Confused male small business owner reading loan paperwork
Essential Guide to Small Business Funding Small Business Funding

Common Types of Small Business Loan

There are many different small business loans available to business owners. Each type of loan has different qualification requirements, interest rates, and terms. To complicate matters further, each funding option is ideal for different circumstances, depending on variables such as the size of your business, the type of business you conduct, what you intend to do with your funding, and other factors unique to your situation.

Ultimately, the type of funding you receive and the terms of your loan will depend on your business’s history and earning potential, as well as the type of lender you apply for funding from. But you’re an entrepreneur—not a financial adviser—and understanding the various types of funding available to you (and when to use them) may seem even more overwhelming than starting up your business in the first place.

Don’t worry! To help you get the lay of the lending land, we’ve created a comprehensive list of 10 of the most common funding options available to small business owners. We’ll cover:

  1. Term loans
  2. Short term loans
  3. SBA loans
  4. Merchant cash advance
  5. Invoice financing and invoice factoring
  6. Business line of credit
  7. Equipment financing
  8. Commercial real estate loans
  9. Microloans
  10. Personal loans for business use

We’ll explain the basics of each type of funding, what you need to know before you apply, terms and fees, what the loan can be used for, and who should apply.

Let’s get started.

1. Term loans

What is a term loan?

A term loan is a lump sum loan that is repaid at regularly scheduled intervals over the course of the length of your loan, plus interest accrued at a fixed rate. Term loans are the most straightforward funding option, and they’re probably the first thing you think of when you hear the term “small business loan”.

Applying for a term loan

Term loans are typically obtained through traditional lenders and credit unions.

Because they are for longer periods and have lower rates than other lending options, you’ll need to meet higher standards in order to qualify for a term loan. Be prepared to complete an in-depth application—term loans often require up to a year’s worth of detailed financial documentation for your business, and potentially even your personal finances.

You may need the following to apply:

  • Detailed business plan for why you want the loan and how you plan to use it
  • Financial statements for up to the last 3 years
  • Tax returns for the business and the business owner
  • Personal financial statements
  • Financial projections

Because of the rigorous application requirements, it can take longer to approve term loans than other types of funding, and it may be tough for new businesses or those with low credit to qualify.

Terms and fees

“Term” refers to the length of your loan. Term loans tend to be for larger sums over a longer period of time, usually 1-5 years, with lower interest rates than other funding options.

How to use a term loan

Term loans are often used for:

  • Buying real estate
  • Purchasing another business
  • Renovating or remodeling your space
  • Planning long-term business expansion

Who should apply for a term loan? Established businesses with strong financial history and a clear idea of how they will use their funding

2. Short term loans

What is a short term loan?

Short term loans are similar to traditional term loans, but (as you may have guessed) with a shorter term length. As with term loans, borrowers receive a lump sum up front that is repaid at regularly scheduled intervals.

Applying for a short term loan

Short term loans can be obtained through both traditional and alternative online lenders.

The application process for a short term loan is less rigorous than a traditional term loan, with less paperwork and faster approval. In many cases, borrowers will fill out a simple online form, and the lender will follow up (sometimes within an hour) for more information. Approval requirements are also more flexible than term loans, making short term loans a good option for new businesses or businesses with low credit scores.

GREENBOX TIP: Don’t let a low credit score stop you from applying for funding. Successfully repaying a loan can actually help boost your credit score! If you have low credit, speak with one of our Funding Advisors to see if you qualify for working capital funding.

Learn more about Low-Credit Business Funding

You may need the following to apply:

  • Borrower’s Social Security Number (or Social Insurance Number in Canada)
  • Business’s Tax ID number
  • Several months of business bank statements
  • Financial statements

Terms and fees

Short term loans are commonly repaid between 3-18 months, and often within a year.

Because they are for shorter lengths of time, interest rates tend to be higher than traditional term loans, with payments made more frequently—typically weekly, or even daily. Fees and interest rates vary from lender to lender.

GREENBOX TIP: Even with higher rates, short term loans and other forms of financing can still be more cost-effective than long term loans if the total cost of a long term loan is higher than that of a short term loan. Always ask for the following information to assess different lenders and accurately compare your loan options:

  • Total cost of capital
  • Any fees associated with the funding
  • APR (which includes annualized interest rate, plus fees)
  • Prepayment policies

How to use a short term loan

It is always recommended that you have a plan for how you intend to use your funding before you apply, especially if you have low credit. Your intended use may impact the exact terms of your loan, and having a clear idea for how you’ll use your funds will improve your chances of approval.

Short term loans are often used for:

  • Funding short-term needs, such as purchasing inventory or boosting your marketing and promotions
  • Immediate or emergency costs, such as recovering from theft or rebuilding after a natural disaster

Who should apply for a short term loan?

  • Applicants who don’t meet the strict criteria of a traditional lender, such as applicants with low credit scores
  • Businesses with short-term funding needs
  • Businesses with immediate funding needs who need fast access to working capital

3. SBA loans

What is an SBA loan?

The term “SBA loan” is a bit of a misnomer. “SBA loans” are not actually provided by the SBA or BDC—they are provided by “intermediaries” like banks, credit unions, non-profit organizations, and Commercial Development Companies, and are partially guaranteed (usually up to 80%) by the Small Business Association (SBA) in the United States and the Business Development Bank of (BDC) in Canada. Partially guaranteeing the loan reduces the risk to the intermediary and encourages lenders to approve more loans to small businesses.

There are multiple types of SBA loans. Here are some of the most common:

  • 7(a) Guaranteed Loan Program: This is the primary SBA-guaranteed business loan program. It’s often used to fund start up businesses, as well as for helping established businesses meet short- and long-term needs. 7(a) loans are available up to $5 million, typically require collateral, and follow guidelines similar to standard term loans. 7(a) Guaranteed Loans are ideal for starting, expanding or acquiring a business.
  • 504 Local Development Company Program: These are long-term, fixed rate loans commonly used to acquire real estate, machinery, or equipment. These loans are administered by Certified Development Companies (CDCs) through commercial lending institutions. Businesses seeking this type of funding are expected to create or retain jobs, or meet certain public policy goals such as supporting minority-owned businesses, revitalizing a business district, or rural development. They are ideal for making large purchases, such as equipment or real estate, or for upgrading existing property.
  • Microloan Program: Microloans can be as small as a few hundred dollars up to $25,000, and are intended for businesses that can’t apply for funding from traditional lenders because the requested amount is considered too small. This program is offered through community-based non-profit organizations that have qualified as SBA Microloan lenders. They receive long-term loans from the SBA, and set up revolving funds from which they can make shorter, smaller Microloans. These loans are ideal for purchasing supplies, inventory, furniture, fixtures, and other machinery.
  • Express Loans: Applications for Express Loans are reviewed in 36 hours or less, but it will still take about a month for the funds to arrive. Funding up to $350,000 is available.

Applying for an SBA loan

The application for an SBA loan is much more rigorous than any other type of small business loan. Application forms are extensive, often requiring years of detailed business and personal financial information, and the approval process is very long—potentially months. There’s no guarantee of approval and most applicants are rejected, especially applicants with low credit or those seeking a short-term loan.

The type of intermediary you apply for funding with will determine how long it takes to process your application, as well as who gets the final word on whether your SBA loan is approved. There are three types of intermediary:

  1. Infrequent participant lenders: Bank and non-bank institutions that deal with the SBA infrequently. When you apply for a loan with an infrequent participant lender, the lender will send your application to the SBA. The SBA will then review your documentation and decide whether to guarantee your loan.
  2. Certified lenders: Institutions that work with the SBA on a regular basis, with SBA-trained and certified staff. When you apply for a loan with a certified lender, the lender will review your application and decide whether you are approved, but the SBA will still give the final word.
  3. Preferred lenders: Certified lenders with top performance. When you apply for a loan with a preferred lender, they decide whether you are approved.

Terms and fees

SBA loans are typically the preferred loan for many small businesses—because the loans are guaranteed by the SBA, the risk to the lender is lower, which means these loans often come with lower rates and better terms than other financing options.

How to use an SBA loan

Some SBA loans have specific purposes. Generally speaking, SBA loans are best used for:

  • Purchasing or upgrading real estate
  • Purchasing machinery or equipment, inventory, or supplies

Who should apply for a term loan?

  • Business owners with great credit seeking a long-term loan

4. Merchant cash advance

What is a merchant cash advance?

Merchant cash advances are technically a “non-loan” form of financing called an “asset purchase”. With a merchant cash advance (MCA), a lender purchases a portion of your business’s future revenue in exchange for cash up front. You’ll receive an advance of working capital when you need it, and the lender will receive a portion of your daily credit and debit card sales until the advance has been repaid.

Applying for a merchant cash advance

The application process for a merchant cash advance is shorter and easier to navigate than other forms of funding, with much less restrictive requirements for approval. Approval is based on factors such as strength and potential of your business rather than just your credit score, making merchant cash advances ideal for businesses with low credit.

Learn more about Merchant Cash Advances.

Terms and fees

Because they have shorter terms and are easier to qualify for, this type of funding typically has higher rates than other types of funding. Fees are charged based on a factor rate rather than regular interest/APR rates, with daily payments withdrawn directly from your business’s bank account. When business is slow, your payments are smaller; when business is booming, your payments will be larger.

How to use a merchant cash advance

Merchant cash advances are one of one of the most flexible funding options because there are no restrictions placed on how you use the funds. Funding can also be accessed quicker than other lending options—in some cases, funding can even be made available in less than 24 hours.

Merchant cash advances can be used to:

  • Purchase inventory or raw materials
  • Boost marketing and promotional efforts
  • Invest in training and continuing education
  • Take advantage of short-lived opportunities to grow

Who should apply for a merchant cash advance?

  • B2C businesses that need smaller amounts of cash fast
  • Businesses with lower credit scores

Apply for Merchant Cash Advance

5. Invoice financing and invoice factoring

What is invoice financing?

Invoice financing is another form of asset purchase.

With invoice financing, a business’s unpaid invoices are leveraged to gain fast access to working capital funding. Invoice financing can take many forms, but typically, an applicant will be offered an immediate cash advance up to 85% of an invoice’s value. The remaining 15% will be given to you when your client pays their invoice, minus the lender’s fee.

One popular form of invoice financing is called “invoice factoring”. With invoice factoring, the lender will provide you with a percentage of your outstanding invoices’ value up front and will take care of collecting payment from your customer. With invoice financing, on the other hand, you (the business owner) are still responsible for collecting payment.

Another common form of invoice financing is “invoice discounting”. With invoice discounting, a percentage of the unpaid invoice is paid to the small business up front. Once you (the business owner) collect payment, the loan will be repaid along with accumulated interest and fees.

Applying for invoice financing and invoice factoring

Invoice financing is available from both traditional and online alternative lenders. Because the unpaid invoice (or invoices) acts as collateral for your advance, invoice financing may be easier to approve than other types of funding.

Learn more about Invoice Factoring.

Terms and fees

Invoice financing and invoice factoring come with shorter terms than other forms of funding. Term lengths typically correspond to the length of your accounts receivable period—usually 60-120 days.

Once the invoice is paid, your lender will subtract their fee from the remainder of what is owed to you. The exact cost of your loan often depends on how fast your client pays their invoice, but fees vary by lender and can depend on a number of factors, including your business’s financial history and your client’s payment history.

How to use invoice financing

Invoice financing can be used to:

  • Cover recurring operating expenses
  • Fill in cash flow gaps as you wait for clients to pay outstanding invoices

Who should apply for invoice financing?

  • Businesses with cash flow problems caused by unpaid invoices (typically B2B businesses)
  • Businesses with long accounts receivable periods

Apply for Invoice Factoring

6. Business line of credit

What is a business line of credit?

A business line of credit is slightly different than other forms of small business funding. Instead of offering a lump sum of funding, business lines of credit provide a maximum credit amount from which funds can be drawn and repaid as needed.

Applying for a business line of credit

Available from traditional lenders, credit unions, and alternative online lenders, business lines of credit are one of the most flexible forms of small business funding. They function similarly to a business credit card in that there are no restrictions placed on how you use your available credit, but they come with much higher credit limits.

Business lines of credit can be secured or unsecured, depending on the strength of your application and the credit limit you are seeking:

  • Unsecured: Does not require collateral. Often available to borrowers with strong credit histories.
  • Secured: Requires collateral. Often given to start ups and applicants with lower credit scores.

Learn more about Business Lines of Credit

Terms and fees

Business lines of credit can be based on fixed or revolving terms. With a fixed line of credit, the term length of your line of credit will be set in advance, and your credit line will not reset when you repay your balance. With a revolving line of credit, sometimes called an “open ended line of credit”, your credit line resets after you pay your balance in full.

Whether fixed or revolving, borrowers will only pay interest on the funds they draw from the total credit line. Payments will be scheduled, typically monthly, and will cover both the interest and the principal.

How to use a business line of credit

Business lines of credit are typically used to:

  • Cover recurring operating expenses
  • Manage the costs of unexpected emergencies
  • Purchase inventory
  • Fill gaps caused by seasonal cash flow shortages

Who should apply for a business line of credit:

  • Business owners with a strong credit history who want a cushion to fill in gaps in cash flow or manage emergency costs
  • Business owners who need flexible access to working capital

Apply for Business Line of Credit

7. Equipment financing

What is equipment financing?

Equipment financing is a specific type of loan that is uniquely designed to finance the purchase of equipment, allowing business owners to purchase high-value equipment with payments spread out typically on a monthly basis. It functions similarly to a car loan—the equipment serves as collateral, and the funding cannot be used for any other purpose. Equipment financing may not cover the full cost of the equipment—some lenders will only provide 80-90% of the cost of the equipment.

Applying for equipment financing

Equipment financing is available to both new and established businesses, and can be acquired from both traditional and alternative lenders. Equipment manufacturers may also offer financing programs akin to equipment financing.

Because the loan is secured by the equipment you are purchasing, this form of financing tends to have easier approval requirements than other types of loan, making this an ideal option for applicants with low credit.

GREENBOX TIP: Equipment financing isn’t your only option for financing the purchase of new equipment. Merchant cash advances can also be used for this purpose, and may be more suitable for your business, especially if you need funding for more than simply purchasing new equipment.

Learn more about merchant cash advances

Terms and fees

Rates and terms will depend on the age of your business, your credit history, and your financial statements.

How to use equipment financing

Equipment financing can only be used to purchase the equipment you are using to secure the loan. However, “equipment” can refer to a number of items and tools, including:

  • Heavy machinery
  • Computers
  • Vehicles
  • Printers
  • Kitchen appliances

Who should apply for equipment financing:

  • Businesses with significant or immediate equipment needs

8. Commercial real estate loans

What is a commercial real estate loan?

Commercial real estate loans are for the express purpose of purchasing or improving commercial real estate. The property acts as collateral to secure the loan, and the size of the loan depends on something called “loan-to-value” (LTV), which compares the size of the loan to the value of the property. A typical LTV for commercial real estate loans is around 75-80%.

Commercial real estate loans can take on different structures depending on the lender and the amount of the loan. You may also see this type of funding referred to as a “balloon loan”.

Applying for a commercial real estate loan

Commercial real estate loans are available from banks and credit unions, and occasionally as SBA 50 or SBA 7(a) loans. Because these loans are for larger amounts and longer terms, application requirements are typically quite strict, and the process can be lengthy.

Terms and fees

These loans typically have much longer terms and are often paid off over 20-30 years. The property acts as collateral to secure the loan, so interest rates and other fees may be lower than other forms of funding.

How to use commercial real estate loans

Commercial real estate loans can only be used to purchase or improve commercial real estate, including:

  • Offices
  • Shops
  • Restaurants
  • Manufacturing facilities, and more.

Who should apply for a commercial real estate loan?

  • Businesses looking to purchase or renovate a building or other commercial property

9. Microloans

What is a microloan?

Microloans are technically very small loans for amounts between $250 and $1,500, but the term is often applied to any loan for an amount under $50,000. This type of lending is often used to support underserved entrepreneur communities and businesses that seek to aid the local economy.

Applying for a microloan

Microloans are typically available from non-profit lenders who receive government grants which are then awarded as microloans, including SBA lenders. Most microlenders are community-based organizations that provide business support services alongside small business funding.

Microlenders often have flexible requirements and will consider alternate forms of collateral, making this type of funding a common choice for start-ups, businesses in higher risk industries, and businesses with low credit.

Terms and fees

Term lengths for microloans are shorter than standard term loans, which means they may also carry higher interest rates and fees compared to other forms of funding. On the other hand, these lenders may also have the flexibility to customize your loan terms to make your payments easier to manage.

How to use a microloan

Creating a plan for how you’ll use your microloan before you apply can improve your chances of approval. Some microloans will limit what you can do with your funds.

Microloans are often used for:

  • Covering start-up costs and recurring operating expenses
  • Purchasing inventory or equipment
  • Boosting marketing and promotions

Who should apply for a microloan?

  • Business owners in underserved entrepreneurial communities, such as women-, minority-, or veteran-owned businesses
  • Start ups, smaller businesses, and sole proprietorships

10. Personal loans for business use

What are personal loans for business use?

Personal loans for business use are not technically a “small business loan”. In this case, business owners will apply for a loan based on their personal financial profile with the intention of using the funds to support their business.

Applying for a personal loan for business use

Personal loans for business use are granted to the applicant based on the strength of their personal financial profile alone. The owner will use their personal credit score and income documentation to qualify, and will be held personally liable if they default on the loan.

Their business’s history and potential does not factor into the application process and approval decision, which can make personal loans an ideal option for start ups, newer businesses, or applicants with low business credit but a strong personal financial history.

GREENBOX TIP: If you can qualify, business loans are always recommended for business use. Business loans will be more affordable, and you won’t be held personally liable if you default.

Terms and fees

These loans are typically approved for smaller amounts, and can be both short and long term with flexible options and different rates and terms depending on your qualifications and personal financial history.

How to use a personal loan for business use

There are usually no restrictions placed on personal loans for business use. Use your personal loan to:

  • Purchase real estate or another location
  • Renovate or remodel your space
  • Boost marketing and promotional efforts
  • Invest in continuing education and training
  • Stock up on supplies and inventory

Who should apply for a personal loan for business use?

  • Start ups whose owners have a good credit history
  • Businesses without established credit

Summary of Types of Small Business Loans

Term Loans

Description Lump sum repaid at regularly scheduled intervals over length of term, plus interest.
Typical Term Length 1-5 years
Cost of Capital Lower than other funding options
Approval Difficulty Higher than other funding options, with in-depth applications and long wait times
Common Uses
  • Buying real estate
  • Purchasing another business
  • Renovating or remodelling
  • Planning long-term expansion
Other Considerations May carry early repayment charges

Short Term Loans

Description Similar to a term loan, but with a shorter term length
Typical Term Length Varies by lender
Cost of Capital Higher than other funding options
Approval Difficulty Easier application process with less paperwork and faster approvals
Common Uses
  • Short-term funding needs
  • Immediate or emergency funding needs
Other Considerations Ideal for applicants with low credit

SBA Loans

Description Low cost loans offered by intermediaries and guaranteed by the SBC (or BDC in Canada)
Typical Term Length Longer terms
Cost of Capital Lower rates than other funding options
Approval Difficulty Very difficult, sometimes taking months
Common Uses
  • Purchasing or upgrading real estate
  • Purchasing machinery, equipment, inventory, or supplies
Other Considerations Multiple types of SBA loan are available depending on your needs

Merchant Cash Advance

Description A “non-loan” form of financing in which a lender provides working capital up front in exchange for a portion of your future credit and debit sales.
Typical Term Length Shorter terms, typically less than 1 year
Cost of Capital Higher than other forms of loan
Approval Difficulty Streamlined application process with greater chance of approval
Common Uses Funds can be used however business owners choose
Other Considerations Fees are charged based on a factor rate rather than traditional interest/APR rates

Invoice financing and invoice factoring

Description Leverage unpaid invoices to gain access to working capital.
Typical Term Length 60-90 days
Cost of Capital Varies by lender and invoice amount
Approval Difficulty Easier than other loans because financing is secured by invoice
Common Uses
  • Cover operating expenses
  • Fill in cash flow gaps
Other Considerations Many types of invoice financing are available

Business line of credit

Description Provide a maximum credit amount from which funds can be drawn and repaid as needed.
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant, typically lower than other forms of funding
Approval Difficulty Varies by applicant
Common Uses
  • Cover operating expenses
  • Purchase inventory
  • Fill seasonal gaps in cash flow
  • Cover unexpected emergency costs
Other Considerations
  • Can be fixed or revolving
  • Can be secured or unsecured

Equipment financing

Description Financing specifically designed to purchase new equipment
Typical Term Length Varies by lender
Cost of Capital Varies by lender and applicant
Approval Difficulty Easier than other loans because financing is secured by equipment
Common Uses Purchasing new equipment
Other Considerations Can only be used to purchase new equipment

Commercial real estate loans

Description For the express purpose of purchasing or improving commercial real estate.
Typical Term Length 20-30 years
Cost of Capital Varies by lender and LTV
Approval Difficulty High
Common Uses Purchase or improve commercial real estate
Other Considerations Property acts as collateral to secure the loan.

Microloans

Description Small loans under $1,500 offered by non-profit organizations
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant
Approval Difficulty Moderately difficult
Common Uses
  • Covering start up costs and operating expenses
  • Purchasing inventory or equipment
  • Boosting marketing and promotions
Other Considerations Ideal for underserved entrepreneur communities

Personal loans for business use

Description Loans based on your personal financial profile, not your business
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant
Approval Difficulty Easier than other forms of business funding, especially if you have good personal credit
Common Uses
  • Purchasing real estate or equipment
  • Remodelling or renovating
  • Boosting marketing and promotions
  • Stocking up on inventory and supplies
  • Continuing education and training
Other Considerations Business loans are always recommended for businesses who can qualify

Wrapping Up

It can be difficult to determine which type of small business funding will support your goals without compromising your cash flow. There are many small business funding options available to business owners, including:

  1. Term loans
  2. Short term loans
  3. SBA loans
  4. Merchant cash advance
  5. Invoice financing and invoice factoring
  6. Business line of credit
  7. Equipment financing
  8. Commercial real estate loans
  9. Microloans
  10. Personal loans for business use

Some of these options are intended for specific purposes, while others place no restrictions on how they can be used. Some are easier to obtain but come with higher costs, while others are tougher to get but come with better terms and lower fees. The best institutions will help you understand your options and will take the time to get to know your business so that they can help you acquire the right funding without over-leveraging your business.

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