The world of business lending is vast and often complex, filled with different loan types, terms, and requirements. If you need financing to fuel your operation, choosing the right business loan will be critical for your company’s financial health.
Here are some of the most common types of business loans to help you understand your options and secure the funding your business needs to thrive.
How do business loans work?
A business loan is an agreement between a lender and a borrower. In exchange for a lump sum of capital or access to a pool of funds, the business agrees to repay the loan amount during a predetermined period, plus interest and any applicable fees.
Where to get a business loan
You can apply for a business loan from the following institutions:
- Traditional banks. These institutions, such as Chase, Bank of America, and Wells Fargo, are often the first stop for established businesses with a strong credit history. They typically offer some of the most competitive interest rates, but they typically apply stringent lending standards.
- Credit unions. As member-owned nonprofits, credit unions often provide more personalized service and potentially better rates than traditional banks, especially if you are already a member.
- Online lenders and alternative lenders. This growing category includes a wide range of fintech companies and non-bank lenders. Online lenders often provide a faster, more streamlined application process and may have more flexible requirements, making them a strong option for new businesses, entrepreneurs with a weaker personal credit history, or those who need funds quickly. However, this convenience often comes at the cost of higher interest rates.
For Shopify users, Shopify Capital offers financing based on your store’s performance. Loans are repaid as a percentage of your daily sales, which means payments flex with your revenue. Eligible merchants receive offers directly in their Shopify admin, with a fast application process and no lengthy paperwork.
10 types of business loans
- Term loans
- SBA loans
- Business lines of credit
- Equipment financing
- Invoice financing and factoring
- Merchant cash advances
- Business credit cards
- Commercial real estate loans
- Microloans
- Personal loans for business use
Here are 10 common types of business financing.
1. Term loans
With a term loan, you borrow a lump sum of money upfront and repay it, plus interest, with fixed monthly payments during a set period of time. Terms range from short (less than a year), to medium (one to five years), or long (as much as 10 years or more). Term loans are best for large, one-time investments like an expansion, debt refinancing, or a major equipment purchase.
Example: An ecommerce brand that has outgrown its space for on-site inventory storage decides to purchase a small warehouse. It secures a $250,000 long-term loan to finance the purchase, letting it budget for the fixed monthly installments over the next 10 years.
2. SBA loans
SBA loans are not loans directly from the US Small Business Administration. Instead, the SBA guarantees a portion of a loan issued by an approved lender, such as a bank or credit union. This guarantee reduces the lender’s risk, resulting in competitive interest rates and longer repayment terms for the borrower. Among the agency’s various loan programs, the most popular is the SBA 7(a) loan. These loans, which can be for as much as $5 million, have a wide range of uses, including working capital, buying equipment, or purchasing real estate. They are a top choice for established businesses seeking favorable terms.
Example: A growing online artisanal food seller needs a significant working capital loan to expand its product line and invest in marketing. Thanks to the SBA guarantee, it secures a $100,000 SBA 7(a) loan with a low interest rate and a seven-year term, which helps keep monthly payments manageable.
3. Business lines of credit
A business line of credit functions like a credit card. You are approved for a maximum credit limit but you pay interest only on the funds you actually draw. Once you repay what you’ve used, your set credit limit is restored. It’s an excellent tool for managing cash flow. Business lines of credit are best for covering operating expenses, bridging cash flow problems during a seasonal dip, or handling unexpected expenses without the work of applying for a term loan.
Example: Revenue dips during the winter for a store selling swimwear. The owner uses $8,000 of their $20,000 business line to cover payroll and order fabric for the new spring collection. As sales pick up in March, the owner repays the $8,000, and their full $20,000 limit is available again.
4. Equipment financing
An equipment loan is a loan used to purchase a specific piece of business equipment, from computers and video gear to vehicles or manufacturing machinery. The equipment itself typically serves as the collateral for the loan, which the lender can claim if the borrower defaults. Equipment financing is best for purchasing fixed assets with an extended life.
Example: An ecommerce jewelry maker needs to buy a $15,000 laser engraver to scale production. It uses equipment financing for the purchase, and the loan is secured by the engraver itself. The loan amount is paid off in fixed monthly installments over three years.
5. Invoice financing and factoring
This type of financing uses your unpaid customer invoices as collateral. It is mainly used by B2B (business to business) companies that have long payment cycles and need to solve immediate cash flow problems. There are two main forms:
- Invoice financing. You obtain a loan based on the value of your invoices outstanding. You remain responsible for collecting payment from your customers and repaying the loan.
- Invoice factoring. You sell your invoices to factoring companies at a discount. The factoring company gives you a large percentage of the invoice value upfront, such as 85%, and then collects the payment directly from your customer. Once collected, they pay you the remaining balance, minus fees.
Example: A wholesale apparel brand ships a $40,000 order to a major department store, which has a 90-day payment term. Needing cash now to pay its textile supplier, the brand uses invoice factoring. A factoring company immediately advances the brand $34,000, which is 85% of the order total.
6. Merchant cash advances
A merchant cash advance provides you with funds in exchange for a percentage of your future sales, plus a fee. Repayments are often made daily or weekly, deducted directly from your credit-card sales. They are best for businesses that need cash very quickly and have high-volume credit card sales, like retailers. This is one of the most expensive forms of financing and should be considered carefully.
Example: An online store experiences a sudden, unexpected drop in sales after a Google algorithm change affects its visibility in search results. It needs $10,000 immediately to cover operating expenses. It takes a merchant cash advance, and 15% of its daily sales are automatically deducted until the advance and fees are fully paid.
7. Business credit cards
These revolving credit lines work just like personal credit cards but are tied to your business. You can use them to pay for business expenses up to your credit limit. They can help build your business credit when used responsibly and show separation between personal and business finances. Business credit cards are best for day-to-day ongoing expenses, small purchases, and managing employee spending.
Shopify Credit is a pay-in-full business credit card that offers cashback on eligible business purchases like marketing, shipping, and wholesale—automatically applied as statement credits. Your credit limit is based on your business performance and there are no annual fees.
Example: A graphic designer uses a business credit card to pay for software subscriptions, travel to client meetings, and office supplies. They pay the balance in full each month to avoid interest and they also earn travel rewards.
8. Commercial real estate loans
Also known as a commercial mortgage, this is a long-term loan used to purchase, develop, or refinance a property used for business purposes. These loans are similar to residential mortgages but often have shorter terms and may permit lower down payments through programs like the SBA 504. They are best for purchasing an office, warehouse, retail storefront, or other commercial real estate.
Example: An ecommerce brand that had been renting a warehouse decides to buy its own facility. It uses a commercial real estate loan to finance the $1 million purchase, securing a 15-year term with a 25% down payment. Unlike many residential mortgages, commercial real estate loans often require higher down payments, typically in the 20% to 30% range.
9. Microloans
Microloans are smaller loans of up to $50,000, designed to help startups, solo entrepreneurs, and businesses in underserved communities. They are often offered by non-profit organizations or community development financial institutions and may come with mentorship or training. Microloans are best for startups that don’t need a large loan amount, or business owners with a limited credit history who can’t qualify for traditional bank loans.
Example: An online seller wants to formalize their side hustle, so they take out a $5,000 microloan to buy bulk materials, purchase a professional-grade camera, and file to establish a limited liability company (LLC).
10. Personal loans for business use
This involves taking out one of the personal loans in your own name and using the funds for your business. For brand-new businesses with no business credit or revenue, this is often the only option. The loan is based entirely on your personal credit history and income. It is best for startups and early-stage entrepreneurs who can’t yet qualify for a traditional unsecured business loan.
Example: An entrepreneur has a great idea for a dropshipping ecommerce store but has no business history. They have a strong personal credit score and take out a $15,000 loan, which they use to build their website, pay for initial marketing campaigns, and cover operating expenses for the first few months.
What to look for in a business loan
No matter which type of loan you seek, evaluate these four factors:
Interest rates
This is the cost of borrowing money, expressed as an annual percentage of the amount borrowed. Fixed-rate loans have the same interest rate for the life of the loan, while variable-rate loans have interest costs that fluctuate with market conditions. The rate you’re offered depends on your credit history, business financials, loan type, and the lender.
Terms and repayment
This is the loan’s repayment schedule. It includes the length of time you have to pay it back and the structure of your monthly payments. Many term loans have fixed monthly payments, making it easier to work them into a business’s budget. Other types, like a line of credit, may require minimum monthly payments based on how much you’ve drawn.
Collateral
Secured loans require collateral—a specific asset the lender can seize if you default on your loan. This could be equipment, commercial real estate, or even unpaid invoices. Secured loans are typically available in larger loan amounts and lower interest rates. An unsecured business loan does not require specific collateral. Instead, lender approval hinges on the strength of your cash flow and business credit. These are often faster to get but may have higher interest rates.
Personal guarantee
This is the most common requirement, especially for small businesses. A personal guarantee is a written commitment from you, the business owner, stating that if your business cannot repay the loan, you will be personally responsible for the debt. This means the lender could potentially seize your personal assets, like your home or car.
The loan application process
Business loan requirements vary by lender, although the application process generally follows these steps:
1. Preparation and self-assessment. Clearly define why you need the money; this will point to the right business loan to seek. Next, calculate the exact amount you need and create a detailed budget showing how you will use the funds to generate the business revenue to both repay the loan and help your company grow.
2. Gathering financial documents. Lenders need to assess your business’s financial health and its ability to repay the loan. You will almost always be asked to provide business and personal tax returns, balance sheets and income statements, and a detailed business plan, especially critical for startups or new ventures.
3. Apply. You will complete the lender’s official application, which details your business, its owners, the loan amount requested, and the purpose of the funds.
4. Underwriting. This is the review and verification stage. The lender will analyze your financial statement, check your personal credit and business credit reports, and evaluate the risk of lending to you.
5. Approval and funding. If you’re approved, the lender will present you with a loan agreement outlining all terms. Once you sign, the funds are disbursed, often as a lump sum, directly to your business bank account.
Types of business loans FAQ
What are the different types of business loans?
The main types of business loans include term loans for a lump sum, business lines of credit for flexible spending, and government-guaranteed SBA loans. Businesses can also use equipment financing, invoice financing, or commercial real estate loans. Other common options include business credit cards for daily expenses, microloans for startups, and merchant cash advances based on future sales.
What is the easiest business loan to get?
The easiest loans to qualify for are typically merchant cash advances, invoice financing, and business credit cards because they often rely on sales or invoices rather than a favorable credit history. However, this convenience almost always comes with much higher interest rates and fees compared to other options like a traditional term loan or an SBA loan.
What are the three main types of loans?
First are term loans, which provide a lump sum upfront for a large purchase, and repaid on a fixed schedule. Second are lines of credit, which offer a revolving credit limit for managing cash flow and ongoing expenses. Third is asset-based financing, where the loan is secured by a specific asset, such as equipment financing or a commercial mortgage.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
