Types of Business Loans

Term Loans: Short-Term vs. Long-Term

A term loan is a type of loan that is repaid over a fixed period with regular payments, including principal and interest. Term loans are typically used for business expansion, purchasing assets, or other capital investments. They are categorized into short-term and long-term loans based on their repayment duration.

1. Short-Term Loans

• Repayment Period: Usually less than 1 year, sometimes up to 3 years

• Purpose: Used for working capital, inventory purchases, or managing cash flow gaps

• Interest Rates: Generally higher than long-term loans due to the short repayment period

• Loan Amount: Typically lower than long-term loans

• Example: A business taking a 6-month loan to cover seasonal inventory purchases

2. Long-Term Loans

• Repayment Period: More than 3 years, typically 5 to 30 years

• Purpose: Used for large investments like equipment, real estate, or expansion projects

• Interest Rates: Lower than short-term loans due to longer repayment terms

• Loan Amount: Higher amounts, often secured by collateral

• Example: A company taking a 10-year loan to purchase a new factory

Key Differences:

Equipment Financing: Best Lenders & Terms

What is Equipment Financing?

Equipment financing is a type of loan or lease that businesses use to purchase equipment, such as machinery, vehicles, or technology, without paying the full cost upfront. The equipment itself typically serves as collateral for the loan.

Best Equipment Financing Lenders 

1. Avance Credit

• Best for: Small businesses with strong credit

• Loan Amounts: Up to $500,000

• Terms: 2–7 years

• Interest Rates: As low as 5.5%

• Minimum Credit Score: 650

• Pros: No hidden fees, fast approval

• Cons: Requires good credit

2. National Funding

• Best for: Startups & businesses with fair credit

• Loan Amounts: $5,000–$150,000

• Terms: 2–5 years

• Interest Rates: 6%–30%

• Minimum Credit Score: 600

• Pros: Low credit score requirements, flexible terms

• Cons: Higher rates for lower credit

3. Balboa Capital

• Best for: Quick funding needs

• Loan Amounts: $5,000–$500,000

• Terms: 2–5 years

• Interest Rates: Starting at 4%

• Minimum Credit Score: 620

• Pros: Same-day funding available

• Cons: Higher rates for smaller loans

4. Triton Capital

• Best for: Construction & heavy equipment financing

• Loan Amounts: $10,000–$250,000

• Terms: 12–60 months

• Interest Rates: 5%–25%

• Minimum Credit Score: 600

• Pros: Specialized in industry equipment

• Cons: Higher interest rates for lower credit scores

5. U.S. Small Business Administration (SBA) 504 Loans

• Best for: Long-term, low-cost financing

• Loan Amounts: Up to $5 million

• Terms: 10–25 years

• Interest Rates: ~3%–7%

• Minimum Credit Score: 680

• Pros: Low rates, long terms

• Cons: Longer approval process

Key Terms to Consider

• Loan Amount – How much financing you can get

• Interest Rate – The cost of borrowing, based on creditworthiness

• Loan Term – The repayment period (shorter terms = higher payments)

• Down Payment – Some lenders require a % of the equipment cost upfront

• Funding Speed – How quickly you can access the money

How to Qualify for Equipment Financing

• Strong Credit (600+ for most lenders, 680+ for the best rates)

• Established Business (At least 6 months, preferably 2+ years)

• Steady Revenue (Proof of cash flow to make payments)

• Collateral (The equipment itself usually secures the loan)

Invoice Factoring vs. Invoice Financing

Invoice Factoring and Invoice Financing are both methods businesses use to improve cash flow by leveraging outstanding invoices, but they function differently. Here’s a breakdown:

Invoice Factoring

• A business sells its unpaid invoices to a third-party company (a factoring company) at a discount.

• The factoring company takes over collection from the customer.

• The business gets an immediate cash advance, usually around 70-90% of the invoice value.

• Once the customer pays the invoice, the factoring company releases the remaining balance (minus fees).

• The factoring company interacts directly with the customer, which can impact relationships.

Best for: Businesses that need fast cash and don’t mind customers knowing about the factoring arrangement.

Invoice Financing

• A business uses its unpaid invoices as collateral to get a loan or line of credit from a lender.

• The business retains control over customer collections.

• The lender provides an advance (often 80-95% of the invoice value).

• Once the customer pays, the business repays the loan with interest/fees.

Best for: Businesses that want to maintain control over customer interactions while accessing funds tied up in unpaid invoices.

Key Differences:

Merchant Cash Advances: Pros & Cons

A Merchant Cash Advance (MCA) is an alternative financing option where a business receives a lump sum of cash in exchange for a percentage of future credit card or debit card sales. It’s often used by small businesses that need quick access to capital but may not qualify for traditional loans.

How It Works:

• A business receives an advance from an MCA provider.

• Repayment is made through a percentage of daily or weekly sales (credit card transactions or bank deposits).

• The cost of borrowing is determined by a factor rate (e.g., 1.2), meaning if you borrow $10,000 at a 1.2 factor rate, you owe $12,000.

• No fixed monthly payments—repayments adjust based on sales volume.

Pros of Merchant Cash Advances:

1. Fast Access to Funds – Approval and funding can take just a few days.

2. Flexible Repayments – Payments fluctuate with sales, easing financial strain during slow periods.

3. No Collateral Required – Unlike traditional loans, MCAs are unsecured.

4. Easier Approval – Less emphasis on credit scores and more on business revenue.

5. No Fixed Monthly Payments – Reduces pressure compared to fixed loan repayments.

Cons of Merchant Cash Advances:

1. High Costs – Factor rates can result in effective APRs exceeding 50-100%, making MCAs very expensive.

2. Daily or Weekly Deductions – Constant cash flow reduction can strain business operations.

3. Not Building Credit – Unlike loans, MCAs don’t typically improve business credit scores.

4. Risk of Debt Cycle – Many businesses take out new MCAs to pay off previous ones, leading to financial trouble.

5. Limited Regulation – Fewer consumer protections compared to traditional loans.

Who Should Consider an MCA?

• Businesses with strong daily credit card sales.

• Those needing quick cash but unable to secure a traditional loan.

• Seasonal businesses that benefit from fluctuating payments.

Who Should Avoid an MCA?

• Businesses that can qualify for lower-cost financing.

• Those with inconsistent revenue that can’t sustain daily/weekly deductions.

• Anyone looking to build credit history.

Microloans: Best Options for Small Businesses

Microloans are small loans, typically ranging from $500 to $50,000, designed to help small businesses, startups, and entrepreneurs who may not qualify for traditional bank loans. These loans often come with lower interest rates, flexible terms, and can be used for working capital, inventory, equipment, or business expansion.

Best Microloan Options for Small Businesses

Here are some of the best microloan providers:

1. SBA Microloan Program (U.S. Small Business Administration)

• Loan Amount: Up to $50,000

• Interest Rate: Varies (typically 8%–13%)

• Repayment Terms: Up to 6 years

• Best For: Startups, women-owned businesses, minority entrepreneurs, and underserved communities

• How to Apply: Loans are distributed through nonprofit intermediaries approved by the SBA

2. Kiva

• Loan Amount: Up to $15,000

• Interest Rate: 0% (crowdfunded loan)

• Repayment Terms: Up to 36 months

• Best For: Entrepreneurs who have community support and need an interest-free loan

• How to Apply: Businesses must gather social support before fundraising

3. Accion Opportunity Fund

• Loan Amount: $5,000 to $250,000

• Interest Rate: Starts at 7.99%

• Repayment Terms: 12 to 60 months

• Best For: Minority-owned businesses, women entrepreneurs, and low-to-moderate-income business owners

• How to Apply: Online application through Accion’s website

4. Grameen America

• Loan Amount: Typically $2,000 to $15,000

• Interest Rate: Low-interest microloans

• Repayment Terms: Flexible

• Best For: Women entrepreneurs in low-income communities

• How to Apply: Must attend financial training and become part of a small lending group

5. LiftFund

• Loan Amount: $500 to $500,000

• Interest Rate: Varies, but competitive

• Repayment Terms: Flexible

• Best For: Startups, minority-owned businesses, and those unable to secure traditional loans

• How to Apply: Online application via LiftFund’s website

How to Qualify for a Microloan

• Have a solid business plan

• Demonstrate ability to repay the loan

• Show financial statements or cash flow projections

• Have a fair or better credit score (though some lenders accept lower scores)

• Be a legal U.S. business entity

Peer-to-Peer Business Loans: Are They Worth It?

Peer-to-peer (P2P) business loans are a form of alternative financing where businesses borrow money directly from individual investors through online platforms, bypassing traditional banks. These platforms connect businesses in need of funding with investors looking to earn interest on their money.

How Peer-to-Peer Business Loans Work

1. Application – A business applies for a loan on a P2P lending platform, providing financial details and the purpose of the loan.

2. Risk Assessment – The platform evaluates the borrower’s creditworthiness and assigns an interest rate.

3. Investor Matching – Individual investors review loan listings and choose where to invest.

4. Funding & Repayment – Once fully funded, the borrower receives the loan amount and begins making fixed monthly repayments with interest.

Pros of P2P Business Loans

✅ Easier Approval – Businesses with less-than-perfect credit may qualify.
✅ Competitive Interest Rates – Rates can be lower than traditional banks, depending on creditworthiness.
✅ Faster Process – Applications and funding can be quicker than banks.
✅ Flexible Terms – Loan amounts and repayment terms vary, allowing customization.

Cons of P2P Business Loans

❌ Higher Interest Rates for Risky Borrowers – If credit is poor, rates can be high.
❌ Loan Amount Limits – May not be ideal for large funding needs.
❌ Risk of Rejection – If not enough investors fund the loan, it may not go through.
❌ Platform Fees – Some platforms charge origination or service fees.

Are They Worth It?

P2P business loans can be a good option for small businesses and startups struggling to secure bank loans. If you need quick access to capital, have decent credit, and are comfortable with online lending, they might be worth considering. However, businesses requiring larger loans or the lowest possible interest rates may still prefer traditional bank loans or government-backed options.