9 Types Of Business Loans

• Invoice financing. You use your accounts receivables — unpaid money owed to you by clients — as collateral for an advance. The lender advances you up to 85 percent of the total amount. Once the invoice is paid by your client, you will repay your lender the amount advanced plus fees.
• Invoice factoring. Similar to invoice financing, but you will sell your invoices directly to the lender for a lump sum. You may receive up to 85 percent of the total invoice amount. Once the invoice is paid, the lender will send you the remaining amount minus fees.

The fees you pay are significant, but it may be worth it if your invoices aren’t due for 60 or 90 days and you need money to cover expenses in the meantime.

Pros

• Quick turnaround for unexpected gaps in cash flow
• Fees may depend on amount advanced

Cons

• High fees based on when your client repays
• Advances are typically for 85 percent of invoice or less

Who this is best for

Invoice financing and invoice factoring are best for businesses that do not qualify for traditional business loans. Because they are convenient and quick, you will pay a significant fee when you use an invoice financing or an invoice factoring company.

4. Line of credit

Lines of credit are similar to business credit cards but are meant for larger expenses than you can cover with the typical credit card. A business line of credit will likely have a higher funding limit than a card, which makes them ideal for midsize expenses.

With a line of credit, you will have a set credit limit and a draw period — a period during which you can borrow money. Until the draw period is over, you can borrow, repay and borrow again for as long as you need. With some lenders, only interest payments are due during the draw period. After, you will be required to pay back what you owe. 

Lines of credit are available from banks and online lenders and are a common way to cover expenses. And while they don’t have fixed repayment terms like a term loan, the ability to continually borrow makes them a solid choice for businesses that need to make frequent purchases.

Pros

• Line of credit resets as you repay
• Flexible repayments based on how much you spend

Cons

• Lack business credit card rewards
• Draw period limits time to spend funds

Who this is best for

Businesses that have regular, variable expenses can take advantage of lines of credit. They are more flexible than term loans and may offer better rates than business credit cards.

5. Merchant cash advance

A merchant cash advance (MCA) is a short-term funding option offered by online lenders. The amount you receive is based on your credit card sales rather than your business’s credit score or total revenue. Like invoice factoring and invoice financing, you receive a lump sum to cover issues with cash flow. Then, you repay it with a percentage of daily credit card sales.

A merchant cash advance company charges a factor rate instead of interest, and the fees are significant. MCAs are easy to access, have short terms and are designed for businesses that lack other funding options. But the high fees mean you may take on more debt than your business can handle. Before you borrow, exhaust all other funding options.

Pros

• Quick funding based on credit card sales
• Lump sum covers small gaps in cash flow

Cons

• High fees 
• Repayment terms may be less than one year

Who this is best for

Merchant cash advances are expensive, so they should only be used if your business needs quick access to working capital and does a significant amount of its sales through credit cards.

6. Microloan

Microloans are designed for newer businesses just starting to grow. The average microloan is around $13,000, according to the SBA, although amounts range up to $50,000. They are repaid within a few years and function as working capital. 

The SBA runs one popular microloan program, although several online lenders and some banks also offer microloans. Microloans have low rates — between 8 to 13 percent for an SBA microloan.

Pros

• Designed for working capital and small expenses
• Most backed by the SBA

Cons

• Funding limited to less than $50,000
• Rates may be higher than larger term loans

Who this is best for

Since microloans are meant to cover small expenses or be used as working capital, they are good for very new businesses that need a boost in funding to get ahead. 

7. Personal loan

Not every lender allows you to use personal loans for business expenses, but many do. Approval for a personal loan involves your financial history, not your business’s. It depends on your credit score, income and current debt. 

Although there are many personal loans to compare, most will offer funding up to $50,000 with rates as low as 6 percent. You repay in fixed payments over two to five years, though some lenders offer terms as long as seven years.

You will need to check with your lender to confirm you can use your loan for your business. Even if you are permitted to use a personal loan for your business, a lender may not allow you to fund businesses in certain industries. Always be upfront about how you plan to use your funding and get written permission from your lender before you sign any legal documentation.

Pros

• Does not rely on business revenue or credit
• Simple application process

Cons

• Positive payments don’t benefit your business
• Lenders may not consider self-employment income

Who this is best for

Because personal loans rely on your own finances and credit score, these are best for people with good to excellent credit who can afford additional monthly payments. New businesses and startups that lack established revenue will benefit most from personal loans. 

8. SBA loan

SBA loans — loans backed by the Small Business Administration — are some of the most sought-after loans. These three programs meet different business needs: