Types of Business Loans: Compare Business Funding

Types of Business Loans: Compare Business Funding

Types of Business Loans: Compare Business Funding

Looking for funding to grow your business? You’re not alone.

Problems with cash flow is one of the most common causes for small business failure. That’s why many small business owners pursue one or multiple sources of financing to start, expand, or sustain their companies.

It helps to be informed, regardless of where you choose to get your funding. Different types of business loans or funding will come with varying requirements, from business revenues to personal credit scores, repayment terms to equity stakes, and more.

Let’s take a look at the main sources of business funding, and the various types of small business loans or other financing you can obtain. We’ll evaluate the pros and cons of each source and funding type, and examine the situations for which each type of business funding might be most effective.

6 Sources of Business Loans

Here are your primary options when it comes to business financing:

  • Personal or friends-and-family financing
  • Bank financing
  • Government-backed financing
  • Private investment (angel investors or venture capital)
  • Peer-to-peer or crowdfunding financing
  • Alternative lenders

1. Personal or Friends-and-Family Financing

When starting a business, most entrepreneurs depend on their own personal capital, the contributions of family and friends, or a combination of both. Repayment terms may be quite flexible or simply undefined. A major benefit to this option is that you typically won’t have to jump through any documentation hoops or put up any collateral when obtaining financing from friends and family.

However, these types of loans can carry the greatest risk if your business fails. Investing your own money—or that of friends and family—into your business will leave you (or them) with a smaller financial cushion to fall back on.

Taking money from friends and family can also damage your relationships with your loved ones if the business goes south, or if funding terms are ill-defined or not adhered to by either party.

✅ Easiest to obtain

✅ Fast to fund

✅ Flexible repayment terms

✅ More forgiving financing conditions

✅ May be offered as a gift with no repayment conditions

❌ Amounts available are often limited

❌ Can increase personal financial risk

❌ May damage personal relationships

Best for:

2. Bank Financing

Everyone knows traditional banks are a good source of business funding. However, many entrepreneurs may be surprised by how difficult it can be to get loans from banks, and they may not know how limited most types of business loans from banks can actually be.

Many people think an SBA loan is a type of bank loan, but it’s not. While you often obtain SBA loans from banks or credit unions, SBA funding is actually backed by the government. Most banks typically lend in smaller amounts, and at more restrictive terms, when they’re not supported by SBA funds.

✅ Higher funding amounts

✅ Reasonable interest rates

✅ Longer repayment terms

❌ Difficult to obtain (most applicants are rejected)

❌ Can take a long time to fund

❌ May restrict your use of the funds

Best for:

  • Established businesses with good credit
  • Expanding businesses that need substantial capital

3. Government-Backed Financing

The Small Business Administration dispenses several types of SBA loans.

The most common SBA financing is the SBA 7(a) loan, a general-purpose loan that can be used to cover most major business expenses. The SBA 504/CDC loan is a more restrictive type of funding available to small businesses that pledge to create a certain amount of economic growth in their communities. The SBA also offers microloans for businesses that just need a little financing.

The government doesn’t like to take on risk, which makes SBA loans among the most difficult and time-consuming to obtain. If you can get an SBA loan, your business might be in such good shape that it won’t actually need the funding.

✅ Large amounts available

✅ Low-interest rates

✅ Long repayment terms (up to 25 years)

❌ Difficult to obtain (most applicants are rejected)

❌ Extensive documentation requirements

❌ Takes a long time to fund

❌ May restrict your use of the funds

Best for:

  • Small business owners with great credit
  • Businesses that need long-term financing
  • Businesses looking to buy durable assets (equipment or real estate)

4. Private Investment (Angel Investors or Venture Capital)

Few businesses will become the next Google or Facebook, but it’s exceedingly rare for any company to reach the Google or Facebook level without substantial private investment.

This type of business funding is typically available only to the most ambitious entrepreneurs. While you won’t be expected to repay venture capital or angel investments like you do a business loan, you should expect to give up ownership in part of your business to secure these funds.

Since private investors have every incentive to see your business succeed, they’ll often provide resources beyond simple capital—such as mentorship and networking opportunities—to help you grow.

✅ Large amounts available

✅ No immediate or near-term repayment expected

✅ Can help expand your professional network

✅ Can connect you to world-class leaders and mentorship

❌ Rarely available for most businesses

❌ Extensive documentation requirements (includes business plans)

❌ Typically requires giving up equity in your business

❌ May reduce your ability to control your business

Best for:

  • Ambitious businesses with innovative ideas
  • Rapidly-growing businesses

5. Peer-to-Peer or Crowdfunding Financing

Crowdfunding and peer-to-peer financing aren’t the same thing, but they’re often viewed similarly.

Crowdfunding can take various forms, including peer-to-peer financing—in general, crowdfunding is simply raising capital via small amounts from large numbers of people. It’s most commonly associated with platforms like Kickstarter and Indiegogo, where in-development products are essentially pre-sold to “backers,” making it less lending or equity financing than simply a way to market concepts that haven’t been fully produced yet.

Nearly all businesses using crowdfunding successfully in this way are product-based businesses, because backers on crowdfunding platforms expect to receive a specific item or set of items in exchange for their financial support.

Peer-to-peer lending can resemble other types of business loans, particularly when raised through one of the major peer-to-peer lending platforms. A business seeking peer-to-peer lending will need to provide documentation verifying its ability to repay the loan. These loans may process quickly, but they often come with higher interest rates.

✅ Flexible “repayment” terms may be available

✅ Often quick to fund

✅ Can sometimes help to market your business or product

✅ May not require assuming “debts” or giving up equity

❌ Loans often come with higher interest rates

❌ Similar documentation requirements to other online options

❌ Crowdfunding is typically only available to product-based businesses

❌ May require more marketing ability than other options

Best for:

  • Product-focused startups looking for a market
  • Businesses looking for alternatives to bank loans
  • Entrepreneurs who don’t want to give up equity

6. Alternative Lenders

An “alternative” lender is simply any non-bank lender, which these days encompass quite a large number of sources.

The rise of alternative lending has been driven by tighter lending standards at banks and credit unions since the 2008 financial crisis. Big banks now approve only a quarter of business loan applications, and smaller banks and local credit unions approve less than half of applicants. On the other hand, approval rates with alternative lenders can be as high as 90%.

Alternative lending is often the fastest and most reliable funding option for most small businesses, and offer short-term loans, invoice financing, and merchant cash advances, among other types of loan programs. However, because approval rates are so high, borrowers with weaker credit histories or business finances may be assessed high-interest rates.

✅ High approval rates

✅ Faster to fund than bank loans

✅ Funding generally has few restrictions on use

✅ Good for newer businesses

✅ Fewer documentation requirements than bank loans

❌ Loans may come with higher interest rates

❌ Some loans come with very short repayment schedules

❌ Collateral often required for larger amounts

Best for:

  • Newer businesses (3+ months in operation)
  • Business owners with poor credit histories
  • Businesses that need capital quickly

We’ve looked at the primary sources of business funding. Now, let’s look at the various types of funding available to most small businesses.

7 Types of Business Loans and Funding

Now let’s help you find the type of financing that best fits your needs, based on the amount of money you need and your credit profile.

  • Business term loans
  • Business lines of credit
  • Equipment financing/equipment leasing
  • Commercial real estate loans
  • Invoice factoring
  • Purchase order financing
  • Working capital/business cash advance

1. Term Loans

A term loan is the type of business loan most people think of when they think of “business loans.” Term loans are typically offered at reasonable interest rates, and with longer repayment terms, than most other types of business funding. This makes it a good option for more established businesses with stronger financial histories.

✅ Funds can be used for any business need

✅ Longer repayment terms than many other loans 

✅ Secured long term-loans can be obtained in large amounts

✅ Reasonable interest rates

❌ Can be harder to obtain

❌ Larger amounts restricted to high-quality borrowers

Best for:

  • Established businesses
  • Businesses with strong revenue and credit histories

Learn more about term loans here.

2. Business Lines of Credit

A business line of credit works similar to the way personal and business credit cards work in that you get money when you need it, not in a lump sum, but much larger amounts can be available to qualified borrowers. You can borrow any or all of your credit line up to your credit limit but must pay it back within a specified period. Any funds in your credit line that you don’t access won’t need to be repaid, so businesses can manage their funds by only tapping into lines of credit when needed, when they’re easily repaid.

✅ Funds can be used for any business need

✅ Flexible amounts and repayment requirements

✅ Only pay interest on the funds you use

✅ Can be renewed and accessed multiple times

❌ Interest rates can be higher

❌ Can be easy to abuse without proper financial management

Best for:

  • Businesses with strong revenue and credit histories
  • Businesses with good financial management practices

Learn more about business lines of credit here.

3. Equipment Financing/Equipment Leasing

Sometimes you just need money to get new equipment for your business. In these cases, equipment loans or equipment leasing are great options. While the funds are only usable to buy or lease durable business equipment, such as trucks or tractors or printing presses, their targeted nature often brings lower interest rates and more accommodating repayment terms.

✅ Reasonable interest rates and repayment terms

✅ Large amounts available

✅ Fast approval

✅ Backed by equipment (no personal guarantees)

❌ Only usable to buy or lease equipment

❌ May require good personal credit

❌ You may not own your equipment after the term is over

Best for:

  • Businesses in need of equipment ASAP

Learn more about equipment financing and equipment leasing here.

4. Commercial Real Estate Loans

Like equipment financing, commercial real estate loans are designed to help businesses purchase a specific type of durable asset—real estate property, in this example. Unlike equipment financing, a commercial real estate loan can be a legitimate way to build business wealth, as real estate tends to appreciate in value over time, while equipment loses its value.

Businesses that need lots of space, or which utilize real estate ownership as part of their business model, can benefit from commercial real estate loans. Since they’re backed by an appreciating asset, these loans often come with some of the longest repayment terms and lowest interest rates of any major type of business funding.

However, this type of business loan can be difficult to get, as real estate is a major investment, and lending standards for commercial property have definitely tightened since the financial crisis.

✅ Reasonable interest rates and repayment terms

✅ Large amounts available

✅ Allows your business to own valuable assets (real estate)

✅ Can be available to businesses with poor credit

❌ Tends to require strong business history for approval

❌ Will be a long-term commitment (up to 25 years)

❌ May become difficult to manage if you no longer need the space

Best for:

  • Businesses looking to expand
  • Businesses that need to get capital from real estate already owned
  • Businesses with long-term plans

Learn more about commercial real estate loans here.

5. Invoice Factoring

If you’ve delivered a big order or completed work on a major contract, but you’re still waiting for full payment from your clients, you might run into cash flow issues until you’ve gotten what you’re owed.

Invoice factoring allows businesses to sidestep long invoice payment cycles by effectively selling unpaid invoices to a financial specialist. The factoring company not only pays most of the invoice value upfront, but they also often assume responsibility for collecting the unpaid balance directly from your customers, freeing you to focus on building your business.

Because the factoring company makes its money from your clients, rather than directly from your business, it can also be a good way for business owners with weaker credit to piggyback on the stronger financial histories of other companies.

✅ Rapid approval

✅ Frees you from collecting unpaid invoices

✅ No collateral required for high loan amounts

✅ Can help businesses with bad credit

❌ Dependent on your clients’ and customers’ credit scores

❌ Only useful for businesses with high-value invoices

❌ You may be on the hook for unpaid invoices

Best for:

  • Smaller businesses with large reputable customers
  • Businesses with long contract repayment terms

Learn more about invoice factoring here.

6. Purchase Order Financing

If invoice factoring is the post-delivery financing option, purchase order financing is its pre-delivery cousin. Both types of business funding convert customer orders into capital, but purchase order financing is tailored to help wholesalers and resellers fulfill their orders. A financing company accomplishes this by paying manufacturers and collecting directly from customers.

✅ Rapid approval

✅ Frees you from collecting unpaid invoices

✅ No collateral required for high loan amounts

✅ Can help businesses with bad credit

❌ Dependent on your partners’ and customers’ credit scores

❌ Only useful for businesses with high-value invoices

❌ You may be on the hook for unpaid invoices

Best for:

  • Wholesalers or resellers with large reputable customers
  • Product-focused B2B businesses

Learn more about purchase order financing here.

7. Working Capital/Business Cash Advance

Many businesses in need of fast funding turn to working capital, also known as a business cash advance or a merchant cash advance. A cash advance is not a typical loan. Rather, it funds you based on your credit card sales volumes, using credit card payment volumes (merchant cash advance) or overall business sales volumes to determine amounts funded and repayment terms.

Working capital is quick to fund, but you must also be quick to repay it—terms on working capital funding can start with three-month repayment terms and typically do not extend beyond 18 months.

Many financing companies will require access to your merchant processing account or bank account to withdraw their fee on a daily or weekly basis, which can also hinder cash flow if you don’t adequately prepare your business finances for it.

✅ Rapid approval

✅ Available to newer businesses

✅ Available to business owners with bad credit

✅ Can be used for any business purpose

❌ Interest rates are often high

❌ Repayment frequency (daily or weekly) can be hard to manage

❌ Amounts are often lower than available from other forms of funding

Best for:

  • Newer businesses (3+ months in operation)
  • Business owners with bad credit
  • Businesses that need capital quickly

Learn more about working capital and cash advances here.

What it Takes to Get Approved for a Business Loan

Now that you have an idea of what financing options you have, let’s talk about what it takes to qualify for one.

New businesses may have difficulties qualifying for SBA or small business loans, because high credit scores are often required, as are being in business for at least two years.

If that’s the case, or if you don’t have strong credit, you may still find eligibility for a short-term loan, line of credit, or merchant cash advance. Some of the alternative lending options we discussed look less at your credit and more at your annual revenue and credit card sales.

Before applying for any type of credit, check to see what the requirements are.

How to Apply for a Business Loan

The application process for each of the options above may vary. With bank or SBA loans, you may have a lengthy application and may even need to apply in a physical branch. For some alternative loans, you can apply in minutes with basic information about your company.

Expect to be asked details like what industry your business is in, how long you’ve been in operations, how many employees you have, and your Employee Information Number. 

Once you’re approved, you’ll get a loan agreement that outlines how much you are approved for, your rate, and how much your monthly payments will be. Sign the agreement and funds will be deposited into your bank account in as little as one business day. 

We hope you’ve learned something about what types and sources of funding would best work for you, and where you might obtain the best terms and amounts.

If you’d like to discuss your business loan options further, please give us a call, or fill out our easy application (no credit check or documentation required up front) to get started on your business funding journey today! Find the Best Start Up Business loans Options for 2022 here

This article was originally written on March 7, 2020 and updated on July 8, 2022.

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