Your Guide to Every Type of Small Business Loans

Your Guide to Every Type of Small Business Loans

Only 56% of new small businesses make it to their fifth year. About 30% of these businesses fail because they run out of cash. About a third of these businesses start with less than $5,000.

Meanwhile, 58% start with less than $25,000.

About 65% of entrepreneurs say they weren’t confident they had enough money to start their business.

You don’t have to start your own business with that same level of uncertainty. Instead, consider every type of small business loans available. By exploring these options, you can choose the right type of loan for your business.

Get started with this helpful business loan guide today!

1. Business Term Loan

Term loans are also called installment loans. This is a traditional type of business loan. You’ll receive a specific amount of money and pay it back on a schedule.

Term loan payments are usually made on a monthly basis. However, the pay schedule can vary depending on the lender’s policy. Make sure to review their policy before signing an agreement.

You’ll apply each payment toward the balance of the loan (the principal), as well as to the lender’s interest.

A business term loan is best for future business growth or expansion. You can also use it for large, one-time purchases. For example, maybe you need real estate or new equipment.

This type of small business loans is best for businesses with a strong borrowing profile. 

2. Business Line of Credit

As you explore different business loans, it helps to consider what you plan to spend the money on. For example, a business line of credit is similar to a credit card. It’s best for:

  • Seasonal spending
  • Cash flow problems
  • Unexpected expenses

If you’re approved, you’ll receive a maximum credit amount. You can keep borrowing from the fund as long as you don’t spend over the limit. Then, you’ll pay interest only on the money you draw from the credit line. 

3. Small Business Administration (SBA) Loan

About one in 12 businesses close every year. You could set your business up for success by looking into Small Business Administration (SBA) loans. This type of small business loans is best for:

  • Debt refinancing
  • Business growth or expansion
  • Working capital

It’s also ideal for businesses that have a strong borrowing profile.

You won’t go directly to the SBA for a loan. Instead, the SBA will work with a lender (such as a nonprofit or bank). With an SBA loan, you’ll receive lower rates and better terms.

The average SBA loan amount for a large national bank is $59,000. For small national or regional banks, it’s about $165,000.

In 2019 alone, small businesses borrowed about $28 billion from the SBA. These loans supported about 550,000 American jobs.

4. Business Credit Cards

If you need a revolving line of credit, consider a credit card. Business cards are used to finance normal, everyday expenses. Some credit cards also offer special cardholder benefits. 

Business cards offer widespread usability. They usually come with lower credit limits and higher APRs than a line of credit, though. However, you’ll have the opportunity to improve your credit.

For example, you might receive a signup bonus. You can also join a reward program. 

5. Equipment Financing

Do you need to purchase new equipment for your business? Consider an equipment loan. You can purchase and immediately use the equipment without paying the full cost.

Instead, you’ll only pay smaller payments on a regular basis. Some lenders charge interest for the loan.

This type of business loan is ideal for borrowers with poor credit and startups that need equipment.

6. Commercial Real Estate Loans

Commercial real estate loans can help if you need to purchase commercial real estate. You can purchase land, an existing building, or upgrade your existing property. You can also construct a new building using a commercial real estate loan.

These loans are long-term. You’ll pay it off over 20 to 30 years.

7. Cash Flow Loans

This type of small business loans is designed for short-term cash flow needs. These loans can include:

  • Merchant cash advances
  • Invoice financing
  • Lines of credit
  • Short-term loans

These loans usually carry higher fees than other types of loans, though. They’re ideal for people who don’t have the credit to get a bank loan. However, you might have to worry about higher rates and the potential for a debt cycle. 

8. Merchant Cash Advances

With this type of business loan, a lender will advance money in return for a percentage of your future credit card sales. Once you receive the advance, the lender will withdraw daily payments from your business bank account.

Payment is usually determined based on a percentage of sales. If your sales are low, the daily payment will decrease, too.

This type of business loan is ideal if you have emergency financing needs. You’ll require a strong daily revenue. It’s also suitable for borrowers with poor credit.

9. Invoice Factoring and Financing

Are you experiencing cash flow problems due to unpaid invoices? Consider invoice financing. This type of small business loans can help.

Invoice financing is ideal for borrowers with poor credit, as well as startups.

You can sell your unpaid invoices or use them as collateral. You’ll receive cash up-front in exchange.

Your FundingTree accounts receivable financing can help as well. Take the time to explore your options before choosing a business loan.

10. Trade Credit

This type of business loan is also called mercantile credit. It allows you to buy goods from a supplier in exchange for promised future payment. The supplier will likely set the precise terms.

Usually, a 30-day term is average.

With trade credit, you likely won’t need to worry about interest rates. You have the potential to build your credit, too. However, there are fees involved with late payments. 

11. Microloans

Microloans are usually priced at $50,000 or less. These smaller loans are ideal for:

  • Startups with low capital requirements
  • Small businesses
  • Sole proprietors

It’s also ideal if you have poor credit. However, microloans usually have higher interest rates than bank loans. There’s often a moderate wait time for funds, too. 

Financially Set for Success: 11 Types of Small Business Loans to Keep in Mind

Set your business up for long-term growth and success. Consider these the type of small business loans and determine what suits your needs. With these business loans, you’ll have the finances you need to get started!

Then, you can get growing and survive beyond the five-year mark.

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About the Author: Veronica Baxter

Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.