repayment structure can strain cash flow. Use carefully.
Business credit cards
What they are: Revolving unsecured credit lines with purchase protections and rewards.
Who they fit: Startups and businesses for small purchases, travel, or short-term cash needs.
Pros: Convenience, rewards, expense tracking.
Cons: High interest after grace periods; not a substitute for larger, planned financing.
SBA‑backed loans
What they are: Loans partially guaranteed by the Small Business Administration to reduce lender risk. Popular programs include 7(a) (general purpose), 504 (real estate & major fixed assets), and Community Advantage (for underserved markets). SBA 7(a) loans can reach up to $5 million (SBA, sba.gov).
Who they fit: Businesses that need competitive long‑term financing but may not qualify for a conventional bank loan without a guaranty.
Typical terms: Longer terms and lower down payments than many alternatives; underwriting is rigorous and documentation‑heavy.
Pros: Favorable rates and longer amortizations; supports growth, real estate purchase, and refinancing.
Cons: Slower approval and closing; guaranty fees and specific eligibility rules.
Related FinHelp pieces: SBA 7(a) vs Alternative Lenders: Choosing the Right Partner (https://finhelp.io/glossary/sba-7a-vs-alternative-lenders-choosing-the-right-partner/) and SBA 7(a) Loan (https://finhelp.io/glossary/sba-7a-loan/).
How lenders evaluate applications
Lenders usually look at these factors:
- Credit history (business and personal for small firms)
- Time in business and revenue trends
- Cash flow and debt service coverage
- Collateral and personal guarantees
- Industry and customer concentration
Alternative lenders emphasize cash flow and bank statements; traditional banks require tax returns, business plans, and audited financials for larger loans.
For a deeper look at underwriting focus, see How Lenders Use Cash Flow Analysis to Underwrite Business Loans (https://finhelp.io/glossary/how-lenders-use-cash-flow-analysis-to-underwrite-business-loans/).
Application checklist
Gather these items before applying:
- Business and personal tax returns (2–3 years)
- Profit & loss and balance sheet (recent months and year‑to‑date)
- Bank statements (3–12 months)
- Business plan or loan purpose statement
- Ownership documentation and business licenses
- Equipment quotes or invoices when financing assets
Having organized, up‑to‑date records cuts weeks off processing time.
Practical tips I give clients
- Match loan type to the need: short gaps = line of credit; new equipment = equipment loan/lease; large, long‑term capital = bank or SBA loan.
- Run a realistic cash‑flow forecast showing how you’ll repay the loan.
- Negotiate covenants and prepayment terms—some loans have penalties or daily remittance mechanics (MCAs).
- Compare total cost, not just interest rate: fees, origination, and guaranty charges matter.
- Improve qualifications first if possible: clean up bookkeeping, reduce owner debt, or increase revenue before applying.
Common mistakes
- Taking fast, expensive capital for long‑term needs.
- Underestimating how repayment cadence (daily, weekly, monthly) affects cash flow.
- Failing to read covenants or fee schedules.
Final considerations and next steps
Start by defining the precise use of funds and the repayment timeline. Use the application checklist above and shop multiple lenders. If you’re unfamiliar with loan paperwork, work with a CPA or an experienced advisor—an hour of professional help can avoid costly mistakes.
This article is educational only and not personalized financial advice. For guidance tailored to your business, consult a licensed financial professional or an SBA-approved lender.
Authoritative resources
- U.S. Small Business Administration: https://www.sba.gov
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov
Additional FinHelp reading: “Microloan Programs for Early-Stage Startups: What to Expect” and “SBA 7(a) vs Alternative Lenders: Choosing the Right Partner.”
