What Are the Four Types of Business Loans?

Business financing enables companies to grow, manage operations, and seize new opportunities. Access to capital helps businesses maintain stability and invest in their future. Various types of loans are available, each structured to meet specific business needs. Understanding these options helps business owners make informed decisions about securing the right funding.

Term Loans

A term loan provides a business with a lump sum of money, which is then repaid over a predetermined period with interest. These loans are often structured with fixed repayment schedules, making budgeting predictable for the borrower. Interest rates can be fixed, remaining constant throughout the loan’s life, or variable, meaning they may fluctuate based on market conditions, such as the prime rate.

Term loans are commonly used for significant investments that support long-term growth. Businesses might use these funds to purchase assets like real estate, finance equipment acquisitions, or fund major expansion projects. Collateral, such as real estate, equipment, or inventory, may be required to secure the loan, reducing the lender’s risk. Repayment periods can vary widely, from a few months to 25 years for real estate.

Business Lines of Credit

A business line of credit offers flexible, revolving access to funds up to a set maximum limit, functioning much like a business credit card. Businesses can draw funds as needed, repay the amount, and then draw again, with interest typically charged only on the amount borrowed. This revolving nature distinguishes it from a term loan, where a lump sum is disbursed upfront.

Lines of credit are useful for managing cash flow fluctuations, covering short-term operational expenses, or purchasing inventory. They provide a financial safety net for unexpected costs or to bridge gaps between receivables and payables. While some lines of credit are unsecured, others may require collateral, such as a blanket lien on assets or a certificate of deposit, especially for higher credit limits.

SBA-Backed Loans

SBA-backed loans are financing options where the U.S. Small Business Administration (SBA) guarantees a portion of the loan, reducing the risk for lenders. This government backing allows traditional lenders, such as banks and credit unions, to offer more favorable terms to small businesses that might not otherwise qualify for conventional loans. The SBA itself does not directly lend money, except in disaster recovery situations; rather, it sets guidelines and reduces the risk for its lending partners.

These loans feature lower down payments, competitive interest rates, and longer repayment periods, which can improve a business’s cash flow. Common programs include the 7(a) loan program, which is versatile and can be used for general business purposes like working capital, equipment purchases, or real estate acquisition, with a maximum loan amount up to $5 million. The CDC/504 loan program focuses on long-term, fixed-rate financing for major fixed assets like real estate or machinery, with amounts up to $5.5 million for certain projects.

Equipment and Asset-Backed Loans

Equipment loans are a specific type of financing used to purchase machinery, vehicles, or technology, where the acquired asset itself serves as collateral for the loan. This arrangement allows businesses to acquire tools without a large upfront cost, spreading the cost over the asset’s useful life. The value of the equipment directly influences the loan amount and terms offered.

Asset-backed lending involves using existing business assets as collateral to secure financing, which can be either a term loan or a line of credit. These assets can include accounts receivable, inventory, or real estate. This type of lending is beneficial for businesses that have assets but may experience fluctuating cash flow, as the collateral mitigates risk for the lender, leading to more accessible financing and competitive interest rates.