Types of Business Loans: Which is Best?

Written by Banks Editorial Team
5 min. read
Written by Banks Editorial Team
5 min. read

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If you’re wondering which type of business loan is best, you aren’t alone. Small business owners who need to borrow money may not know how to find the right loans or business lines of credit based on their business needs. There are long-term loans and short-term business loans. This guide can help you understand different types of business loans to help you determine which is best for you.

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What is a Business Loan and How Does it Work?

A business loan is a common way for small business owners to buy or expand a business. First, you apply for a lump sum or a business line of credit from a traditional bank or online lender. Then, you repay the funds based on the terms you agreed upon at the time of the loan. Business loans can be structured for quick or long-term repayment, depending on the type of loan. You can use the funding for a wide range of things, including buying equipment or other business assets, gaining customers, expanding your product line, purchasing buildings or commercial real estate, paying off debts or improving your cash flow.

Types of Business Loans

There are different types of business loans for virtually any business need. If you can explain how you will use the funds and meet the requirements for approval, lenders will offer a loan. Here are 12 common types of business loans you can use to buy or expand your business. 

Business Term Loans

Business term loans are some of the most common small business loans. You borrow from an online lender or traditional financial institution like a bank or credit union and pay back the loan over a timeframe and at a fixed interest rate agreed upon at the time of the loan. The more established your business and the better your personal credit score, the more favorable rates and other loan terms you will qualify for. Some lenders require that you have been in business for at least two years and have proven annual revenue to be eligible for business term loans. In addition, you may need to submit a business plan. The approval process may be quicker with an online lender than with a bank or credit union if you need funding fast.

SBA Loan

The U.S. Small Business Administration guarantees SBA loans. It’s worth noting that the funds do not come from the government but rather from lenders approved to offer SBA loans. You can get SBA loans intended to expand your business or acquire an existing company; purchase equipment or real estate for your business; or SBA microloans for smaller amounts of working capital. Interest rates and other loan terms may be more attractive for SBA loans, but the requirements to qualify are much more strict than other loans. For example, you will need a business plan and financial documents for this financing option. The application process for the SBA loan program is more difficult than that of other common types of business loans, and you may wait months for approval.

Business Line of Credit

Think of a business line of credit like a credit card for your small business. You use it as needed up to a certain credit limit and pay back the bank, credit union or online lender. Then, if you need more money for business purposes, you can use the business line of credit again until the term expires. Using business lines of credit may be the type of business financing you need, especially if you’re not sure what your business expenses will be. You only pay interest on the funds you use versus a term loan or SBA loan where you need to pay interest on a much larger amount. However, you will owe interest as soon as you withdraw funds. Also, you won’t need to offer collateral for a business line of credit since it’s an unsecured loan.

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Equipment Financing

Equipment financing is funding specifically for the equipment you may need for your small business. An equipment loan can help pay for vehicles, equipment or machinery, computers, office furniture and other business assets. Most of the time, the equipment you are financing can serve as collateral for the loan amount. The lender can seize the equipment as payment if, for some reason, you cannot make payments. Depending on your personal credit score and other factors, you can qualify for favorable terms, such as a lower interest rate or a more extended repayment period.

Merchant Cash Advance

A merchant cash advance is a promise of future sales. The lender provides cash in a lump sum that you repay with regular transfers from your business bank account or a portion of your credit card sales. To qualify for a merchant cash advance, the lender will consider your daily or weekly sales figures to determine whether your business is a good risk. Fees vary depending on the lender. If your business has significant credit card sales and you need cash fast for other business needs, a merchant cash advance may be an option to consider.

Inventory Financing

Inventory financing is a short-term loan you use to buy products you will sell at a later date. If you need to pay suppliers for your business’s products, inventory financing may be the loan you need. The inventory serves as collateral. You can use inventory financing to meet customer demand and update product lines while maintaining steady cash flow. Newer businesses without a solid credit history can qualify for this type of financing, but fees and higher interest rates may apply.

Invoice Factoring

With invoice factoring, your business sells invoices from sales to your customers to a third-party lender in exchange for cash. Then, your customers pay that lender directly for the products or services you have provided. Invoice factoring may be a quick way to get cash for your business on invoices before they are due. It’s easy to qualify for this type of financing, but the invoice financing company may review the credit history of your customers to determine suitability.

Commercial Real Estate Loan

Business owners use commercial real estate loans to finance a new or existing property, such as retail space, warehouse or office buildings. Also called commercial mortgages, a commercial real estate loan can help you expand your business to a new location or even refinance an existing loan amount. The building or other property you are buying can serve as collateral for the loan, which the lender will sell to pay for the loan if you cannot repay it. The terms of a commercial real estate loan will depend on the value of the property, your credit history, down payment, business cash flow and other debts, among other factors. Also, be aware the lender may charge prepayment penalties or balloon payments.

Microloan

A microloan may be the lending solution you need if you only need to borrow a small amount for a shorter period of time than more traditional small business loans. Another feature of microloans is that interest rates are low or even zero in certain circumstances. The application process for microloans is streamlined, and there may be fewer qualifications as well. Many microloans are offered through nonprofit organizations or government-guaranteed SBA loans. Collateral may be required, depending on the lender and funding needs.

Working Capital Loan

A working capital loan may be the right choice if you operate a seasonal business with unpredictable cash flow. Use a working capital loan to cover expenses or purchase equipment that you can pay off quickly once sales increase. Working capital loans are usually short-term loans from online lenders and traditional banks or credit unions. Interest rates can vary depending on the type of working capital loan program you choose.

Business Credit Card

Use a business credit card as you would a personal credit card. Whether you have a new or established business, a business credit card can help you build a business credit history that can help you qualify for small business loans in the future.

Startup Business Loans

A startup business loan may be the answer if your business is too new to qualify for more traditional small business loans. You can usually qualify for a startup business loan without established credit history or business track record, and it’s a way to build up your credit for future business growth. 

Where to Get a Business Loan

If you are unsure where to get a business loan, consider Mulligan Funding (*) , a financial partner you can trust for free quotes and quick funding (1) . Mulligan Funding offers:

  • Streamlined online application
  • Fast approval in just a few hours (1)
  • Funding as soon as the next business day after approval (1)

Request a quick quote from Mulligan Funding for working capital loans and small business term loans at competitive interest rates.

The majority of Mulligan Funding, LLC business loans are issued by FinWise Bank. Certain loans are made by Mulligan Loans, LLC who holds a California Finance Lenders License.

To view Mulligan Funding’s disclaimers and how they pertain to our services, please visit our disclaimers page.

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The majority of Mulligan Funding, LLC business loans are issued by FinWise Bank. Certain loans are made by Mulligan Loans, LLC who holds a California Finance Lenders License. To view Mulligan Funding's disclaimers and how they pertain to our services, please visit Mulligan Funding’s disclaimers page.

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Approval and funding speed refer to applications submitted during normal business hours (Monday-Friday, 7 AM – 5 PM PT.) Most approvals happen within a few hours on completed submissions. Delays could occur due to unforeseen circumstances or if additional information or verification is required.

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Approval and funding speed refer to applications submitted during normal business hours (Monday-Friday, 7 AM – 5 PM PT.) Most approvals happen within a few hours on completed submissions. Delays could occur due to unforeseen circumstances or if additional information or verification is required.

×

Approval and funding speed refer to applications submitted during normal business hours (Monday-Friday, 7 AM – 5 PM PT.) Most approvals happen within a few hours on completed submissions. Delays could occur due to unforeseen circumstances or if additional information or verification is required.

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