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Key takeaways
Small business owners have more funding options than ever — from term loans and SBA loans to alternative tools like invoice financing, lines of credit and MCAs.
Each loan type comes with different costs, qualification requirements and risks, so the best option depends on your credit, revenue and how fast you need the funds.
Comparing multiple lenders and loan structures is essential to finding the most affordable financing and avoiding high-fee, short-term products you may not need.
Every small business can benefit from outside funding at some point, and you’ll have many options to choose from. SBA loans, term loans, business lines of credit and equipment loans are just a few examples of common business loans. However, the type of financing you decide on depends on your goals, how soon you need the money, what types of funding you qualify for and other factors.
Each type of loan comes with risks and rewards, so it’s important to research and explore all your options to find the best funding for your business.
Term loans are one of the more traditional types of lending. You borrow a lump sum from a bank, credit union or online lender and agree to repay the money, plus interest, in regular monthly installments. Loan terms typically range from one to 10 years but can be longer. Interest rates vary by lender and may be fixed or variable.
Term loans often have better interest rates than shorter-term lending options but can be harder to qualify for. For example, you’ll typically need at least two years in business and a good credit score to get the best rates and loan terms. Lenders typically accept mid-600s, but 700 and higher is better.
In addition, some lenders may require collateral or a personal guarantee before approving the loan.
Who are term loans best for?
Term loans work best for established businesses with good credit looking to borrow a large sum. This type of business loan is also good for business owners looking for a long-term loan and the predictability of regular monthly payments.
Pros
Higher loan amounts than other lending options
Lump sum of cash up front
Fixed monthly payments can be easier to budget for
Cons
Can be difficult to qualify for
May require collateral or personal guarantee
Some lenders charge variable interest rates, which can be tricky
May include an origination fee or other charges
2. SBA loans
SBA loans are business loans offered by banks and credit unions but are guaranteed by the federal government’s Small Business Administration (SBA). If you can’t repay your loan, the government covers up to 90% of the amount you owe, depending on the loan type. This guarantee can make it easier for some small businesses to qualify.
Loan amounts range from less than $13,000 to $5.5 million, and loan terms can extend up to 25 years. In general, SBA-backed loans have lower interest rates than conventional business term loans but vary by lender. However, SBA loans have strict requirements to qualify, some SBA loans require a down payment and the loan process can take a long time.
Who are SBA loans best for?
SBA loans are best for businesses with decent credit looking for more affordable financing. SBA loan borrowers shouldn’t be in a hurry, because the approval process can take weeks or months. However, it might be worth the wait to secure a large amount of funding with a longer loan term.
Pros
Large loan amounts
Lower interest rates
Long-term financing options
Cons
Strict requirements to qualify
Approval process is lengthy
May require collateral or personal guarantee
3. Business line of credit
A business line of credit works much like a credit card where you can borrow money as you need it, on an ongoing basis, up to your approved credit limit. Plus, once you pay back borrowed funds, that amount is available for you to borrow from again. Business lines of credit are usually unsecured — meaning you don’t need to put up collateral — but higher borrowing limits may require some security in the form or a personal guarantee, though there are lines of credit without personal guarantees.
Who are business lines of credit good for?
A business line of credit might be a good choice for firms looking for immediate LOC, short-term funding. It’s also an option for borrowers who want to keep the line of credit as a sort of emergency fund. For example, seasonal businesses or other businesses that occasionally run into cash flow issues may benefit from a business line of credit.
Pros
A flexible, revolving source of funding
Only pay interest on the amount you borrow
Flexibility to borrow only what you need
Typically doesn’t require collateral
Cons
Need good credit
May need collateral for higher borrowing limits
Borrowing limit typically lower than loans
Variable interest rates
May have fees in addition to interest charges
4. Equipment loans
An equipment loan is similar to the term loan you would take out to finance a car. But in this case, it’s a loan used to finance tangible assets used to run your business. Typical purchases might include heavy construction vehicles, factory machines or even office furniture.
With equipment financing, the asset purchased acts as collateral for the loan, so you may get a more competitive interest rate. However, if you can’t make your loan payments, the bank can repossess the equipment. This could hurt your credit and your business activities.
You’ll need a good credit score to get the best interest rates and loan terms. Some lenders may also require a down payment, so you might have to come up with some cash up front.
Who are equipment loans best for?
An equipment loan might be a smart move for business owners who prefer to buy their equipment rather than rent it. An equipment loan can also be used to help expand your business quickly instead of waiting until you’ve saved up enough money for the latest technology.
Pros
Opportunity to expand your business
The equipment is the collateral
Secured loans usually have lower interest rates
Cons
Risk of repossesion if you can’t repay the loan
Need good credit
May have to make a downpayment
5. Invoice factoring
Invoice factoring is a form of funding that leverages your unpaid invoices in exchange for cash. You sell your unpaid invoices to a factoring company, and it pays you a percentage of the invoices’ face value up front. Once customers pay the invoices to the factoring company, you’ll receive a portion of the remaining balance back minus the factoring company’s fees, which can run high.
Who is invoice factoring best for?
Invoice factoring is usually a better choice for companies with significant cash flow and a lot of unpaid invoices. It’s also a good choice if your credit isn’t in perfect shape, since approval is typically based on the value of your invoices instead of your personal credit score.
Pros
Quick funding for immediate needs
Easier approval process than other lending sources
Won’t affect your credit score
Cons
Fees are high compared to other lending options
Factoring companies may vet customers’ payment histories
Invoice factoring isn’t an option for many businesses
6. Invoice financing
Invoice financing is similar to invoice factoring in that both are short-term sources of funding based on your firm’s unpaid invoices. However, there are a couple of key differences. For example, instead of selling your invoices to a lender, you borrow money based on the value of the invoices and then repay the money as your customers settle their bills.
Another important point with invoice financing is that you don’t sell your invoices to a third party like with invoice factoring, so you are still responsible for collecting the unpaid invoices. On the other hand, this method maintains a closer relationship with your clients.
Who is invoice financing best for?
Like invoice factoring, invoice financing is suitable for small businesses with a lot of cash flow. It may also be a solution for B2B companies or firms that have reliable, repeat customers.
Pros
Quick access to funding
Maintain control of your customer invoices
Faster and easier approval process than other lending options
Cons
Lenders typically charge high fees
Lender may require evaluation of customers’ payment histories
7. Merchant cash advances
A merchant cash advance (MCA) is another form of short-term funding similar to invoice factoring or financing. However, instead of borrowing against its unpaid invoices, the loan is based on a company’s future credit and debit card sales. With a merchant cash advance, the lender advances a lump sum in exchange for a percentage of your future sales.
Repayment schedules can be rigorous with MCAs. Many lenders require weekly or even daily payments, and you may have to agree to automatic deductions from your business bank account. These automatic deductions could be an issue if your bank account ever falls short. Plus, MCA lenders typically charge a factor rate rather than an interest rate that could be equivalent to a triple-digit APR.
Who are merchant cash advances best for?
Merchant cash advances are best for companies with a high daily sales volume and cannot qualify for more traditional lending solutions. An MCA may also be an option for firms that need a quick influx of cash and have exhausted other sources.
Pros
Fast cash
Fairly easy to qualify
Cons
Fees are extremely high
Repayment schedules may require automatic weekly or daily withdrawals from your account
8. Working capital loans
Working capital loans are any short-term business loan designed to help a company cover its daily operational needs, such as rent, payroll and other bills. These loan types can be found online or from more traditional lenders like banks and credit unions. Working capital may be obtained in the form of a term loan or a line of credit or by other means.
Who are working capital loans best for?
Companies that may benefit from a working capital loan are seasonal businesses or other firms that don’t have consistent income to cover daily costs throughout the year. For example, a business that makes most of its revenue in the warmer months may benefit from a working capital loan to pay expenses through the winter.
Pros
Funds to keep operating during slower times
May not need to put up collateral
Depending on the method used to obtain the working capital, credit score may not be a factor
Cons
Poor credit history may require collateral
Interest rates may be high depending on the source of funding
9. Microloans
Microloans are a type of small business term loan typically offered through the SBA, online lenders or nonprofit lenders. These loan types are usually within the range of $500 to $50,000 and have relatively short terms.
They are most often awarded to start-up businesses, women or minority-owned firms, or nonprofit organizations. Loan requirements may be less strict for microloans, but borrowers may need to offer a personal guarantee or collateral.
Who are microloans best for?
Microloans may be a good fit for those just getting started in business or firms that don’t require a large loan amount. Microloans may also benefit not-for-profit businesses or companies run by women or minorities.
Pros
Good for borrowers in need of smaller loans
Less strict credit requirements
Some are guaranteed by the SBA
Cons
Loan amounts may not be as high as a borrower needs
May require collateral or a personal guarantee
Many businesses are not eligible for microloans
10. Commercial real estate loans
If your business needs a building or requires a larger space to expand, a commercial real estate loan is a solid option to consider. A commercial real estate loan can be compared to a residential mortgage, and the terms may be similar. Borrowers may secure up to $5 million in financing, but you may need to come up with a sizable down payment.
The property acts as collateral for the loan, which means you may qualify for a lower interest rate than with unsecured loans. However, just like with an equipment loan or mortgage, if you default on your payments, the asset can be seized and resold to pay your debt.
Who are commercial real estate loans best for?
A commercial real estate loan is usually best for well-established companies that bring in a lot of revenue and can afford the down payment. Borrowers should expect a high level of scrutiny regarding business revenues, debts, creditworthiness and other factors.
Pros
Ability to expand the business
High loan amounts
Lower interest rates than unsecured loans
Longer repayment terms
Cons
Poor credit may result in less-than-favorable rates and loan terms
High closing costs, prepayment penalties and other fees may apply
Smaller companies with low revenues or startups may not qualify
May require a down payment
11. Startup loans
Many types of small business lending might not be available for companies just starting out because lenders consider them a higher risk. In that case, newer business owners may want to seek out a startup loan. Startup loans, like working capital loans, can take on different forms, such as SBA loans, microloans, lines of credit or nonprofit lending programs.
Because of the many options to obtain startup capital, borrowers should expect differing interest rates, loan terms and fees from lenders. In addition, your personal creditworthiness could be a deciding factor.
Who are startup loans best for?
Startup loans are designed for those just beginning to get a business up and running. You may need money for a rental space, office supplies and equipment, inventory and more. Startup loans can also be an option for those newly established and looking to take their business to the next level.
Pros
Funds to start or grow your young business
Opportunity to begin building your business credit profile
Cons
Higher interest rates due to lack of business credit
Might have to put up collateral or a personal guarantee
12. Personal loans for business use
If you can’t secure business financing, using a personal loan for business purposes may be an option. These loans may be secured or unsecured, which affects your interest rates and loan terms. Plus, loan amounts are generally smaller than you could secure with more traditional business lending options.
Not all personal loan lenders allow loan proceeds to be used for business purposes because of the added risk, so check the terms and conditions. In addition, your personal creditworthiness is on the line. If your business can’t repay the loan, your credit score will take a hit.
Who are personal loans for business best for?
A personal loan might be another option for those trying to start a new business or grow a company. Personal loans may also be suitable for business owners who have yet to establish sufficient business credit and don’t mind putting their own credit history at risk.
Pros
Can obtain funding quickly
Suitable for startups or newer companies
Easy to qualify with good personal credit
Cons
Risk of damaging your personal credit history
Smaller loan amounts
Some lenders may not allow personal loans to be used for business purposes
13. Peer-to-peer business loans
Another alternative to finance your business is to consider peer-to-peer business lending. This type of lending typically comes from private investors rather than traditional lenders like banks or credit unions. Usually, a third-party platform connects borrowers with investors and acts as an intermediary. Borrowers repay the investors plus interest, which can vary.
Who is peer-to-peer lending best for?
Peer-to-peer lending might be an option for startups, newer businesses or others who can’t secure more traditional business lending alternatives.
Pros
Faster approval process
More flexible eligibility requirements than banks
Cons
Higher interest rates than traditional lenders
May have origination fees and other charges
Not as many lending platforms to choose from
Unsecured vs. secured business loans
A secured loan is backed by one of your assets (aka collateral), while unsecured loans don’t require collateral.
A secured loan is considered less risky for the lender, which means lower interest rates for you. After all, if you don’t make your car payments, the bank can take your car and sell it. However, you risk losing your assets if you can’t repay the loan.
On the flip side, if your loan is not backed by an asset, the lender has very little recourse if you can’t repay your loan and charges higher interest rates to make up for the additional risk.
Business loan requirements
While lender requirements vary widely, such as with brick-and-mortar banks versus online lenders, they typically analyze the following:
Business and personal credit scores
Personal financial information
Financial details of your business (e.g., revenues, debts, financial statements, tax returns, etc.)
Type of business you’re in
Years in business
Business plan and proposal for the loan proceeds
Collateral or personal guarantee
Any other documentation requested
Compare business loans
It’s important to do your research, weigh your options and compare options before choosing the best business loan for you. To get you started, use Finder’s business loan comparison table.
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How we picked these
What is the Finder Score?
The Finder Score crunches 12+ types of business loans across 35+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
To provide a Score, we compare like-for-like loans. So if you're comparing the best business loans for startups loans, you can see how each business loan stacks up against other business loans with the same borrower type, rate type and repayment type.
If you haven’t found a business loan that fits your needs, or you’re having trouble qualifying, consider some alternatives.
0% credit card. Many credit cards have introductory rates of 0% for up to 18 months or more. If you need quick cash and can pay off what you borrowed before the introductory rate expires, you just got yourself a short-term, interest-free loan.
Grants. Depending on the type of business you run, you may be eligible for a grant. That’s free money! Grants are offered by federal, state and local governments as well as public and private organizations.
Home equity loan or home equity line of credit. If you own your home and have some equity built up, consider getting a home equity loan or home equity line of credit (HELOC) to help expand your business.
Ask friends and family. Do you have a rich uncle or a friend with a knack for investing? It never hurts to ask for a low-interest loan from someone you know — just be professional, offer an agreement in writing and stick to the terms.
Bottom line
Depending on your needs, consider term loans, business lines of credit, SBA loans and equipment or real estate loans. For less traditional alternatives, look into invoice factoring or financing, working capital loans or even personal loans. Whatever your business needs, it’s best to consider multiple loans to get the best business loan for you.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
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