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Seven Most Common Types of Small Business Loans for Entrepreneurs

By Mini Saha | March 15, 2022

It is critical to do your research before getting started with your application process for a small business loan. Rushing into the process is like walking into a paint store and asking for any paint that doesn’t even fulfill your specific needs. Learn more about the different types of small business loans here so you can choose the one most suitable for your financing needs.

There are multiple small business loans to choose from and each loan product has unique qualification requirements, interest rates, and terms. Whether you need to buy equipment, inventory, real estate, or just require working capital, there’s a type of small business loan meant particularly for each of them.

Seven most common types of small business loans for entrepreneurs

1. Term Loans

Good whenSkip if
You want to invest in specific business areas or have an ongoing need for working capital.You need capital only for occasional emergencies.

With a traditional term loan, you can borrow a specific amount of money upfront and pay it back with interest while following a comprehensive repayment schedule. Banks and many online lenders offer term loans.

If you have strong credit and don’t mind waiting for financing, consider applying for a loan from a bank since they have the most desirable amounts, rates, and terms. On the contrary, if your credit score isn’t strong, try applying with a short-term lender. 

You may want to take out a term loan when you want to:

  • Buy real estate
  • Acquire another business
  • Invest in remodeling and renovating a commercial property
  • Plan long-term business expansion

2. Business Line of Credit

Good whenSkip if
You want cash to manage cash flow gaps and emergencies.You want to invest in long-term business goals or look to expand.

A business line of credit is one of the most known types of small business loans where the lender gives you access to a certain amount of money to draw from whenever you need it. So, there’s no pressure to dip into the money right away, but stay assured it’s available for you.

There are two types of business lines of credit, fixed and revolving, where the latter resets after you pay your balance in full, much like a credit card.

Though lines of credit are available from different types of lenders, banks offer the best interest rates and the longest time between renewals. Many online lenders offer short-term lines of credit for younger businesses or business owners with low credit scores.

A small business can benefit from a business line of credit under these circumstances:

  • When you need to pay for recurring operating expenses
  • Tiding over cash flow while you wait to receive customer payments 
  • Cover seasonal cash flow shortages
  • Pay for emergencies or unexpected situations

This loan type comes in handy when you need money immediately. Banks offer both secured and unsecured credit lines, but for secured lines, it’s obligatory to put down some assets as collateral.

3. Microloans

Good whenSkip if
You need $50,000 or less in financing.You need enormous amounts of financing.

Microloans are a good option when you need money for working capital, expansion, or to manage other startup costs that won’t go beyond $50,000. Another positive thing about microloans is that the qualification requirements aren’t very stringent.

Most microloans come from non-profit lenders who want to financially help underserved entrepreneurs struggling in the early stages of moving their businesses. Though anyone can apply for microloans, they are much more suited for women entrepreneurs and minority business owners.

Those looking to launch a startup or entrepreneurs with micro-businesses (vendors, food trucks, and freelance businesses) can use apps to borrow money online. One of the trusted money-borrowing online platforms is Lendee, offering you instant access to a network of lenders who’ll be willing to help you when you need money the most.

4. SBA Loans

Good whenSkip if
You have good credit and are seeking long-term loans.You need quick capital or have a low credit score.

The U.S. Small Business Administration doesn’t offer business loans, but it partially guarantees the loans banks and other lending institutions offer. A partial guarantee on loans eliminates some risks, encouraging lenders to offer loans to small business owners.

SBA loans are a great product and the most affordable source of capital for small businesses. Startups and established businesses can apply for SBA loans, but there’s a variety of such loans meant for different types of business needs.

For instance, the SBA 7(a) loan is a good option for businesses that need working capital, want to expand, or acquire a business, and the SBA 504/CDC loan is ideal for businesses looking to finance the purchase of equipment, real estate, or upgrade their existing property.

Even though SBA loans are designed to help small business owners, they are still obligated to meet high qualifications, which include strong business financials, credit history, and a few years in business.

5. Commercial Real Estate Loans

Good whenSkip if
You want to finance the purchase of a building, office space, shop, or other commercial property.You don’t need to acquire a commercial property.

Consider taking out a commercial real estate loan when your business wants to acquire a manufacturing facility, office building, or retail shop, for which the underlying property acts as collateral. 

Based on the amount of financing you need and the lender you work with, commercial real estate loans can take on different structures.

Banks offer these loans with longer repayment terms and lower interest rates. Then there are private money lenders who offer hard money business loans or balloon loans for commercial real estate purposes. 

For these loans, you can make smaller payments for several years based on a longer amortization period, followed by a large balloon payment at the end of the loan. You might have to renegotiate terms with the lender or refinance the debt if you can’t afford the balloon payment.

6. Merchant Cash Advances

Good whenSkip if
You don’t qualify for any other types of business loans.You qualify for other less expensive business loans.

A lender grants you advance capital alongside purchasing a portion of your daily credit and debit card sales. You need to pay back the advance with a percent of your daily card sales.

One benefit of this type of loan is that you pay back less when your business is slow and more when your business is booming. The downside of a merchant cash advance is that it’s the most expensive type of business financing on the market. 

So, consider this option when you are sure that your cash flow can handle it and because you don’t qualify for any other types of business loans.

7. Personal Loans For Business Use

Good whenSkip if
You own a startup and have a good credit history.You can qualify for a traditional business loan.

One of the most popular funding options is to use a personal loan for business purposes, offered by both banks and online lenders. Your personal credit score is extremely important since these loans are based solely on your personal finances and credit. Make note that your credit score should ideally be above 650 to qualify for a personal loan.

Even though these loans are called personal loans, they can be used for business purposes. However, you can take out only smaller amounts of capital (up to $35,000) through these loans.

This type of loan can help you get there if you need large amounts of money, but you’ll need to combine it with other sources of funding.

The Bottom Line

Although there are different types of loans, several factors determine the best one for your business. You’ll need to consider your credit, business finances, the length of time you’ve been operating, and your reason for the loan before narrowing down your options.

Visit if you want to get money online in just a few clicks. Lendee will make sure that you receive a loan at a fair rate no matter what your credit score is.