Types of Small Business Loans, Explained

The phrase "small business loan" hides at least seven different products, and they behave nothing alike. The menu of business loans for startups runs from patient, low-cost SBA financing to fast cash that can carry triple-digit interest, and reaching for the wrong one is an expensive mistake.

This guide is the map. For each major type you get one plain-language definition, what it is best for, and the catch that comes with it. The aim is not to sell you on a single option. It is to help you tell them apart, then compare the ones you qualify for on the number that actually decides cost: the annual percentage rate. Here are the main types, running roughly from the most patient money to the most expensive.

Term loans: the straightforward workhorse

A term loan is the product most people picture when they hear the word "loan." You borrow a set amount once and repay it in fixed installments over a defined period, with interest. That predictability is why term loans are the backbone of most business borrowing.

They fit a specific, one-time investment with a clear payback, like buying a machine or funding a proven expansion. The catch is the payment, which comes due whether sales are strong or slow, so a term loan rewards steady cash flow and strains a business without it. Because this is such a common route, it earns its own breakdown. The full mechanics of a term loan cover rates, amortization, and how lenders decide whether to approve you.

SBA loans: 7(a), 504, and microloans

SBA loans are not loans from the government. The U.S. Small Business Administration guarantees part of a loan made by a bank or nonprofit lender, which lowers the lender's risk and can open a door for borrowers who would not qualify for conventional financing. Three programs cover most needs.

The 7(a) program is the flagship. It is the most flexible option, with a maximum loan of $5 million that can fund working capital, equipment, real estate, refinancing, or a change of ownership. It is where most founders start.

504 loans provide long-term, fixed-rate financing of up to $5.5 million for major fixed assets like real estate and long-life equipment, delivered through nonprofit Certified Development Companies. They cannot be used for working capital or inventory, so they suit a business buying a building or heavy machinery, not one covering payroll.

Microloans run up to $50,000, with the average around $13,000, through nonprofit intermediary lenders that focus on newer and underserved businesses. They can fund working capital, inventory, or equipment, but not real estate. If you have no revenue or collateral yet, a conventional loan is a hard sell, and these smaller programs are one of the realistic paths to a first loan with no money.

SBA loans win on rates and length of term. The tradeoff is time, since the application is more involved and slower to approve than most online products.

Business lines of credit

A business line of credit works like a credit limit for the company. You draw what you need up to a set cap, repay it, and borrow again, paying interest only on the balance you actually use.

It is built for smoothing uneven cash flow, covering a gap until a big invoice clears, or handling a surprise cost. The tradeoffs are that limits tend to be smaller than a term loan, rates are usually variable, and the always-available flexibility can quietly pull you into carrying a balance you never planned to hold.

Equipment financing

Equipment financing is a loan tied to a specific asset, where the machine, vehicle, or hardware itself serves as the collateral. Because the purchase secures the debt, approval is often easier than for an unsecured term loan.

It fits any costly, long-lived asset, from a delivery van to a commercial oven, that you would rather not buy with cash all at once. The catch is that the loan is only as useful as the asset, and if you fall behind, the lender can repossess the equipment you financed.

Invoice financing and factoring

If your business bills other companies and waits 30, 60, or 90 days to get paid, invoice financing turns those unpaid invoices into cash now. With factoring, you sell the invoices to a company at a discount and it collects from your customers. With invoice financing, you borrow against the invoices and keep collections in-house.

This fits B2B businesses stuck with slow-paying customers and a cash gap between doing the work and getting paid. The tradeoff is margin: you give up a slice of every invoice you advance, and factoring can hand your customer relationships to a third party for collection.

Merchant cash advances: fast money, steep price

A merchant cash advance is not really a loan. A provider buys a fixed amount of your future sales and takes repayment as a percentage of your daily card receipts. The price is quoted as a factor rate, often adding 20% to 50% to the amount advanced, rather than as an interest rate you can easily compare.

Speed is the only real advantage, and it comes at a punishing cost. Federal regulators note that a merchant cash advance can carry estimated APRs in the triple digits, and the daily withdrawals can choke a thin cash flow. Treat it as a last resort, read every term, and exhaust the cheaper options above before you sign one.

Business credit cards

A business credit card is revolving credit you already understand from personal cards: a limit, a monthly statement, and interest on any balance you carry. Used well, it separates business spending from personal and covers short-term float you clear each month.

It is a fine tool for everyday expenses and a poor one for anything large and long-term. Carry a balance and the interest rate is steep, so funding a major purchase on a card costs far more than a term loan or equipment financing would.

How to choose among business loans for startups

With the types sorted, the choice comes down to matching the money to the job and comparing honest costs. Three questions do most of the work.

• What is the money for? A one-time asset points to a term loan or equipment financing. An ongoing cash-flow gap points to a line of credit or invoice financing.
• How fast do you need it, and what will speed cost? The fastest products are usually the most expensive, and patience is often worth thousands.
• What is the real price? Compare every offer on its annual percentage rate, not its sticker rate or a factor rate, because APR folds in the fees that a headline number leaves out.

Here is the landscape at a glance.

Loan type	Best for	Watch out for
Term loan	A one-time investment with a clear payback	Fixed payment due in slow months
SBA loan	Lowest rates, longest terms	Slower, heavier application
Line of credit	Uneven cash flow and short gaps	Variable rates, easy to overuse
Equipment financing	Buying a costly long-lived asset	Lender can repossess the asset
Invoice financing	B2B with slow-paying customers	Eats into your margin
Merchant cash advance	Last-resort speed only	Very high effective cost
Business credit card	Everyday spend paid off monthly	Steep interest on carried balances

Loans are only one branch of the funding tree. If you are still deciding whether to borrow at all, weigh a loan against every realistic funding option, from grants and crowdfunding to equity, before you commit.

Match the money to the job, then build the case

No type of loan is good or bad on its own. Each is a tool for a specific job, and the founders who borrow well are the ones who name the job first, then compare offers on total cost instead of the sticker rate. Approval and terms always depend on your credit, cash flow, and how strong the plan behind the request looks.

If you want a structured place to build that plan, your financial projections, and the case a lender will actually read, join EntraWorld free. The platform brings AI-powered business planning, a founder community, and the EntraPath roadmap together in one place, so you can walk into any lending conversation prepared.