Small Business Loans

Types of small business loans include term loans, lines of credit, merchant cash advances and equipment loans. There are many different types of business loans. Understanding your options can help you choose the one that fits your business. Some can help make major investments in business growth, some can help you level out cash flow during a slow season and others may be better suited for an entrepreneur just getting started.

Term loan. A business term loan provides funding for small businesses in a single lump sum. Maximum loan amounts typically exceed those offered by a line of credit or cash advance. Borrowers may repay a term loan through a regular schedule of daily, weekly or monthly payments. Term loans are typically used for big, one-time investments such as buying machinery, renovating a facility or large inventory purchases.

Line of credit. A business line of credit provides access to a specific amount of funding that borrowers can tap as needed. Funds are repaid through a regular schedule of payments, and the available credit replenishes as funds are repaid. A line of credit is a good financing option for recurring expenses — it allows borrowers to withdraw within their credit limit without reapplying. Many business owners use it for flexible, short-term working capital that can smooth cash flow gaps, cover unexpected expenses or fund day-to-day operational expenses.

Merchant cash advance. A merchant cash advance (MCA) provides businesses with lump-sum financing in exchange for a portion of future sales at a discount. Funding is often quick, but repayment can be expensive relative to other types of financing. Depending on the provider, repayment can be as a percentage of your debit and credit card sales or as a fixed scheduled payment (regardless of what your sales have been).

Equipment loan. Equipment loans are typically for purchases of machinery or work equipment, and are offered by many banks and online lenders. Typically, the purchased equipment serves as a form of specific collateral to secure the loan, which may allow the lenders to offer a more competitive interest rate than an unsecured loan. However, if the borrower defaults, the lender can repossess the purchased equipment. Standard business term loans can also be used to make equipment purchases.

OnDeck offers funding in as soon as 24 hours for qualified customers.^† Timing depends on things like what time you apply and where you’re located. If you need capital quickly, applying early in the day can help speed things up.

Qualifying for a small business loan typically depends on several key factors, including your personal and business credit score, business revenue, time in business, and financial history. Most lenders look for a personal credit score of 650 or higher, at least 1 - 2 years in operation, and consistent cash flow to ensure you can repay the loan. You’ll also likely need to provide additional information with documentation such as tax returns, bank statements and sometimes a business plan.

The easiest small business loans to qualify for are usually online loans and lines of credit from alternative lenders, which often have more relaxed requirements than traditional lenders. Other types of business financing that can be more accessible for new businesses or those with lower credit scores include merchant cash advances, invoice factoring, and loans advertised as “business loans for bad credit” or “no credit check business loans.” However, these easier-to-get financing options may come with higher interest rates, shorter repayment terms and other risks, so it’s important to weigh convenience against cost.

Whether a small business loan is secured or unsecured depends on the lender and the loan itself. Many traditional banks and credit unions specialize in secured loans — though some may offer unsecured loans, too. Online lenders are better known for unsecured business loans, though many offer both.

With a secured loan, the borrower pledges collateral, such as property or liquid assets, in exchange for the loan. If the borrower defaults, the lender can take possession of the collateral to recoup losses on the loan. Unsecured loans don’t require collateral. This increases the risk to the lender, so interest rates for unsecured loans are typically higher than those for secured loans.

To provide flexibility, OnDeck’s term loan is secured with a general lien on business assets. This can help healthy businesses secure a small business loan, even if they don’t have specific collateral to offer. OnDeck’s line of credit is unsecured.

Small business loans can be installment (closed-end) credit or revolving (open-end) credit, depending on the financing option you choose. Term loans are installment credit, meaning you receive a lump sum up front that you can repay in smaller installments over time. Lines of credit are a form of revolving credit and work similarly to a credit card (though there are a few key differences). With a line of credit you’ll be given a credit limit that you can borrow up to. As you repay, the funds become available to borrow again.

Small business loans can be either fixed or variable, depending on the type of loan and the lender. Traditional term loans and many SBA loans often come with fixed interest rates, meaning your payment stays the same over the life of the loan. On the other hand, lines of credit and some alternative loans may have variable rates that fluctuate based on market conditions. Always check the loan terms carefully to understand whether your rate is fixed or variable and how it might affect your payments.