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Update Jan. 19, 2021: The latest round of the Paycheck Protection Program is open to small businesses hard hit by the coronavirus pandemic.
The legislation provides more than $284 billion for first and second forgivable coronavirus relief loans, reviving the Paycheck Protection Program that lapsed in the summer. It also widens the kinds of businesses that could seek PPP funding, such as news outlets, and adds funding for smaller, independent entertainment venues and restaurants. For the latest information, read our PPP page.
Small business owners who need financing have many options: term loans, Small Business Administration loans, business lines of credit, invoice financing and microloans.
The right business loan product depends on your needs, and terms, rates and qualifications vary by lender. Here is a breakdown of the types of business loans.
1. Term loans
A term loan is a common form of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period.
Online lenders offer term loans with borrowing amounts up to $1 million and can provide faster funding than banks.
Get cash upfront to invest in your business.
Typically higher borrowing amounts.
Fast funding if you use an online lender rather than a traditional bank; typically few days to a week versus up to several months.
May require a personal guarantee or collateral — an asset such as real estate or business equipment that the lender can sell if you default.
Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks.
Businesses looking to expand.
Borrowers who have good credit and a strong business and who don’t want to wait long for funding.
2. SBA loans
The Small Business Administration guarantees these loans, which are offered by banks and other lenders. Repayment periods on SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years for buying equipment and 25 years for real estate purchases.
Some of the lowest rates on the market.
High borrowing amounts up to $5 million.
Long repayment terms.
Hard to qualify.
Long and rigorous application process.
Businesses looking to expand or refinance existing debts.
Strong-credit borrowers who can wait a long time for funding.
3. Business lines of credit
A business line of credit provides access to funds up to your credit limit, and you pay interest only on the money you’ve drawn. It can provide more flexibility than a term loan.
Flexible way to borrow.
Typically unsecured, so no collateral required.
May carry additional costs, such as maintenance fees and draw fees.
Strong revenue and credit required.
Short-term financing needs, managing cash flow or handling unexpected expenses.
4. Equipment loans
You own the equipment and build equity in it.
You can get competitive rates if you have strong credit and business finances.
You may have to come up with a down payment.
Equipment can become outdated more quickly than the length of your financing.
Businesses that want to own equipment outright.
5. Invoice factoring
You’d sell the invoices to a factoring company, which would be responsible for collecting from the customer when the invoice is due.
Fast cash for your business.
Easier approval than traditional funding options.
Costly compared with other options.
You lose control over the collection of your invoices.
Businesses with unpaid invoices that need fast cash.
Businesses with reliable customers on long payment terms (30, 60 or 90 days).
6. Invoice financing
This is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance.
Your customers won’t know their invoice is being financed.
Costly compared with other options.
You’re still responsible for collecting the invoice payment.
Businesses looking to turn unpaid invoices into fast cash.
Businesses that want to maintain control over their invoices.
7. Merchant cash advances
Instead of making one fixed payment each month from a bank account as you would with a term loan, you make payments on a merchant cash advance either by withholding a percentage of your credit and debit card sales daily, or by fixed daily or weekly withdrawals from a bank account.
Some of the highest borrowing costs — up to 350% in some cases.
Frequent repayments can create cash flow problems.
Businesses that have high and consistent credit card sales and can handle frequent repayments.
Businesses that can't get financing anywhere else and can't wait for capital.
8. Personal loans
Approval for these loans is based solely on your personal credit score, but you’ll need good credit to qualify.
Startups and newer businesses can qualify.
High borrowing costs.
Small borrowing amounts of up to $50,000.
Failure to repay can hurt your credit.
Startups and newer businesses with strong personal credit.
Borrowers willing to risk damaging their credit score.
9. Business credit cards
Business credit cards are revolving lines of credit. You can draw from and repay the card as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.
They are typically best used for financing ongoing expenses, such as travel, office supplies and utilities.
Earn rewards on your purchases.
No collateral required.
High cost, with a variable rate that may rise.
Extra fees may apply.
Ongoing business expenses.
These loans typically are available to startups, newer businesses and businesses in disadvantaged communities.
Other services may be provided, such as consulting and training.
Smaller loan amounts.
You may have to meet stringent eligibility requirements.
Startups and businesses in disadvantaged communities.
Businesses seeking only a small amount of financing.
Types of business loans
Good option if:
You have good credit and a strong business.
You have a strong business and can wait for funding.
Business line of credit
You have short-term financing needs and want flexibility.
If you want to own equipment outright.
You have unpaid customer invoices.
You have unpaid customer invoices and want control over their invoices.
Merchant cash advance
You have high and consistent credit card sales and can handle frequent payments.
You're a startup and have a strong credit score.
Business credit cards
You have ongoing business expenses.
If you're a startup and need a small amount of financing.