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Best Types of Small Business Loans

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Last editedMay 20222 min read

Whether you need to raise start-up funds or access an injection of cash for growth, small business loans can help. There’s a wide selection of loans for small businesses on the market, from cash advances to lines of credit. While each comes with its own pros and cons, here’s our pick of the best types of small business loans in terms of terms, rates, and risk.

What are the best types of small business loans?

The type of loan available to your business will depend on a variety of factors, including your size, industry, and credit score. Here are six of the most useful options for smaller businesses.

1. SBA loans

Guaranteed by the federal government’sSmall Business Administration (SBA),SBA loans are one of the most popular options for start-ups and growing companies alike. The government agrees to pay up to 85% of the loan amount should the borrower default, assuming a high percentage of risk. However, there are still strict eligibility requirements in place including a high personal credit score. For those eligible, interest rates will vary between roughly 3% and 13%, with repayment terms between 10 and 25 years.

SBA 7(a) loans are available for expansion and acquisition up to $5 million.
SBA 504 loans are designed to help purchase fixed assets, also up to $5 million.
SBA microloans offer up to $50,000 to purchase supplies and assist with working capital needs.

2. Business lines of credit

Another type of loan is a business line of credit, which offers access to money as you need it up to a defined credit limit. You only need to pay interest on the money you’ve withdrawn, which offers a high level of flexibility. Lines of credit are usually unsecured, meaning no collateral is needed. However, there may be additional maintenance costs and withdrawal fees, and you’ll need good credit to qualify.

3. Term loans

Perhaps the most popular form of business financing, term loans are very straightforward. The business applies to take out a lump sum of cash, which is then paid back over a predetermined term or period with interest. You can take out term loans both from traditional lenders like banks as well as from online lenders. Fast and efficient, this is one of the best types of small business loans for those who need an immediate cash injection for investment.

4. Invoice financing

Does your business issue a series of invoices to its customers? You may be able to sell these to an invoice factoring company for fast cash. The factor is then responsible for collecting payment from the customer. Invoice financing works in a similar way, but instead of selling the unpaid invoices you use them as collateral for a loan. Your business is also responsible for collecting payment, unlike factoring.

5. Microloans

While some of the loans for small businesses on this list offer access to millions of dollars, microloans cover smaller amounts. Eligible businesses can borrow up to $50,000 from microlenders, who typically offer benefits like low interest rates and consulting services. They’re best suited to non-profits and start-ups who need a helping hand.

6. Revolving lines of credit

While a business line of credit involves a fixed term, revolving lines of credit are more flexible. Business credit cards are an example of this type of loan, which allows you to pull funds up to your limit and then make minimum monthly payments over time. If your business has a series of ongoing expenses, a revolving line of credit helps you build your credit profile while earning rewards on purchases – provided you make on-time payments.

How to qualify for the best small business loans

It’s best to compare terms and conditions carefully for all small business loans to find the best fit. Eligibility criteria will also vary. Typically, you must meet requirements such as the following:

Have a minimum credit score of 550
Be free from recent bankruptcy
Have an established business presence
Have a business checking account
Show a history of steady annual revenue

The more financially stable and credit-worthy your business is, the more favorable your loan conditions will be.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.