What are the different types of business loans (a complete comparison)?

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Are you a sole proprietor that needs to learn about the different types of business loans? This article is the complete comparison of the different types of loans for business.

A complete comparison of the different types of small business loans.
Read this article for a straightforward, complete comparison of the different types of small business loans.
This article is empower small business owners with the information they need to choose the best small business loan to finance their business to the next level.

Growing your small business as a self-employed sole proprietor is always a challenge, and a goal. Often, a small business loan is a great way to quickly infuse your small business with the needed cash to reach your next business goals. However, when a self-employed sole proprietor begins their research to compare different types of business loans it easily becomes a daunting task. 

The market of small business financing and small business loans is vast and complex at first glance. 

That’s why we created this complete comparison of the different types of small business loans. In our complete comparison we simplify your research process. We do this by providing you with an easy to digest summary of each small business loan type, its advantages compared to the other business loan types and much more. Keep reading to find out more.

SBA Loans

What is an SBA loan?

An SBA loan is a type of small business loan that is guaranteed by the United States Small Business Association. The Government guaranty backing SBA loans helps small businesses obtain the credit that they need. Some banks issue SBA loans. When an SBA loan is issued by the bank, the bank has the United States government guarantee that the US Government will repay up to 85% of the small business loan if the business defaults on their loan. This makes it possible for small businesses to access money at lower interest rates with less rigid qualification requirements. 

SBA loans are issued by banks; therefore, SBA loan applications are submitted to the bank. In addition, SBA loan payments are paid to the bank as well. 

Advantages

Low-interest working capital; refinancing debt and equipment.

APR Range

1-15%

FICO Minimum

155 FICO SBSS 

*some lenders may require higher

Traditional Bank Loans

What is a traditional business bank loan?

A traditional business bank loan is also known as a business term loan or a conventional business loan. A business term loan is a lump sum of capital that your business receives at one time in exchange for borrowing terms. A business pays back traditional business bank loans with regular payments, typically every month, at a fixed interest rate.

The repayment length of a traditional business bank loan is one to five years. It’s common for small business owners to use a traditional business term loan to finance one-time investments. However, that is not the only way a traditional bank loan can be used.

To get a business term loan you typically need to be an established business (i.e. in business for at least one year) with solid financial statements.

Traditional bank loans are not guaranteed by the government like an SBA loan.

Advantages

Versatile loans for a variety of purposes.

APR Range

4-13%

FICO Minimum

680

Merchant Cash Advance

What is a merchant cash advance?

A merchant cash advance is a type of business funding. Merchant cash advances help businesses access needed cash in a flexible way. More specifically, the lender provides the business with a cash advance that the business pays back through a percentage of its customers’ card payments using a card terminal.

Advantages

Quick access to capital if you don’t have great credit.

APR Range

10-350%

FICO Minimum   

550 

*sometimes no score is required

Business Lines of Credit

What is a business line of credit?

A business line of credit allows you to borrow up to a certain amount of money. You can borrow up to the amount of money that has been approved for your business line of credit. You only pay interest on the amount of money you borrow. It’s similar to the way a credit card works. You borrow money up to a certain amount, repay it (or pay it completely off), then you can borrow more up to the maximum limit.

An advantage of a business line of credit is that you don’t receive all of the money in one lump sum, like a traditional business loan. This means that you are not paying interest on the full amount of your business credit line, you are only paying interest on the part you have used. For example, say you take out a $10,000 traditional business loan. Then you use the first $5,000 for a business growth project the day you receive it and don’t use the second $5,000 dollars until two months from when you received the business loan. This means you’re paying interest on half of your small business loan ($5,000) for the first two months that you’re not using the money.

Advantages

Access to funds when you need them.   

APR Range

10-90%

FICO Minimum

500

Microloans

What is a microloan?

A microloan is a small sum of money lent to a new business at a low interest rate.

The purpose of microloans is to help sole proprietors and entrepreneurs who are having trouble to get a small business loan from other sources. For traditional term microloans the borrower is given the full amount of the loan. Then the borrower (I.e. your small business) makes repayments on the principal loans amount and interest. 

Advantages

Great for businesses with thin credit profiles looking for small loan amounts.   

APR Range

12-18%

FICO Minimum

Varies

Cash Flow Loans

What is a cash flow loan?

A cash flow loan is debt financing that is typically used for working capital. Cash flow loans use the expected future cash flows that the business loans to generate as collateral for the loan. 

A cash flow loan is a type of debt financing, in which a bank lends funds, generally for working capital, using the expected cash flows that a borrowing company generates as collateral for the loan. Cashflow loans are usually senior term loans or subordinated debt, being used for funding growth or financing an acquisition.


What is working capital?

Working capital is the capital used by a business in its day-to-day operations. It is calculated as the current assets minus current liabilities.


Advantages

Quick access to cash without great credit.

APR Range

11.0-90%

FICO Minimum

600

Alternative Online Loans

What is an alternative loan?

An alternative online loan is a loan offered through an alternative source that is not a bank or credit union. Alternative lenders are usually online-based private companies. They operate like the lending arm of a bank.

Alternative lenders offer a range of business financing products. The financial products alternative lenders offer include, term loans, business lines of credit, equipment financing, invoice financing, and more.

The advantages of an alternative online loan is that they are quick, flexible, and accessible. Traditional bank loans can be harder to qualify for, have more extensive application processes, and lengthy-time to funding.

Advantages

Quick access to cash without great credit.

APR Range

11.0-90%

FICO Minimum

600

Business Credit Cards

A business credit card is a credit card for a business instead of an individual. Business credit cards are used for business purchases. Businesses of all sizes can get business credit cards. In addition, business credit cards help a business build credit, which improves future borrowing terms.

Advantages

Fast turnaround time with less required documentation.

APR Range

7-30%

FICO Minimum

600

Equity Crowdfunding

Equity crowdfunding is an online offering of a private company’s equity. With equity crowdfunding the equity is offered to a group of people for investment. Therefore, it is part of the capital markets. Equity crowdfunding is typically done through specialized online platforms.

Advantages

Capital without having to repay; mentorship from experienced investors.

APR Range

n/a, investors get equity

FICO Minimum

n/a

Reward Crowdfunding

Reward crowdfunding is a type of crowdfunding where individuals donate to a project or business. In return for their donations to the business the donates receive  non-financial rewards such as goods or services that the business produces. Reward crowdfunding is typically done through specialized online platforms.

Advantages

Test out your idea; you don’t have to repay capital.

Interest / Cost

Crowdfunding platform: 0-5%

Payment processing: 3%+$.30 per transaction

FICO Minimum

n/a

Equipment Financing

Equipment financing is a business loan given to a small business to help finance the purchase of equipment and machinery. Machinery and equipment financed through equipment financing needs to be related to the business. An equipment financing loan is used to buy, lease, upgrade or repair equipment quickly.

Advantages

Capital to buy equipment that doesn’t require assets other than equipment.

APR Range

15-25%

FICO Minimum

600

Invoice Financing

What is invoice financing?

Invoice financing is short-term borrowing. With invoicing financing your business borrows money against the amount due on invoices issued to customers. Your invoices issued to customers are used as loan collateral.

Advantages

Leverages future accounts receivable.

APR Range

15-25%

FICO Minimum

n/a

Trade Credit

Advantages

Builds credit

APR Range

5-15%

FICO Minimum

n/a

Conclusion

At first, it might have seemed that financing your small business was complicated and daunting. Hopefully after reading this article you’ve gained some, even a lot, of insight about small business loans. We hope this article will help guide you in your decision of what the most appropriate type of small business financing is for your business.

We are a community of self-employed small business owners, sole proprietors and independent contractors. With that said, we would love for you to share your story about how you evaluated your recent small business loan financing.

Please share your story in the comments below or send us an email at support@falconexpenses.com and we can share your story in a featured blog post. Our community would greatly benefit from your experience. Also, feel free to email us with any questions you have that were not answered in this article. We will surely answer them for you.

Thank you, and help spread this valuable resource to your community. The social sharing links are at the top of this article.

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