Small businesses are an integral part of our economy, and often need help with capital to get off the ground, continue expansion, or survive a difficult season. Thankfully there are a plethora of financial options to assist small business owners in getting the working capital they need.
But not just any old loan will work for every business. The wide variety of funding options are designed to meet specific needs. Divvy has broken down all the different types of small business loans that are available to help you better determine what your unique business may require at this time.
What is a small business loan?
A small business loan is a funding option for small businesses that provides immediate capital in exchange for a repayment plan with interest. Often, small businesses are given more optimal terms in order to encourage economic growth and to support local communities.
Small business loans may be used to start a new business, to finance growth or upgrades, to weather an economic storm, or to allow expansion and development.
Types of small business loans
Business loans differ in length of term, interest rates, payment deferment, and eligibility criteria. Choosing the right loan can launch your business into unprecedented success, while choosing the wrong loan can leave you feeling trapped by suffocating repayment terms or inadequate funding.
There are essentially nine types of small business loans:
Types of small business loans
|Loan Type||Best for||Loan Amount||Term Length||Interest|
|Term loans||All purpose loans||Up to $600k||1-5 years||7-30%|
|Business lines of credit||Flexible and immediate funding||Up to $250k||2 years||7-25%|
|SBA loans||Established businesses||Up to $5 million||5-25 years||varies|
|Equipment financing||Purchasing new equipment||Equipment price||5-6 years||4-40%|
|Invoice financing||Covering cash flow due to unpaid invoices||Invoice amount||Until customer pays invoice||3% processing fee, plus weekly 1% until paid|
|Commercial real estate loans||Buying or renovating commercial space||Property amount||25 years||5-30%|
|Microloans||Small amount of capital||Up to $50,000||6 years||7%+|
|Personal loans||New businesses||Up to $35,000||3-5 years||5.99-35%|
|Merchant cash advance||Fast capital for businesses who can’t qualify elsewhere||Up to $250k||Paid daily via merchant account||1.14-1.18% factor fee|
How Divvy can help
Divvy is all about spending smarter. We help businesses manage their money in ways that fit their needs and maximize both profits and efficiency. Divvy offers credit through our Divvy cards that allow instant expense reporting and responsive budgets.
Term loans are the traditional bank loans you’d think of. Terms are very straightforward: a set amount of money, paid back with interest on a payment schedule. Term loans are available through banks or online lending platforms. Banks are generally going to offer better terms, but may take a little longer to get your capital. Online lenders can provide rapid funding, but may charge higher interest and give shorter loan term lengths.
You can secure short-term loans, (which are typically paid back in less than a year), through traditional banks or alternative lenders. These loans may require more frequent payments with weekly or even daily schedules.
Term loan requirements
Depending on your bank, you may need to meet certain criteria for the age of your business. Online lenders usually require 1-2 years in business. Your business credit score will be factored in to determine how much you may qualify to borrow and the interest rate assigned to your loan.
Term loans are best for
Businesses needing ongoing capital, whether for improvements, expansion, or acquiring a new business.
How to apply for a term loan
Start first with your existing bank, as they may be able to offer you loyalty terms that are more competitive. Online lenders make application as easy as a few clicks, and we’ve gathered a handful of the most helpful online lenders in this chart.
Business line of credit
A business line of credit is access to a sum of money from which you can draw whenever needed. You can get a fixed line of credit, or a revolving line. Fixed lines are a set amount that is used and paid back once, where revolving lines of credit reset when the balances are paid (like a credit card). As typical, banks will offer the most favorable terms but online lenders can typically get you approved faster if your credit score isn’t stellar.
Business line of credit requirements
You don’t need to be in business as long to get a line of credit as you might for a term loan, but you may need at least a few months of operation before qualifying. Your credit score will also determine limits and interest terms.
Business lines of credit are best for
Short term needs and emergencies, such as a revenue drought, accident recovery, or other unforeseen circumstance. However, revolving lines of credit can also be useful as a backup source of funding that you can access when you’ve exhausted your typical cash flow.
How to apply for a business line of credit
Start first with your existing bank, as they may be able to offer you loyalty terms that are more competitive. Online lenders make applications as easy as a few clicks, so check the lenders listed below.
The Small Business Administration provides guarantees for loans to assist American small businesses, essentially encouraging banks to give favorable loans with longer terms. These are generally the most affordable loans after traditional bank loans, and there are a few different options offered by the SBA to meet your needs.
The standard SBA 7(a) and 7(c) loans can allow companies to expand or acquire new businesses or equipment. SBA Disaster loans can be used for physical and economic disasters. The recent Paycheck Protection Program created by the CARES Act has been an incredibly popular choice of SBA loan for small businesses responding to COVID-19 complications.
In all, here are the most common types of SBA loans:
- SBA 7(a) loans, including
- Standard 7(a) loans
- SBA Express loans
- Community Advantage loans
- Veterans Advantage loans
- Export Express & Export Working Capital Loans
- SBA CAPLines of Credit
- SBA CDC/504 loans
- SBA microloans
Visit SBA.gov to learn about each loan type in more detail.
SBA loan requirements
The Small Business Administration has high standards for their loans. You must have a good credit history and strong profits to qualify for an SBA loan. You will likely need to show that you’ve been in business at least a year to qualify for most SBA loans.
SBA loans are best for
Long term loans for healthy businesses.
How to apply for an SBA loan
SBA loans are administered through SBA-approved lenders. Check with your bank to see if they are a preferred lender, or contact your local SBA office.
Purchasing new equipment can be an expensive but important step for small businesses. Many small business owners look for loans specifically designed to help them purchase new tools, machinery, vehicles, or other necessary equipment to grow the business.
Equipment financing requirements
Most business owners can qualify for equipment financing, even if they have lower credit scores, because the equipment you purchase also functions as collateral. Often you will just need to provide documentation of your business plan and explain the reason for the equipment purchase (in addition to your credit score). Some finance options may require a certain annual revenue requirement.
Equipment financing is best for
Purchasing or leasing equipment for your business that you don’t have current funds for.
How to apply for equipment financing
You may be eligible for financing directly through the equipment supplier, your bank, or online lenders.
Some businesses face financial challenges when they are waiting for customers to pay outstanding invoices. Invoice financing can bridge the gap in cash flow by giving you a loan for 80-90% of the invoice amount, and usually charging a weekly fee until your customers fulfill their invoices.
Invoice financing requirements
Invoice financing may require a certain age of business, annual revenue, and usually a credit score above 500 for eligibility. However, invoice financing can be easier to secure than traditional small businesses loans because the invoices serve as collateral.
Invoice financing is best for
Businesses facing temporary cash flow problems due to a large volume of unpaid invoices or a large amount of outstanding accounts receivable.
How to apply for invoice financing
Online lenders, like BlueVine or Fundbox, are your best options for fast invoice financing. They require only a few tax documents and invoice records and can finance your invoices within a few days.
Commercial real estate loans
Commercial real estate loans are used to acquire commercial property such as land, a building for a storefront, or a facility for manufacturing or operations. Commercial real estate loans are structured differently than conventional loans, and may require a significant downpayment. Commercial real estate loans may be “balloon loans,” where smaller installments are made and then a large lump or “balloon” payment at the conclusion of the loan term.
Commercial real estate loan requirements
Businesses may need to provide the gap between the loan and eventual value of the property (Loan-to-Value) as the down payment for the commercial real estate loan.
Commercial real estate loans are best for
Financing commercial property purchases—like a retail shop, office, or facility.
How to apply for commercial real estate loans
Banks offer the best terms for commercial real estate loans, so start with your existing bank or work with affiliates of your commercial real estate agent.
Does your business need just a little bit of working capital to reach your next goal? Microloans are designed for smaller, newer businesses that need less than $50,000 for startup, expansion, or fast working capital. Nonprofit lenders, such as Kiva and Accion, and the SBA Microloan program provide microloans as a way to support new business and to strengthen communities in need.
Targeted microloans are available for women, minorities, veterans, and other groups. You may need to be located in a certain area, and you may need to provide collateral for the loan. However, eligibility for these loans is more relaxed due to the smaller total sum.
Microloans are best for
Businesses needing small sums, or for micro-businesses like food trucks, freelancers, startups, and entrepreneurs with new businesses.
How to apply for microloans
Contact your local Small Business Administration Office to find SBA microloan programs for your local area and banks.
Merchant cash advance
A merchant cash advance is a very expensive loan option funded through a merchant account that takes a percentage of your daily credit and debit sales after providing you a cash advance. The interest can be punishing, but repayment stays low if your sales are low. Merchant cash advances can be a good last resort when you need fast cash, especially if you have the cash flow to repay it.
Merchant cash advance requirements
Merchant cash advances rely on sales for repayment, so usually proof of gross revenue or monthly card sales is required.
Merchant cash advances are best for
Businesses that don’t qualify for other types of loans.
How to apply for a Merchant cash advance
Merchant cash advance accounts are most easily set up through online lenders like Rapid Finance or CAN Capital.
Personal loans for business use
For small businesses, a personal loan may be a funding option for your company. Owners with great credit scores can get personal loans with favorable terms that they can use to fund a startup or support their growth. Personal loans can also be used in combination with other types of loans to reach a particular financial goal.
Personal loan requirements
An good or excellent credit score (625 or greater) is critical for getting a personal loan that will be beneficial to your business.
Personal loans are best for
Small business owners with excellent credit who need a smaller loan.
How to apply for a personal loan
Personal loans can be processed through your standard bank, though funding may come faster through online lenders.
Where to apply for a small business loan
Once you’ve evaluated your options and determined the best loan type for your small business, the next step is choosing where to apply.
Most businesses will think of traditional lenders, like banks and credit unions, as the first source for small business loans. While financial institutions are hard at work to provide timely support through banks loans and lines of credit to small businesses, they’re not your only option.
Alternative business lenders include many online providers who can often service loans with a faster turnaround. In addition, services like Lendio and Fundera can aggregate business information and apply to many loan options at once, saving you time from sending in many separate applications.
Online small business loan providers
There are plenty of options for business loans, you just need to find the business loan that works for you. Carefully assess your business needs, credit score, revenue, and ability for repayment while you weigh your options.
Be sure to talk to a Divvy expert for a demo of our business credit options so that you’re equipped to spend smarter.