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.

There are different types of business loans, and the right option depends on how much funding you need, how quickly you need it and how you plan to repay it. The 5 most common types of business loans are:

• Term loans—a lump sum of money repaid in fixed monthly installments over a set period, often used for long-term investments like commercial real estate or equipment.

• Business lines of credit—revolving access to funds up to a set limit, useful for managing cash flow, seasonal fluctuations and unexpected expenses.

• Small Business Administration (SBA) loans—financing partially guaranteed by the U.S. Small Business Administration, with high loan amounts, low interest rates and long repayment periods.

• Business credit cards—a revolving account for everyday business expenses and travel that can help build business credit and keep business and personal finances separate.

• Invoice factoring—a way to access cash by selling unpaid invoices to a third party, useful for businesses with long payment cycles.

Other loan options for businesses include equipment financing, merchant cash advances, short-term loans and bridge loans.

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

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.

Best for: businesses with at least six months of operating history looking to make 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

A business line of credit is a revolving form of financing that gives you access to funds up to a set limit, with interest charged only on what you actually borrow. 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.

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.

Best for: small businesses managing cash flow, seasonal revenue fluctuations or unanticipated costs.

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

An SBA loan is a small-business loan that is partially guaranteed by the U.S. Small Business Administration and issued through participating banks and other lenders. 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. 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.

Best for: later-stage startups, businesses with a shorter operating history or owners who might not qualify for traditional bank loans and can accept a longer application process in exchange for higher loan amounts and lower interest rates.

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

A business credit card is a revolving line of credit that lets you make purchases up to a certain amount and pay the balance down repeatedly, separating business and personal spending. 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.

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.

Best for: small businesses funding everyday expenses, travel and online purchases, and building business credit.

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 called accounts receivable financing—is a way to access funds by selling your unpaid invoices to a third party in exchange for cash. Invoice factoring isn't classified as a type of business loan. This type of financing can be especially useful for businesses with long payment cycles, like transportation companies, service providers or manufacturers, because it 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.

Best for: businesses with long payment cycles, like transportation companies, service providers or manufacturers.

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.

A business credit card and a business line of credit are both revolving forms of financing, but they're used in different ways. A business credit card is best suited to everyday purchases, travel and online spending, and typically comes with rewards programs and cardholder benefits. A business line of credit usually offers larger borrowing limits, may include a defined draw period followed by a repayment phase, and is more often used for higher-dollar working-capital needs like inventory, payroll or covering gaps in cash flow.

A business term loan and a business line of credit are two of the most common types of small business loans, but they work differently. A business term loan provides a lump sum of money up front that you repay in fixed monthly installments over a set period of time — making it a good fit for one-time, long-term investments like commercial real estate or equipment. A business line of credit gives you revolving access to funds up to a set limit, and you only pay interest on what you actually borrow — making it a better fit for ongoing cash-flow needs, seasonal fluctuations and unexpected expenses.

The key difference: a business term loan is structured financing with a fixed repayment schedule, while a business line of credit is flexible financing you draw from as needed. Term loans are better when you know exactly how much you need upfront; a line of credit is better when your funding needs vary month to month.

The most common types of business loans offered by banks and credit unions are term loans, business lines of credit and SBA loans. Bank-issued term loans provide a lump sum and are typically used for long-term investments such as commercial real estate or equipment. Bank-issued business lines of credit provide revolving access to working capital for cash-flow management. SBA loans are issued through participating banks under U.S. Small Business Administration guidelines, with the agency guaranteeing a portion of the loan to reduce the bank's risk.

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.