Guide
6 types of business loans, compared
Nearly every product on the market is a variation of six structures. Learn the six and the whole market becomes legible.
On this page
The business lending market presents itself as enormous. Hundreds of providers, dozens of product names, a constant stream of new brands. Underneath the marketing there are six structures, and almost every product you will be offered is a variation on one of them.
Learning the six is worth the half hour it takes, because it converts an intimidating market into a short list of known quantities. Once you can identify which of the six you are being offered, you know how it will be priced, what it will be secured against, and what it is actually good for.
| Type | Structure | Typical cost | Secured against | Speed |
|---|---|---|---|---|
| Term loan | Lump sum, fixed schedule | ~7–12% APR | Business, often personal guarantee | 2–4 weeks |
| Line of credit | Revolving limit | ~8–25% APR on drawn funds | Business, often personal guarantee | 1–7 days |
| SBA loan | Bank loan, government-guaranteed | Prime + 2.75–4.75% | Business, personal guarantee near-universal | 30–90 days |
| Equipment financing | Loan or lease on an asset | ~6–20% APR | The equipment itself | 2–10 days |
| Invoice financing | Advance against receivables | ~1–5% per month | The invoices | 1–3 days |
| Merchant cash advance | Purchase of future receipts | 1.2–1.4 factor rate | Future card revenue | 1–2 days |
1. Term loans
The most familiar structure and the mental model most people bring to borrowing. You receive a lump sum, you repay it on a fixed schedule, and on a known date it is finished.
Its strengths are predictability and, at bank level, price. Its weakness is that interest accrues on the full principal from day one whether the money is deployed or not. Term loans suit defined projects with known costs: a renovation, a vehicle, an acquisition, consolidating existing debt.
2. Lines of credit
A revolving limit rather than a lump sum. You draw what you need, pay interest only on what is drawn, repay, and draw again.
The headline rate is usually higher than a term loan's, and the effective cost is frequently lower, because the rate is applied to less money for less time. Lines suit recurring, fluctuating needs — seasonal stock, payroll gaps, the space between paying suppliers and being paid. Watch for maintenance fees, which accrue whether you draw or not. Our direct comparison of the two works through the arithmetic.
3. SBA loans
Not really a separate product so much as a conventional bank loan with a government guarantee attached. The SBA guarantees a portion of the loan, often between 50% and 90%, which caps the lender's downside and lets it approve borrowers it would otherwise decline.
The 7(a) program reaches $5 million and covers working capital, equipment, refinancing, real estate and changes of ownership. The 504 program reaches $5.5 million but is restricted to buildings, land and long-life machinery — explicitly not working capital or inventory. Microloans go to $50,000 and accept startups.
These are the cheapest loans most small businesses can access and the slowest to obtain: 30 to 90 days is normal, and the document set is substantial. Full detail in our SBA programs guide.
4. Equipment financing
Money advanced specifically to acquire an asset, secured against that asset. Because the lender's recovery position is the machine rather than your trading history, this is frequently available to businesses that could not obtain an unsecured loan of the same size.
It comes as a loan (you own the asset, the lender holds a claim) or a lease (the lender owns it, you use it, often with a purchase option at the end). The trade-off is that the money is tied to the purchase and cannot be redirected to anything else.
5. Invoice financing
An advance against money customers already owe you. It comes in two shapes: discounting, where you retain the customer relationship and collect as normal, and factoring, where the provider takes over collection.
Pricing is usually quoted per month against the invoice value, roughly 1–5%, which means the cost scales with how long your customers take to pay. It is the natural fit for businesses selling on 60- or 90-day terms, and it is underwritten substantially on the quality of your customers rather than on you — which is unusual and occasionally very useful.
6. Merchant cash advances
Structurally not a loan at all. The provider purchases a portion of your future receipts at a discount, and recovers it by taking a fixed percentage of daily or weekly card revenue until the agreed total is repaid.
Priced as a factor rate rather than an APR. A 1.35 factor on $50,000 means repaying $67,500 — a fixed $17,500 cost that does not fall if you repay early.
Read this one carefully That $17,500 is 35% of the amount advanced. If the repayment term is nine months, you are paying 35% for less than a year's use of money on a balance that is falling throughout. Converted to an APR, deals of this shape typically land far above the headline figure; published ranges for the product run roughly 40–150% APR. Advances fund in a day or two and accept weaker credit, and they are the most expensive money in this table by a wide margin.
Choosing between them
Three questions narrow six options to one or two almost every time.
- What is the money for?A specific asset points to equipment financing. Invoices already issued point to invoice financing. A defined project points to a term loan. A recurring gap points to a line of credit.
- How long do you have?Weeks available means SBA or bank lending and a materially lower rate. Days available narrows you to the fast, expensive end.
- What is your file like?Two years of trading and decent credit opens everything. Six months of deposits opens the revenue-based products. Less than that points to the routes in our startup funding guide.
Why the prices are not comparable as quoted
Look back at the cost column in the table above and notice that it does not use a single unit. Four rows are annual percentage rates, one is a monthly percentage, and one is a factor rate. These measure genuinely different things, and the market's habit of quoting them side by side is the main reason the expensive options rarely look expensive.
An APR expresses cost as a yearly percentage of the money you still owe, so it already accounts for time and for the fact that your balance falls as you repay. A monthly percentage on invoice financing has to be annualised before it can sit next to an APR — 3% a month is not 3% a year. And a factor rate is not a rate at all in the usual sense: it is a flat multiplier applied once to the amount advanced, fixed at the outset, unaffected by how quickly you repay.
The practical habit that resolves all of this is to stop comparing rates and start comparing total dollar cost. Ask every provider for the full amount you will repay over the full term, in dollars, with origination and administrative fees included. That number is directly comparable across all six structures, and it is the only figure that is.
Common questions
Which type is cheapest?
SBA and bank term lending, consistently, on rate. They are also the slowest and most demanding to qualify for, so the cheapest option you can actually obtain in the time you have is often a different one.
Can I hold more than one at once?
Yes, and it is common — equipment finance against a machine, a line of credit for working capital. Every provider assesses your total obligations, so each facility affects what the next one offers.
What is "stacking" and why is it a problem?
Taking multiple advances simultaneously, typically from different providers. Each takes its percentage of the same daily revenue, and the combined draw can exceed what the business can survive. Many agreements prohibit it outright.
Figures on this page describe each funding type generally, based on published market ranges. They are not offers, and they are not specific to any one company. Your own rate, amount and terms depend entirely on the provider’s underwriting and your qualifications. Nothing here is financial advice.