What Type of Business Loan Should I Apply For?

3 May 2024

Most small business owners feel a thrill when they achieve the dream of running their own company. However, with the excitement also comes some stressful factors when dealing with operational logistics.

One challenge business owners often face is funding. Needing cash may occur early in a company’s launch, after a couple of years, or even a decade or more down the road. Whatever the case, the need to obtain a loan is likely to happen at some point during the entrepreneurial journey.

Business owners will quickly learn there are numerous options to access extra money, including loans. The tricky part is choosing the right kind of loan. In this post, we’ll list the most common types of small business loans, along with tips for identifying and applying for them.

Common types of small business loans

Getting a small business loan isn’t always straightforward. You’ll need to research choices and select the best small business loan that fulfills your needs while offering a feasible repayment plan.

To start, you’ll want to accurately identify why you need a loan, calculate how much cash you’ll need, and then explore loan options. Let’s take a look at the most common loans available to small businesses.

Term loan

If you need fast funding, you’ll probably look at term loans first. As one of the most common types of small business loans, small business owners commonly pursue this option.

Term loans resemble other types of loans you might have previously applied for if you’ve done a home remodel, bought a used car, or other major purchases. Here’s how they typically work:

● Apply for the term loan

● Shop for the best interest rates

● If approved, receive a lump sum

● Repay your loan in fixed installments, including interest which will be factored in, within the specified length of time

When you shop around, you’ll probably find different interest rates, repayment time frames, and whether or not you’ll need to provide collateral, so be sure to evaluate very carefully. A major upside to term loans is you can usually receive the cash within a few days.

SBA loans

The Small Business Administration (SBA) loan is another popular option for small businesses, especially due to the broad eligibility requirements set, along with capped interest rates. Businesses struggling with eligibility for traditional loans could qualify, making SBA loans attractive.

The SBA partners with numerous U.S. financial institutions, with the federal agency backing these loans. This way, if the borrower goes into default, it’s covered, making lenders less risk-averse.

Three categories of SBA loans are 7(a) loans, 504 loans, and Microloans

● Loans range from $500 to $5,500,000

● Long-term repayment plans are available

● Competitive terms

● Great for long-range plans

The major disadvantages to an SBA loan are its stringent application process, along with the fact it might take over two months for the business owner to receive cash once the lender approves their loan. This may be too long to wait, depending upon current circumstances and why the money is needed.

Credit cards

Credit cards are a great option to pay for a business’s routine bills (e.g., electricity, phone, gas, etc.), vendor bills, suppliers, travel costs, and other minor expenses. It works much like a personal credit card. You charge what you need without exceeding your credit limit and make monthly payments.

Like personal cards, you can carry a balance on your business credit card. However, this isn’t usually a good idea because you’ll pay interest, which may come with higher rates. In the long run, this could set you back financially if you accumulate too much debt. On the plus side, you can gain rewards, such as cashback or other benefits, by utilizing a business credit card and paying it off quickly.

Tip: Use credit cards wisely. If your business accumulates too much debt, or you make late payments, this can have a negative effect on your personal credit score.

Business line of credit

A business line of credit isn’t a credit card but it works a lot like one. Essentially, you borrow money as you need it, up to a credit limit. Once the balance and any interest you’ve accrued are paid, more can be borrowed, as much as your established maximum limit allows.

Business owners find lines of credit as appealing options because they’re flexible and funding is received quickly. However, some shy away from this loan option because lines of credit typically come with high-interest rates and unpredictable fees, and lenders may require personal guarantees or collateral to be given.

Equipment financing

The flexibility accompanying an equipment financing loan is very limited, but for small business owners needing money specifically to buy equipment, it might be the perfect type of funding.

Benefits of equipment financing loans include:

● Ability to shop around for competitive interest rates

● Longer repayment terms

● Funding is quickly available to make purchases

● No collateral because the equipment bought is used to secure the loan

Potential drawbacks include:

● Money can only be used to purchase equipment

● A down payment may (or may not) be required

● If you default, the lender can repossess your equipment, disrupting operations

If an equipment loan meets your needs, the money can buy machinery, computers, office furniture, restaurant equipment, trucks, or anything necessary for operational purposes.

Other relevant loan options for small businesses

Other relevant loan options for small businesses

Determining the best small business loan for your company

There is no best one-size-fits-all small business loan. While some loans are suitable for some companies, available options will largely depend upon the company’s size, industry, company’s stability, business owner’s eligibility, and what the money will be spent on.

When exploring your loan options, always factor the following in your decision-making process:

● Interest rate and APR

● Repayment terms

● Lenders’ reputation and reliability

● The amount allotted to application fees

● Collateral and personal guarantee requirements

● Consider the short and long-term benefits of the loan

It’s a good idea to spend time exploring loan options, even if under pressure to have cash now. You don’t want to inadvertently lock yourself into a financial obligation that turns out to be impossible to get out of once payments come due.

How to apply for a small business loan

As with personal loans, small business loans must go through a process. Lenders need confidence you’ll repay your debt. Once you compare lenders, identify the loan best suited to your needs and one where you’ll meet the lender’s qualifications, you can start the application process.

● Check your personal and business credit scores (low scores may equate to higher interest rates, even if you qualify)

● Run the math to calculate loan repayment affordability

● Assemble application materials

○ Details about yourself and your business

○ Business plan (if required)

○ Relevant financial and bank statements

○ Other documentation lender requires

● Consider what you’ll put up as collateral if the lender requires

● Fill out and file your loan application

● Carefully review the loan agreement to double-check terms

Once you’re approved, depending upon how long the process to distribute funds takes, you’ll obtain the money and be free to spend it to benefit your business.

Obtain your EIN to apply for a business loan

The employer identification number (EIN) is essentially a tax ID. Having one benefits businesses in many ways, including the ability to gain access to business loans. Here’s what you need to do:

● Assemble your company’s information, including legal name, DBA designation, and address

● List the person responsible for your company, along with their taxpayer ID (SSN or ITIN)

● Note the business’s structure (e.g., LLC)

● Provide a reason why an EIN is necessary

● Give an estimation of the number of employees currently working or being hired

It’s best to have your EIN before you begin applying for loans. Having already received an EIN simplifies the process, and assists lenders in verifying the legitimacy of your company and its financial history.


Most business owners will find they have an occasional (or more frequent) need to access additional cash at some point during the company’s lifetime. Fortunately, there are many ways to do this, and loans are a primary avenue small business owners take.

To avoid any of the disadvantages and successfully acquire funding, do your due diligence when evaluating your options. Before committing to a loan, be sure to perform adequate research so you can make the best decision for your business. You don’t want to inadvertently get yourself into a lender situation where it puts your entire business at risk.

Loan options are ample, and the terms associated with them are just as varied. Your best option will be determined by your business’s current needs, revenue streams, and your ability to pay back the loan.