10 types of commercial loans

Types of commercial loans include term loans, SBA loans, and commercial lines of credit. Compare your options.

There are many different types of small business loans, from a business line of credit to invoice factoring to merchant cash advances, each with its own advantages and disadvantages. The right one for your business will depend on when you need the money and what you need it for.
Here are the 10 most popular types of business loans. Loan terms, rates, and qualifications vary by lender.

1. Term loans

A term loan is a common form of business financing. You get a lump sum of cash up front, which you then pay back with interest over a predetermined period.
Online lenders offer term loans up to $1 million and can provide faster funding than banks that offer small business loans.

Best for

  • Businesses looking to expand.
  • Borrowers who have good credit and a solid business and don’t want to wait long to receive financing.

Advantages

  • Get cash upfront to invest in your business.
  • They usually allow you to borrow a larger amount than other types of loans.
  • Funding is fast if you use an online lender instead of a traditional bank; which typically a few days to a week versus up to several months.

Cons

  • May require a personal guarantee or collateral: an asset such as real estate or business equipment that the lender can sell if you default.
  • Costs can vary; Term loans from online lenders typically have higher costs than those from traditional banks.

2. SBA Loans

The Small Business Administration guarantees these loans, which are offered by banks and other lenders. The repayment periods for SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years to buy equipment and 25 years for real estate purchases.

Best for

Businesses looking to expand or refinance existing debt.
Strong credit borrowers who may wait a long time to receive financing.

Advantages

  • Some of the lowest rates on the market.
  • You can borrow up to $5 million.
    Long repayment terms.

Cons

  • Difficult to qualify.
  • Long and rigorous application process.

3. Commercial Lines of Credit

A business line of credit provides access to funds up to your credit limit and pays interest only on the money you have drawn. It can provide more flexibility than a term loan.

Best for

Short-term financing needs, cash flow management, or managing unexpected expenses.
Seasonal business.

Advantages

  • The flexible way to borrow.
  • Generally unsecured, so collateral is not required.

Cons

  • May have additional costs, such as maintenance fees and extraction fees.
  • Strong income and credit are required.

4. Equipment Loans

Equipment loans help you purchase equipment for your business, sometimes even financing for semi-trucks. (Commercial auto loans are available for cars, vans, and light trucks). The term of an equipment loan is generally matched to the expected useful life of the equipment, and the equipment serves as collateral for the loan. Rates will depend on the value of the equipment and the strength of your business.

Best for

Companies that want to own the equipment outright.

Advantages

  • You own the equipment and build equity in it.
  • You can get competitive rates if you have strong credit and business finances.

Cons

  • You may have to come up with a down payment.
  • Equipment may become obsolete faster than the length of your financing.

5. Invoice factoring

Let’s say your company has unpaid customer invoices, which are typically paid in 60 days. If you need cash now, you can get money for those unpaid invoices through invoice factoring.
You would sell the invoices to a factoring company, which would be responsible for collecting from the customer when the invoice is due.

Best for

Businesses with unpaid invoices are in need of quick cash.
Businesses with reliable customers on long payment terms (30, 60, or 90 days).

Advantages

  • Fast cash for your business.
  • Easier approval than traditional financing options.

Cons

  • Costly compared to other options.
  • You lose control over the collection of your invoices.

6. Invoice financing

Invoice financing is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to obtain a cash advance.

Best for

Businesses looking to turn unpaid invoices into quick cash.
Businesses that want to maintain control over their invoices.

Advantages

  • Easy money.
  • Your customers won’t know their invoice is being financed.

Cons

  • Costly compared to other options.
  • You are still responsible for collecting payment on the invoice.

7. Merchant Cash Advances

You get a lump sum of cash upfront that you can use to fund your business.
Instead of making a fixed payment each month from a bank account as you would with a term loan, you make payments on a merchant cash advance by either withholding a percentage of your credit and debit card sales daily or through fixed daily or weekly withdrawals from a bank account.

Best for

Businesses that have consistently high credit card sales and can handle frequent payments.
Businesses that cannot obtain financing anywhere else and cannot wait for capital.

Advantages

  • Easy money.
  • Unsecured financing.

Cons

  • Some of the highest borrowing costs, up to 350% in some cases.
  • Frequent payments can create cash flow problems.

8. Personal Loans

It is possible to use a personal loan for business purposes. It is an option for start-up businesses, as banks generally do not lend to businesses with no operating history.
Approval for these loans is based solely on your personal credit score, but you will need good credit to qualify.

Best for

Startups and newer businesses with solid personal credit.
Borrowers are willing to risk damaging their credit scores.

Advantages

  • Start-ups and newer businesses can qualify.
  • Fast funding.

Cons

  • High borrowing costs.
  • Small loan amounts to up to $50,000.
  • Defaults can damage your credit.

9. Business credit cards

Business credit cards are revolving lines of credit. You can draw and pay off the card as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.
They are generally best used to finance ongoing expenses, such as travel, office supplies, and utilities.

Best for

  • Ongoing business expenses.

Advantages

  • Earn rewards on your purchases.
  • No collateral is required.

Cons

  • High cost, with a variable rate that can go up.
  • Additional fees may apply.

10. Microloan

Microloans are small loans ($50,000 or less) offered by nonprofit organizations and mission-based lenders.
These loans are generally available to new businesses, newer businesses, and businesses in disadvantaged communities.

Best for

  • Startups and businesses in disadvantaged communities.
  • Businesses seeking only a small amount of financing.

Advantages

  • Low cost.
  • Other services, such as consulting and training, can be provided.

Cons

  • Smaller loan amounts.
  • May have to meet strict eligibility requirements.