What are Business Loans?

Whether you’re looking to launch your dream business, scale your company and grow, or just in need of capital to get through a slow period, small business loans can provide the funds you need to turn your business strategy into a success.

For example, a small business loan can provide you with fast-funding for just about any business-related expense with flexible repayment terms. A line of credit can also give you continuous access to revolving capital when you need it. These are just a couple of loan products available to help your business flourish.

The right type of loan really depends on the unique needs of your business. Company size, industry, assets, and financial health all play a role in determining the best business financing for your needs. We’ll go over loan options and how to apply for business funding, giving you some information to help make the right choices and ensure your future success for years to come.

How Business Loans Work

Whether you need cash for expansion, new equipment, or just a little breathing room, business financing can help. The two of the most common options, lump sum business loans and revolving credit, each have their perks. And, knowing the difference can save you from stress (and a lot of money).

Lump Sum Business Loan

With a lump sum loan, you borrow a set amount, receive the cash upfront, and pay it back over time with interest. This option makes a great choice if your business has solid credit and you need a large sum of money for growth.

The repayment terms of lump sum loans vary. Some lenders require quick repayment in six months, others stretch to five years or more. Make sure to negotiate terms that fit your budget.

You’ll also have the option of a secured or unsecured loan. A secured loan requires collateral, such as equipment or property, which the lender may seize if the loan is not repaid. While secured loans often come with lower interest rates, the risk of asset seizure can impact business operations if repayment becomes an issue. Unsecured loans don’t require collateral, but they usually come with higher interest rates and stricter approval criteria, making them a costlier option.

Business Revolving Credit

A revolving business line of credit gives you a more flexible option. Instead of getting one big lump sum, you receive pre-approval for a set credit limit and can withdraw funds as needed. Think of it like a business credit card in which you only pay interest on what you use.

A line of credit provides a continuous source of credit offered to consumers by a bank or credit union. As long as you make payments on time, you can keep using your revolving credit over and over. Once you repay what you’ve borrowed, the funds become available again.

Similar to a lump sum loan, a business line of credit can be secured or unsecured. A secured line of credit requires collateral, such as business assets or equipment, which can lower interest rates. However, failure to repay could result in asset seizure, impacting business operations. An unsecured line of credit does not require collateral, making it a safer option in terms of asset protection, but expect higher interest rates as a tradeoff.

If your industry typically has irregular income, revolving credit business loan can help make ends meet during slow periods. You can also use revolving credit for growth and expansion of your company, which you can cover later with ROI.

The Upside

• Continuous source of funds
• Only pay interest on what you use

The Downside

• Can have variable rates that can go up and down
• Typically lower maximum than lump sum loans

Types of Business Loans

Businesses have a number of loan options to help grow a new business, purchase equipment or fix cash flow problems. Below you can find a breakdown of the products out there to help find the right choice for your business.

SBA Loans

An SBA loan is a small business loan backed by the Small Business Administration (SBA). Thanks to government backing, these types of loans often have lower interest rates, better repayment terms, and more flexible approval requirements compared to traditional loans.

How Businesses Benefit From SBA Loans

Lower interest rates keep borrowing affordable, and long-term fixed rates provide stability. Some programs even come with educational resources to help your business grow. If you qualify, you could secure a loan with a lower down payment and more flexible prepayment options than most bank loans. During tough times, SBA loans offer relief for businesses affected by natural disasters.

Popular SBA Loan Programs

SBA 7(a) Loans: The Most Flexible Option

SBA 7(a) loans offer flexible terms ideal for small business owners. You can use the funds for a variety of purposes, including purchasing equipment, real estate, or refinancing debt. Loan terms typically range between 10–25 years.

SBA 504 Loans: Perfect for Real Estate and Equipment

The SBA 504 loan makes sense if you’re looking to buy, build, or upgrade commercial real estate or need heavy equipment. These loans come with fixed interest rates and long repayment terms, making them ideal for big purchases. Unlike the 7(a) loan, 504 loans require at least 10% of the total project cost from the borrower.

SBA Microloans: Big Help for Small Businesses

The SBA Microloan Program offers loans up to $50,000 with an average loan size of around $13,000. This loan helps small businesses in need of working capital, inventory, supplies, furniture, or equipment. It cannot be used for real estate or paying off existing debt.

How to Qualify for an SBA Loan

Not every business is eligible for SBA funding. To qualify, you must:

• Run a for-profit business based in the US
• Meet the SBA’s small business size standards
• Have good credit and the ability to repay the loan
• Be current on all government debts

The SBA Loan Application Process

Applying for an SBA loan takes time and paperwork. Expect the process to take 60 to 90 days on average. Here’s how to apply for a business loan:

1. Find an SBA-approved lender: Banks are the most common choice, but online lenders also offer SBA loans.
2. Gather your documents: Prepare tax returns, financial statements, a business plan, and other required paperwork.
3. Submit your application: Your lender will review your financials and determine eligibility.
4. Wait for approval: The SBA and lender will assess your business and loan request before making a decision.

If you want to improve your odds of approval, a strong application can make all the difference. Increase your credit score, strengthen your business financials, and ensure you have a clear plan for using the loan. Offering collateral can help, too. Keep track of your credit profile, reduce unnecessary expenses, and pay debts on time. The more prepared you are, the better your chances of getting approved.

Business Line of Credit

A business line of credit gives you access to funds when you need them, without the hassle of applying for a new loan every time. Unlike traditional loans that give you a lump sum with a fixed repayment plan, a line of credit lets you borrow, repay, and borrow again. This makes it a convenient source of cash for unexpected expenses, inventory, or managing cash flow.

How Business Owners Benefit From Lines of Credit

Instead of waiting weeks for loan approval, businesses have funds available immediately with a revolving line of credit. This flexibility makes it an excellent financial tool for growing businesses.

The Perks of a Business Line of Credit

• Fast-funding: Access anywhere from $10,000 to $100,000 in credit based on your financials and credit score.
• Flexibility: Use it when needed, repay at your pace, and borrow again. Funds can be accessed through a business checking account, credit card, or mobile banking app.
• Cheaper than credit cards: Lines of credit usually come with lower rates than a business credit card.

The Downsides to Consider

Business lines of credit interest rates tend to be higher than traditional term loans, especially if the line is unsecured. This business financing option best suits short-term needs, rather than major investments like buying property or expensive equipment.

Is a Business Line of Credit Right for You?

Some industries rely on lines of credit more than others. If your business has fluctuating cash flow, seasonal demand, or regular inventory needs, a line of credit can offer a great option.

• Retailers use lines of credit to stock up on inventory ahead of peak shopping seasons. It also helps cover costs for store renovations or new locations.
• E-commerce businesses can use revolving credit to invest in website upgrades, marketing campaigns, and supply chain improvements. It also helps cover payroll and operational expenses when sales dip.
• Seasonal businesses, like holiday shops, landscaping services, or tourism-based businesses, use lines of credit to keep things afloat during slow periods of the year.

If you need quick, flexible access to cash without committing to a lump-sum loan, a business line of credit could be the perfect solution. It keeps your business moving, covers unexpected costs, and helps you stay ahead of the competition without tying you down to rigid loan terms.

Traditional Small Business Loans

A traditional business loan gives you a lump sum of cash that you repay over time with interest. If you have good credit and need funding for a big investment, this type of loan offers one of the best business financing to secure capital.

Loan amounts vary based on lender, credit score, revenue, and loan type. Bank loans can range from $5,000 to $1 million. If you want to pay off your loan faster, consider a short-term loan which typically falls between $5,000 to $500,000.

What Affects Loan Amounts and Interest Rates?

A few factors can impact your loan amount and interest rates. The stronger your credit score, the better your chances of qualifying for a larger loan at a lower interest rate. Higher revenue also increases your borrowing potential, since lenders want to see consistent income. Putting up collateral may give you more favorable terms as well.

Secured vs. Unsecured Loans

A secured loan requires collateral, like real estate, equipment, or other valuable assets. In return, you’ll likely get lower interest rates and higher borrowing limits. But if you default, you risk losing whatever you put up as collateral.

An unsecured loan skips the collateral requirement but could mean higher interest rates and stricter approval criteria. If you can’t repay, your credit score takes a hit, and lenders may take legal action.

Pros and Cons of Business Loans

Business loans can make all the difference when it comes to running a successful company. They provide the capital needed to expand, invest, and stabilize cash flow.

Traditional bank loans, SBA-backed financing, and short-term funding all exist to help businesses at different stages. Whether you’re opening a new location, upgrading equipment, or covering a seasonal drop in revenue, there’s a loan for almost every need.

If you have strong credit, you can access low-interest loans with long repayment terms. If your credit isn’t perfect, you still have options, though they may come with higher rates.

That said, getting approved isn’t always easy. Banks have strict eligibility criteria, often requiring high credit scores, strong financials, and collateral. Even if you qualify, some loans require personal guarantees. Also, if your business struggles to repay, your personal assets could be on the line.

Make sure to borrow with a clear repayment strategy. For businesses that need money fast, short-term and unsecured loans can be costly. Higher interest rates and frequent repayments can strain cash flow. Merchant cash advances (MCAs) are particularly risky, as daily deductions can create a debt cycle that’s hard to escape.

How to Compare Business Loan Options

Taking out a loan can make all the difference in growing your business or making ends meet during slow periods. The best business loan companies provide a range of products that make sense for your financial situation. When shopping around for offers, make sure to consider the following:

Interest Rates and APR: Business loans come with interest rates and APR that accrue over the length of the loan. Understand the total borrowing cost to ensure you can afford repayment on time. Many business lending companies have free online calculators to help understand the total cost of the loan.

Repayment Terms (Short vs. Long-Term): Design a repayment plan that suits your budget. If you earn enough revenue, it could make more sense to repay the loan quickly in order to save money on interest. If you don’t have the cash flow, extending the loan repayment can help repay on time.

Loan Amounts: How much money do you need and how much can you really afford? Make sure to match the loan size to your business needs in order to help minimize the chance of financial problems down the road.

Fees and Hidden Costs: Business loans may come with added costs beyond just the interest rate. Depending on your lender, these may include application fees, origination fees, credit check fees, appraisal fees, closing costs, late payment fees, prepayment penalties, and potential annual fees.

Approval Speed: How quickly do you need financing? Traditional banks typically have stricter requirements and may take weeks to process your loan. If you need faster funding, shop around for online lenders instead as they can speed up the approval process. The best business loan companies can promise funding in as quickly as 24 hours.

Choosing the Best Business Loans For You

Start by taking a hard look at your finances. How much do you really need? Can your cash flow handle repayments? Knowing where your business stands financially will help you choose a loan that won’t put unnecessary strain on your operations.

Compare traditional vs. online lenders. Long gone are the days when business owners had to rely on traditional banks to gain access to funds. Lenders today offer a range of loan products to meet the unique financial needs of your business, with convenient online applications and quick 24-hour funding.

Don't settle for the first lender you find. Online lending marketplaces make it easier than ever to shop around for the right financing option. Shopping around gives you leverage to find the best deal. Compare different lenders to find terms, interest rates, and approval requirements that meet your situation.

Do your research. Reputation matters, and you can learn a lot just from a quick search online. Read business funding reviews and check customer service ratings. The last thing you want is to be stuck with a lender that’s impossible to reach when you have questions.

Consider how fast you need the money. Some traditional loans take weeks, while online lenders can fund your account within 24 to 48 hours. If timing is critical, make sure your lender can deliver on schedule.

A business loan can provide a powerful tool for growth if you take the time to find the best fit for your needs, budget, and long-term goals. Some loans work best for expansion, while others are designed for short-term needs. Knowing the difference helps you avoid costly mistakes.

Finding the best financing option has never been easier. Instead of guessing, you can compare multiple loan offers side by side and see which one fits your business best. Take your time. Weigh your options. A well-chosen loan can be the boost your business needs to grow stronger and more profitable. Before you sign any dotted lines, compare the best business loans with our comparison chart to find the right financing option for your needs.