Growing a small business often requires a significant financial investment, and finding the right type of of loan — and lender that understands your business’s needs — can be crucial to your success. With a variety of options available, it's essential to understand the different types of small business loans and how they can support your specific needs to help your business grow.
Whether you're looking to expand operations or manage cash flow, small business loans are an essential part of building and growing a thriving small business. In this article, we'll break down several types of small business loans to help you navigate the loan landscape and make an informed decision.
What is a small business loan?
Small business loans are financial products designed to provide business owners with the funds they need to grow their operations. These loans can be used for various purposes, including providing working capital, purchasing equipment, equipment, investing in inventory, managing cash flow or even refinancing existing debt.
The right loan can help your business thrive, but choosing the wrong one can lead to unnecessary financial strain. Below, we'll explore the most common types of small business loans, their benefits and how to determine which one is right for you.
7 Common Types of Small Business Loans
1. Business Credit Cards
Business Credit Cards offer a revolving line of credit that allows businesses to make purchases, manage expenses and maintain cash flow. With flexible spending limits and the ability to pay off balances monthly or over time, business credit cards are a versatile financial tool for managing day-to-day expenses.
Benefits:
- Earn rewards on everyday business purchases
- Access to a revolving line of credit
- Simplified expense management and tracking
Ideal For:
Small businesses that need a flexible and convenient way to manage ongoing expenses while earning rewards or cash back.
2. Commercial Line of Credit
Also known as a business line of credit, a commercial line of credit is a flexible financing option that allows businesses to borrow funds up to a predetermined limit, similar to a credit card. You only pay interest on the amount you use, and once repaid, the funds are available to borrow again.
Benefits:
- Flexible access to funds
- Pay interest only on what you use
- Revolving credit
Ideal For:
Businesses needing to manage cash flow, cover payroll or unexpected expenses or finance ongoing operational needs.
3. Term Loans
Term loans are one of the most straightforward and popular types of small business loans, and they finance the things you need to keep your business growing. They involve borrowing a lump sum of money that is repaid over a fixed period with interest. The repayment terms can range from a few months to several years, depending on the loan amount, collateral and the lender's policies.
Benefits:
- Predictable monthly payments
- Fixed interest rates
- Flexible loan amounts
Ideal For:
Businesses that need a significant amount of capital for large investments, such as purchasing machinery and equipment, refinancing or consolidating debt, undergoing renovations, expanding facilities or undertaking major projects.
4. Equipment Loans
Equipment loans are specifically designed to help businesses purchase machinery, vehicles or other necessary equipment. The equipment itself often serves as collateral for the loan, making it easier to obtain than some other types of financing.
Benefits:
- Helps preserve cash flow
- Can finance majority of equipment cost
- Fixed or variable interest rates
Ideal For:
Businesses that require costly equipment to operate, such as manufacturing companies or technology, construction firms or healthcare providers.
5. Vehicle Loans
Vehicle loans are tailored for businesses that need to purchase cars, trucks or other vehicles essential for their operations. These loans are similar to equipment loans in that the vehicle itself typically serves as collateral, making it a more accessible financing option for many businesses.
Benefits:
- Flexible loan terms
- Ability to finance new or used vehicles
- Ownership of the vehicle once the loan is repaid
Ideal For:
Businesses that rely on transportation, such as delivery services, construction companies or mobile businesses like food trucks.
6. SBA Loans
SBA (Small Business Administration) loans are government-backed loans that offer favorable terms to small business owners. While the SBA itself doesn't lend money, it guarantees a portion of the loan, reducing the risk for lenders and often resulting in lower interest rates and longer repayment terms.
At Apple FCU, we offer two types of SBA loans: the SBA 504 loan and the SBA 7(a)* loan. Both loans are valuable programs offered by the U.S. Small Business Administration, but they are designed for different purposes.
The SBA 504 and 7(a) loans can both be used to purchase and refinance real estate and fixed assets. However, the SBA 7(a) loan can also be used to provide financing for start-ups, partner buy-outs, permanent working capital and financing for buildouts and leasehold improvements for working capital.
Additionally, the SBA 504 loan also offers a low, fixed rate, while the 7(a) loan offers an interest rate that is often variable and unpredictable.
Benefits:
- Lower down payments
- Longer repayment terms
- Competitive interest rates
Ideal For:
Businesses looking for long-term financing solutions, especially those that might not qualify for traditional loans due to limited collateral or a shorter operating history or cashflow shortfall.
7. Owner-Occupied Real Estate Loans
An Owner-Occupied Real Estate Loan is designed for businesses that plan to purchase or refinance property where they will operate their business. The property serves as collateral, which typically allows for more favorable terms, such as lower interest rates and longer repayment periods.
Benefits:
- Build equity in your property
- Potential for lower interest rates due to collateral
- Long-term stability for your business locations
Ideal For:
Businesses that want to purchase or refinance property for their operations.
Choosing the Right Small Business Loan for You
Selecting the right small business loan depends on several factors, including the amount of money you need, how quickly you need it, your credit history and your business's financial health. It's important to evaluate each loan option's terms, interest rates and repayment structures to determine which aligns best with your business goals.
Key Considerations
Loan amount: Consider how much capital you need and whether the loan option can meet that requirement.
Repayment terms: Look at how long you'll have to repay the loan and whether the monthly payments are manageable.
Qualification requirements: Ensure you meet the eligibility criteria, such as credit score, collateral and business history.
Navigating the world of small business loans can be overwhelming, but with the right information and guidance, you can find the perfect financing solution to support your business's growth and success.
At Apple FCU, our Commercial Services Relationship Specialists are here to help you explore your options and choose the loan that best fits your needs. Whether you're just starting out or looking to expand, we're committed to helping your business thrive.
Ready to take the next step? Fill out our inquiry form today to learn more about our small business loan options and how we can support your business goals.
*Apple FCU does not fund the SBA 7(a) loan. Members are referred to a third-party lender for approval and funding.
