5 types of business loans

Growing your company will inevitably require patience, careful planning and the ability to make critical decisions. One decision you’re likely to make is how to borrow the money you’ll need to fund your expansion. For small-business owners, loans are a popular option because they provide access to funds that can cover expenses and enable you to invest in growth and new opportunities. 

But there are different types of loans available. As you research your options, think about how much funding you need and why you need it, and review specific loan terms carefully to make an informed decision.

Learn more about some common types of business loans and how to choose the right one to fuel growth for your organization.

What you’ll learn:

• There are different types of business loans, which can provide the funding you need to move business forward.

• Common types of business loans include term loans and Small Business Administration (SBA) loans.

• Other types of financing include business credit cards, business lines of credit and invoice factoring.

Term loans—often called traditional business loans—are among the most common types of business financing and are typically provided by banks, credit unions or online lenders. With term loans, you receive a lump sum of money up front and repay it in fixed monthly installments—covering both the principal balance and interest—over a set period of time. 

Compared to other types of financing, term loans can be hard to qualify for since lenders often have stricter requirements and may require collateral or a personal guarantee to secure the loan. You might choose a term loan if you have six months of operating history and are looking to expand your company with a long-term investment, such as commercial real estate or a new equipment purchase.

Here are some advantages of term loans:

• A predictable repayment schedule, which can be useful when making projections or budgeting

• Funds provided up front

Here are some disadvantages of term loans:

• More challenging approval since lenders often require a higher credit score and a minimum operating history

• A possible collateral or personal guarantee requirement

Managing cash flow is often one of the biggest challenges that small businesses face, and a line of credit can help address this by providing flexible access to funds for higher-spending needs or unexpected expenses. A business line of credit functions like a business credit card, giving you revolving access to funds up to a set limit—and you only pay interest on what you actually borrow. 

Business lines of credit differ from a business credit card, however, as some come with a draw period. Once the draw period ends, you’ll move into a repayment phase. This type of financing is typically offered by banks, online lenders or other private lenders.

Business lines of credit can be beneficial if you’re looking to fund business needs in the near future. They can also be useful for managing seasonal fluctuations in revenue or covering unanticipated costs. Compared to other loan types, business lines of credit often have high interest rates and may include additional fees.

Here are some benefits of business lines of credit:

• Flexible, revolving access to credit to improve cash flow

• Collateral not always being required

Here are some drawbacks of business lines of credit:

• Higher interest rates and fees, like maintenance fees or draw fees

• Potentially stricter qualifying criteria than other loan types

SBA loans are often the go-to option for later-stage startups, businesses with a shorter operating history or business owners who might not qualify for traditional bank loans. With this type of financing, the U.S. Small Business Administration partners with banks and other providers by setting guidelines and guaranteeing a portion of the loan, which reduces the lender’s risk. This can make it easier for businesses to secure funding for business expansion, working capital or larger purchases. 

There are various types of SBA loans, each with its own loan amounts, interest rates and qualifying guidelines. Compared to other types of financing, SBA loans typically have high loan amounts, low interest rates and long repayment periods. The trade-off is that the application process can be lengthy and demanding, and a personal guarantee is usually required if you own more than 20% of the business.

Here are some of the main advantages of SBA loans:

• High loan amounts—up to $5 million

• Low interest rates and long repayment periods

Here are some of the main disadvantages of SBA loans:

• A time-consuming application process

• The potential for a personal guarantee requirement if you own 20% or more of the company

Business credit cards are widely used by small businesses for everyday expenses, travel, online purchases and building business credit. They offer convenience, often include rewards and can help you keep your business and personal finances separate. Compared to business term loans, which provide a lump sum, business credit cards offer access to a revolving line of credit. This means you can make purchases up to a certain amount and pay down the balance repeatedly.

Business credit cards can be a convenient way to fund day-to-day expenses, but if you carry a balance, interest costs can add up quickly. A variety of business credit cards are available, so take the time to research the rewards programs, benefits and terms so you can find your best option.

Here are some of the main benefits of business credit cards:

• A revolving account to cover ongoing business expenses

• Rewards on everyday spending and access to additional benefits

Here are some of the main downsides of business credit cards:

• Higher interest rates if you carry a balance

• Additional fees, like late fees or annual fees

Invoice factoring—sometimes referred to as accounts receivable financing—isn’t classified as a type of business loan. Rather, it’s a way to access funds by selling unpaid invoices—or accounts receivable—in exchange for cash. This type of financing can be especially useful for businesses with long payment cycles, like transportation companies, service providers or manufacturers. That’s because invoice factoring provides immediate access to cash that would otherwise be tied up in invoices waiting to be paid.

Invoice factoring can be ideal if you need to bridge a gap in your company’s cash flow when buying inventory or covering labor costs. With this type of financing, however, you may need to give up control of your invoices, and it’s often a more expensive option.

There can be positives to invoice factoring, such as:

• Quick access to cash, with more relaxed qualification requirements

• The potential for improved cash flow by unlocking funds from unpaid invoices

There are some downsides to invoice factoring, such as:

• Potentially being costlier than other types of financing

• Possibly giving up control of invoices to a third party that works directly with your customers

Beyond the main types of financing, there are other loan options that could benefit your company, depending on your needs. These options include: 

• Equipment financing: This type of financing refers to a loan you can use specifically to purchase business equipment—like heavy machinery or office technology. 

• Merchant cash advance: A merchant cash advance provides quick access to funds in the form of a lump sum, which you’ll repay with a percentage of future debit or credit card sales.

• Short-term loans: This type of loan—typically lasting from three to 12 months—provides quick funding if you need a fast cash infusion to cover unexpected costs or other short-term expenses.

• Bridge loans: If you’re waiting for future financing, a bridge loan can provide short-term funds to cover the gap and keep operations running smoothly.

There are a variety of business loan options available, and the best type of funding depends on your company’s needs and goals. If one of the options you’re considering is a company credit card, you can compare business credit cards from Capital One and get pre-approved today—with no harm to your credit.