Loans are one of the most common ways to finance a business. In fact, 44% of small businesses use a loan on a regular basis — according to data from the Federal Reserve Banks Small Business Credit Survey.
But, business loans aren’t right for every situation. Before you decide, learn more about the basics: how these loans work, common types and how to qualify.
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What is a business loan?
A business loan is a type of debt financing in which you borrow money from a lender and repay it over time with interest. Small-business loans can be used for:
- Startup expenses.
- Long-term growth.
- Short-term gaps in cash flow.
- Purchasing a business.
- Refinancing or consolidating business debt.
According to NerdWallet’s Business Loan Study, 65% of borrowers use their funding to cover working capital needs.
How do business loans work?
In general, small-business loans follow the same basic structure:
- You submit an application, along with pertinent financial documents.
- A financial institution agrees to lend you a certain amount at a specific cost, including interest and fees.
- In exchange, you provide collateral or a personal guarantee to pay the loan back on time.
- You receive the funds in a lump sum or as a line of credit.
- You pay back what you borrow on a prearranged payment schedule.
- If you don’t repay the loan on time, a lender may consider your loan to be in default and can seize your collateral or other assets.
Common types of business loans
Here are some of the most common types of business loans. The right type of loan for you will depend on your qualifications and why you need funding.
| Type of business loan | How it works | Best for |
| Lump sum of capital that’s repaid over a specific period of time, with interest. | Businesses that have been in operation for at least six months and are looking to expand. | |
| Partially guaranteed by the U.S. Small Business Administration, and issued by participating lenders, such as banks and credit unions. | Strong-credit borrowers who can wait a long time for funding. | |
| Allows you to borrow funding up to a certain amount, only pay interest on the amount you’ve borrowed and continue to borrow up to your limit as you pay down your line. | Short-term financing needs, managing cash flow or handling unexpected expenses. | |
| Form of asset-based financing where the equipment itself serves as collateral for the loan. | Major equipment purchases. | |
| Small-dollar loans that typically offer up to $50,000 in business funding. | Startups; borrowers who only need a small amount of funding. | |
| Sell your unpaid invoices to a third party at a discount in exchange for cash upfront. | Businesses with reliable customers on long payment terms that have unpaid invoices and need fast access to cash. | |
| Lump sum that you repay with a percentage of your future sales, usually on a daily or weekly basis. | Businesses with strong card sales; borrowers that can’t qualify for other options. |
🤓 Nerdy Tip
Personal loans can also be used for business purposes. However, they may impact your personal credit, especially if your company fails, and you’ll miss out on the opportunity to build business credit.
Pros and cons of business loans
Pros
Provide capital for growth.
Set payments allow for predictable budgeting.
Can build business credit.
Maintain control of your business (i.e. don’t have to give up equity).
Cons
Can strain your cash flow.
May be difficult to qualify (especially for newer or bad credit businesses).
Interest means you repay more than you’ve borrowed.
Often require collateral or personal guarantee — meaning your assets and/or savings are at risk if you default.
How to qualify for a business loan
Although each lender has its own process and requirements, there are some factors that typically impact your application:
- Personal or business credit scores. Both personal and business credit can factor into your approval chances, as well as your loan terms.
- Financial documents. You’ll likely need to submit documents like business tax returns, profit and loss statements, balance statements and more. These documents help lenders evaluate your ability to repay debt.
- Time in business. For a traditional business loan, most lenders want to see at least two years in business. However, some online lenders only require six months.
- Use of funds. Lenders want to know why you are applying for funding and the purpose of a loan.
- Collateral or personal guarantee. Large assets that can serve as collateral can significantly improve your chances of approval. If you don’t have physical collateral, a lender may ask you to sign a personal guarantee, which means you’re personally responsible for repaying the loan if your business can’t.
Is a business loan right for you?
A business loan can be a good fit if you:
- Need to fund growth and expansion.
- Need to cover cash flow gaps.
- Want to build business credit.
- Have six or more months in business.
- Have good credit.
- Are currently generating revenue.
- Don’t want to give up equity in your company.
🤓 Nerdy Tip
If you want personalized guidance when it comes to business loans, consider using a lending marketplace, like NerdWallet Small Business. These platforms allow you to submit one application, compare multiple offers and get advice from lending experts.
Alternatives to business loans
If a loan isn’t right for you — or you’re not quite ready to take on debt — there are other ways to finance a business:
- If you don’t want to take on debt. Small-business grants provide free funding that doesn’t need to be repaid. Applications are time-consuming and competitive, however.
- If you’re a high-growth startup. Equity financing allows you to trade ownership for capital. It may come from an individual investor, a firm or even groups of investors.
- If you have a strong online presence. With crowdfunding, you build a campaign and accept donations from individuals. In exchange, you provide rewards or equity.
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- 1. Federal Reserve Banks. 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey.
- 2. NerdWallet. 2026 Business Loan Study.
