Compare Small Business Loans
If you’re in the market for a business loan, it can be overwhelming to decide the type of financing you need for your business. To help with your decision, we’ve taken a look at some of the most common types of business loans, from term loans to invoice factoring to merchant cash advances.
Traditional Business Financing
Before the rise of online lending, loans from banks and credit unions were among the only options available to business owners. And despite the increased competition from online lending, banks and credit unions still generally offer the most competitive terms for business loans.
With a term loan, you receive a lump sum that you repay at regularly scheduled intervals over the course of months or years. Term loans can either be short-term loans with terms of one year or less, or long-term loans with terms of more than one year. Most term loans are amortized, which means each payment will be the same. Businesses use term loans for growth and expansion activities, such as purchasing new equipment, moving into a new facility or refinancing other debts. You can get a term loan from a bank or an online lender.
Best for: Investing in long-term growth and expansion.
Lines of Credit
A line of credit is an open-ended, revolving loan that allows you to withdraw funds, repay those funds and withdraw funds again. Every line of credit has a credit limit, which is the maximum amount you can have withdrawn at any given time. Business lines of credit are used to increase short-term working capital, manage cash flow gaps, purchase inventory, or handle emergency expenses. You can get a line of credit from a bank or online lender.
Best for: Short-term working capital needs, managing cash flow, or emergency expenses.
The Small Business Administration (SBA) offers a variety of loan programs for small business owners. These loans aren’t made directly by the SBA, but rather by a bank or lender, with a portion of the loan being guaranteed by the SBA. Because of the guarantee, an SBA loan will have competitive rates while also being easier to qualify for than a bank loan. The most popular SBA loan is the 7(a) loan, which can be used for almost any business purpose. One downside to SBA loans is that the application and approval process can span months.
Best for: Businesses that can't quite qualify for a bank loan.
Commercial Real Estate Loans
Small businesses use commercial mortgages to purchase or build commercial property. A commercial mortgage uses the property being financed as collateral, allowing these loans to have low interest rates. Business owners can get a commercial real estate loan from a bank, commercial mortgage lender or specialty lender. The SBA also offers a commercial mortgage loan, called the 504 loan. Commercial real estate loans can vary dramatically in their terms, maturities and repayment schedules.
Best for: Purchasing or building commercial property.
Equipment loans are used to purchase equipment, machinery or vehicles, and whatever is purchased is then subsequently used to secure the loan. Most equipment loans allow you to finance between 80% and 100% of the purchase price of the equipment, and they normally have low interest rates. They are also easier to qualify for and have a faster application process than a traditional bank loan.
Best for: Purchasing vehicles, machinery or equipment.
Business Credit Cards
Business credit cards work in the same fashion as consumer credit cards. Similarly to consumer credit cards, qualifying for a business credit card is based on your personal credit history, and many of the top issuers offer rewards, cash back or points for charging purchases. Since credit card issuers do not consider your business’s finances when you apply for a business credit card, they are a popular choice for startups. However, this also means that you’re risking your personal credit if your business falters and you get behind on the card's payments.
Best for: Daily expenses, including supplies, or emergencies.
Business owners can now turn online for financing. Online lenders generally have a faster application process and fewer eligibility requirements than banks do. They also offer a wider variety of financing products, from invoice financing to term loans.
Online Business Loans
Online lenders, such as OnDeck or Kabbage, provide term loans, lines of credit and other types of loans to small businesses. Online loans are different from bank loans in a few ways. They are generally easier to qualify for and quicker to fund, but they often have higher interest rates and shorter terms. They also require more frequent repayment than bank loans.
Best for: Businesses that can't qualify for a traditional loan, or that need funding very quickly.
Individual investors, instead of a lender, will fund you with a peer-to-peer (P2P) loan. This process is facilitated through a peer-to-peer marketplace, such as LendingClub or Funding Circle. Because the loan is divided among a large number of investors (meaning the overall risk is reduced), P2P loans have lower interest rates than online loans and fewer eligibility requirements than bank loans. However, it can take up to two weeks to receive funds as every investor must contribute money before the funds can be disbursed.
Best for: Businesses that can't quite qualify for a traditional loan, but want a better rate than an online loan can offer.
Invoice factoring lets business owners sell their unpaid invoices to a factoring company. Factoring companies will generally advance between 75% and 100% of each invoice, and repayment occurs when the business’ customer pays the invoice. In most cases, your customers will pay the factoring company directly. For invoice financing, the unpaid invoices are used as collateral for a cash advance. Repayment may be made as either a lump-sum payment when the invoice is due, or be required on a weekly basis. You will retain control over how your customer repays the invoice.
Best for: Covering cash flow gaps from unpaid invoices.
Merchant Cash Advances
A merchant cash advance (MCA) is a type of financing in which the MCA company takes a cut of a business’s daily credit and debit card sales as repayment on the loan. The cash advance company will take anywhere from 5% to 25% of daily credit card sales as repayment. Merchant cash advances are one of the quickest funding options on the market, with companies approving applications and disbursing funds within the same day. What’s more, this type of financing is even easier to qualify for than an online loan. However, most merchant cash advances carry very high interest rates, sometimes exceeding 100%.
Best for: Emergency expenses, or businesses that cannot qualify for an online loan.
As the name implies, inventory financing is meant to help business owners purchase inventory. The inventory being financed by the loan will be used as the collateral for it. In general, inventory loans function similarly to a line of credit. Seasonal businesses, retailers, wholesalers, and dealerships are the most common types of businesses that use inventory loans. When you apply for inventory financing, there will be a due diligence process to review existing inventory, warehouses or facilities, and your business’ inventory management processes.
Best for: Increasing inventory in anticipation of a busy season or other growth.
While personal loans aren’t technically business loans, most personal loans can be used for business expenses. Similarly to business credit cards, qualifying for a personal loan will only be based on your personal credit history and financial situation, making them another common choice for new businesses. However, there are two main downsides with personal loans. One is that you’re putting your personal credit on the line for your business, and the other is that you generally can’t borrow more than $100,000.
Best for: Startups that cannot qualify for funding elsewhere.