Small Businesses

A Beginner’s Guide to Navigating The 7 Types of Business Loans

  • 4 min Read
  • January 29, 2024

Author

Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

Table of Contents

Embarking on the entrepreneurship journey often requires more than a great idea and determination; it necessitates financial support to turn dreams into reality. If you can’t afford to bootstrap your business, taking out a business loan is a great option to get the capital you need to start or grow your company.

But do you know how to choose the best one for your needs and goals? 

There are many small business loans and credit to consider, each fitting for a different business circumstance, with various advantages and disadvantages. Go through this primer to see what’s best for your growing company.

Here are the seven most popular types of business loans.



1. Term loans


Term loans are one of the most common types of business financing. It entails borrowing money from traditional banks, online lenders, or credit unions, which must be repaid over a fixed period (often at a fixed interest rate). 

Pros:

  • Gain access to cash upfront for business investment. 
  • Allows for higher amounts to be borrowed than with other types of business loans.

Cons:

  • Securing term loans with the lowest rates and extended terms can be challenging.
  • Borrowers may need to provide a personal guarantee or other collateral.

Schedule a call today

2. SBA loans


SBA loans are guaranteed by the U.S. Small Business Administration (SBA). There are several SBA loans, with the most popular offering being the SBA 7(a) loan.

Pros:

  • Lower interest rates.
  • Allows eligible businesses to borrow higher loan amounts of up to $5 million 
  • Long repayment terms.

Cons:

  • Stricter and extensive qualification requirements.
  • Lengthy and rigorous loan application process.

3. Invoice factoring


Invoice factoring, or accounts receivable factoring, is an alternative to small-business loans. It involves selling unpaid customer invoices to a factoring company for immediate cash. The factoring company advances a percentage of the invoice value and handles the collection from the customer. Once payment is received, they provide the remaining amount, deducting fees.

Pros:

  • Provides instant access to cash.
  • Easier approval process.

Cons: 

  • Costly finance option.
  • Borrowers lose control over the collection of their invoices.
Talk to us about how Escalon’s essential business services can help your startup scale faster.


4. Business lines of credit


It is a type of financing that lets entrepreneurs borrow money on an as-needed basis. It works like a credit card, allowing borrowers to pay interest only on the money they’ve drawn. Once they’ve repaid funds, they can draw on the credit line again.

Pros:

  • Provide more flexibility than other financing options.
  • Allows revolving access to funds. 
  • Unsecured loans.

Cons: 

  • Often carries additional costs, such as maintenance charges and draw fees.
  • Strong business credit and financials are required.

5. Equipment financing loans


These loans are designed to finance the purchase of equipment and machinery such as office furniture, semi-trucks, other commercial vehicles, and commercial fridges. The size of the loan is determined by the value of the equipment it is intended for.

Pros:

  • Equipment being purchased can be used as collateral for the loan. 
  • Longer repayment terms of up to 25 years.

Cons: 

  • Some equipment lenders require a higher credit score and down payment.
  • Equipment may depreciate faster than the financing term.

6. Microloans


Microloans typically come in smaller loan amounts and have shorter repayment terms. Though some banks offer microloans, this financing option is more commonly provided by alternative lenders, like online and nonprofit lenders.

Pros:

  • Easily accessible to borrowers facing credit challenges. 
  • Less stringent qualification criteria.

Cons: 

  • Interest rates are often higher than traditional bank loans. 
  • Personal guarantees and collateral are mandatory to secure funding.

7. Merchant cash advances (MCA)


An MCA gives businesses quick access to a lump sum in exchange for a portion of their future sales revenue. Unlike typical small business loans, the repayment in MCA happens through routine business sales.

Pros:

  • Give access to cash quickly.
  • Easier qualification requirements.

Cons: 

  • Expensive than other types of financing. 
  • Higher repayments can create cash flow problems.

The final word


Don’t feel rushed or pushed into a business loan. It pays to take your time and research to find the best business loan for your company. Carefully compare lenders and their loan terms before selecting the right financing option for your unique situation.

Schedule a call today

Want to know more about finance and accounting? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Small Businesses

The ROI of Outsourcing Business Services: How to Measure Your Investment’s Impact 

The ROI of Outsourcing Business Services: How to Measure Your Investment’s Impact  In a world where every dollar must count,...

Read More
People Management & HR

2025 Employment Law Updates: What to Know

As we step into 2025, businesses across the country face several important updates in labor laws and employee benefits. Staying...

Read More
Startups

5 Signs Your Startup Needs an Outsourced CFO  

5 Signs Your Startup Needs an Outsourced CFO   Startups often operate with lean teams, but as they grow, financial complexity...

Read More
Leadership & Growth

CG Startups: How to Keep Costs Low While Scaling Operations 

Consumer Goods Startups: How to Keep Costs Low While Scaling Operations  Scaling a consumer goods startup requires a careful balancing...

Read More
Press Releases

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader 

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader  In a strategic move that...

Read More
Taxes

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant 

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant  For startups incorporated in Delaware, staying compliant is...

Read More
Taxes

Tax Planning for Startups: Preparing for Your First Tax Filing

Tax Planning for Startups: Preparing for Your First Tax Filing as a Growing Business  For many startups, the first major...

Read More
Taxes

Unlock Tax Savings with the R&D Tax Credit

As a startup, managing cash flow and minimizing expenses are critical to your business's survival and growth. One often-overlooked opportunity...

Read More
Accounting & Finance

1099 Compliance for Early Stage Startups

1099 Compliance for Early Stage Startups As your startup grows from seed funding to Series A, B, or C, you’ll...

Read More