10 Essential Business Loans to Know Before Applying

Starting or scaling a business often requires more capital than you have on hand. Whether you’re investing in equipment, hiring staff, or bridging cash flow gaps, business loans can provide the critical financing you need. However, choosing the wrong loan can strain your operations, while the right one can accelerate your growth.

This comprehensive guide breaks down the 10 most essential types of business loans, including their pros, cons, and ideal use cases—so you can make informed, confident decisions.

“Understanding your financing options is a key step in building a financially sustainable business.” — U.S. Small Business Administration (SBA)

1. Term Loans

A term loan offers a lump sum of money repaid over a fixed period—typically with monthly payments and a fixed or variable interest rate.

Key Features:

• Loan amounts: $25,000 to $500,000+
• Repayment term: 1 to 10 years
• May require collateral

Pros:

• Predictable repayment schedule
• Ideal for long-term investments
• Competitive rates for creditworthy borrowers

Cons:

• Strict credit requirements
• Early repayment penalties possible
• Slower approval process

Best for: Established businesses planning a one-time large investment.

2. SBA Loans

Backed by the U.S. Small Business Administration, SBA loans are issued through approved lenders and offer favorable terms for small businesses.

Key Features:

• Loan size: up to $5 million
• Terms: up to 25 years for real estate
• Lower down payments

Pros:

• Lower interest rates (typically between 6%–13%)
• Extended repayment periods
• Accessible to businesses with limited collateral

Cons:

• Long approval timelines (up to 90 days)
• Extensive documentation required
• Strong financials usually necessary

Best for: Small businesses that qualify and need affordable long-term financing. Source: U.S. SBA – SBA 7(a) Loan Program

3. Business Line of Credit

A business line of credit provides access to revolving funds—you borrow, repay, and reuse within the credit limit.

Key Features:

• Credit limit: $10,000 to $500,000
• Interest applies only to used funds
• Reusable as repayments are made

Pros:

• Flexible access to funds
• Interest-only payments possible
• Ideal for emergencies or cash flow gaps

Cons:

• May require strong credit history
• Interest rates can fluctuate
• Annual or maintenance fees may apply

Best for: Businesses with seasonal or irregular income streams.

4. Equipment Financing

Used specifically to purchase business equipment, this type of loan is secured by the asset itself.

Key Features:

• Term aligns with equipment lifespan
• Down payments may be required
• Equipment serves as collateral

Pros:

• Preserves cash reserves
• Fixed interest rates common
• Potential tax benefits (e.g., Section 179 deduction in the U.S.)

Cons:

• Only applicable for equipment purchases
• Equipment may depreciate faster than loan term
• Down payment required

Best for: Businesses needing vehicles, machinery, or hardware upgrades.

5. Invoice Financing

Also called accounts receivable financing, this allows businesses to borrow against unpaid customer invoices.

Key Features:

• Get 70%–90% of invoice value upfront
• Balance paid when client settles the invoice
• Quick approval and funding

Pros:

• Fast cash access
• No need to wait on slow clients
• Doesn’t usually require collateral

Cons:

• Higher fees than traditional loans
• Availability depends on invoice volume
• May affect customer relationships

Best for: Businesses dealing with long payment cycles.

6. Merchant Cash Advance (MCA)

An MCA provides upfront capital in exchange for a percentage of future daily sales, especially card-based revenue.

Key Features:

• Fast approval (sometimes within 24 hours)
• Repayment is automatic via daily sales
• No fixed term

Pros:

• Ideal for quick funding
• No collateral needed
• Revenue-based repayment flexibility

Cons:

• Extremely high costs (APR can exceed 70%)
• Daily repayments strain cash flow
• Not suited for low-margin businesses

Best for: Retailers or restaurants with strong card-based sales. Source: Federal Reserve Bank – Alternative Lending Risks

7. Microloans

Microloans provide smaller amounts of capital and are often issued by nonprofits or community lenders.

Key Features:

• Loan size: up to $50,000
• Short terms (up to 6 years)
• Commonly used for startups or underserved communities

Pros:

• Accessible for newer businesses
• Often includes business development support
• Lower rates than alternative lenders

Cons:

• Smaller amounts may not meet larger needs
• May require a detailed business plan
• Short repayment window

Best for: Startups and minority-owned or women-owned businesses. Source: Accion Opportunity Fund, Kiva U.S.

8. Startup Loans

These loans help new businesses with limited or no financial history access capital based on projections and personal credit.

Key Features:

• Based on business plan, not revenue history
• Often requires personal guarantees
• Flexible use of funds

Pros:

• Launches businesses faster
• Builds business credit
• More accessible through community lenders

Cons:

• High interest due to lender risk
• Personal liability involved
• Requires strong financial planning

Best for: Entrepreneurs with a solid business plan but no operating history.

9. Commercial Real Estate Loans

Used to purchase, build, or renovate commercial property, these loans are secured by the property itself.

Key Features:

• Long terms (up to 25 years)
• Typically requires 10–30% down
• Can be fixed or variable rate

Pros:

• Builds business equity
• Can generate rental income
• May appreciate in value

Cons:

• Large upfront costs
• Complex underwriting
• Risk of property devaluation

Best for: Businesses looking to own office, retail, or warehouse space. Source: National Association of Realtors – Commercial Lending Trends

10. Franchise Loans

Franchise loans fund the purchase and launch of a franchise business, including fees, inventory, and build-out costs.

Key Features:

• Specialized for franchise setups
• Offered by banks or franchisors
• May include training and support packages

Pros:

• Easier approval for established brands
• Financing tailored to franchise model
• Lower risk profile

Cons:

• Limited to franchise systems
• High upfront fees
• Less independence

Best for: Entrepreneurs joining a reputable franchise network.

How to Choose the Right Business Loan

Selecting the right financing depends on several key factors:

• Purpose: What do you need the funds for?
• Loan Amount: Do you need $10,000 or $1 million?
• Creditworthiness: Both personal and business credit matter.
• Collateral: Are you willing to secure the loan with assets?
• Repayment Terms: What monthly payment can you realistically afford?

Tip: Always compare rates and terms from multiple lenders before deciding.

Common Mistakes to Avoid

Many entrepreneurs unknowingly hurt their financing chances by:

• Applying for the wrong type of loan
• Not reading the full loan terms
• Skipping business or financial planning
• Overestimating projected income
• Ignoring hidden fees

Avoiding these pitfalls can save you thousands—and increase your approval odds.

Final Thoughts

Understanding your loan options isn’t just smart—it’s essential. Whether you’re a startup owner or managing a multimillion-dollar business, the right financing can unlock your next stage of growth.

Research thoroughly, seek advice from certified financial experts, and make the choice that supports your long-term goals.

“Access to the right funding can be a game changer for businesses ready to grow.” — National Federation of Independent Business (NFIB)

If you’d like help comparing lenders or building a loan-ready business plan, consider consulting a certified financial advisor or SBA resource partner near you.

Don’t forget to bookmark this guide for future reference as your funding needs evolve.