Types of Small Business Loans: Which Business Financing Option Is Right For You?

Date: October 13, 2026

Term loans, business lines of credit, equipment financing, and SBA loans are the main types of business loans. The type of financing that is right for your business may depend on what you ae paying for, when you need it, and the impact of payments on your business’s cash flow. Understanding the purpose, cost, repayment schedule, and qualifying criteria for each type of business loan can help determine the best way to finance your business so it can operate without unnecessary strain on your business’s cash flow.

A business purchasing a replacement delivery vehicle has different needs than a business awaiting payment on customer invoices. It makes sense to understand what you need the money for and when you need to spend the money before shopping around for offers.

According to the 2026 Report on Employer Firms (based on the 2025 Small Business Credit Survey) from the Federal Reserve Banks, 56% of financing seekers had operating expenses as their motivation for seeking financing while 46% had expansion or new business opportunities. These needs may sometimes be the same, so it is important to understand the structure of the financing you are considering.

Term Loans

A term loan is a lump sum payment that a business agrees to repay over an agreed term plus interest or other fees. It may be appropriate when a business understands how much funding it needs and what it will use the funding for.

A retailer planning on remodeling their store may use contractor bids to create a budget for the remodel before shopping around for offers. The retailer will want to factor in sales they expect to lose due to the store being closed partially for the remodel.

Things to Understand Before Taking Out a Term Loan

Understand the payment amount, frequency, total cost, and repayment schedule. Business loans with a shorter repayment schedule may have more frequent payments, such as daily or weekly, while other types of business loans may have monthly payments.

A lower payment does not necessarily mean a lower cost business loan. A longer repayment schedule may cost more. With some business loans, the interest rate can vary, which means the business may pay more or less over time.

Understand whether the loan allows for early repayment and reduction of other fees, what collateral is needed if any, and whether an individual guarantee is needed.

Spartan Capital Group has an overview page for small business financing options available from Spartan.

Lines of Credit

A business line of credit is a credit line that a business can draw funds from as needed up to the credit limit. Rather than receiving the entire line of credit immediately, the business draws what it needs and may have a revolving line of credit, meaning principal payments are available to be drawn again (subject to the agreement).

This type of financing may be appropriate when a business has varying needs for spending cash. For example, a landscaping business may draw funds before the busy season for supplies and then draw again later for an emergency repair.

What Each Draw May Cost

Understand the interest rate, fee for each draw, maintenance fee, repayment schedule, and renewal criteria. Some lines of credit treat each draw as its own installment payment obligation. A business may also need to maintain access to the unused portion of the line of credit, which could be conditioned on eligibility.

A line of credit may be appropriate for funding recurring working capital needs, but the credit line is not a spending target. Before drawing the line of credit, a business should understand how it intends to repay the funds drawn.

Bank of America has both a secured and an unsecured business line of credit, so it is important to understand the collateral criteria for each type of product line of credit. They are not the same.

Equipment Financing

Equipment financing may be appropriate when a business is purchasing equipment, which may include machinery, commercial ovens, or work vehicles. Collateral may be required, such as the equipment itself, while some businesses may also need to provide additional collateral or an individual guarantee.

This type of financing may be appropriate when a business wants to use cash for payroll, inventory, or other day-to-day operations expenses while spreading out the cost of purchasing the equipment over a schedule of payments.

More to Consider Beyond the Purchase Price

Consider the cost of delivery, installation, maintenance, insurance, and employee training. Make sure the business understands what is and is not included in the cost of financing.

For example, if a bakery is considering purchasing a $30,000 oven, the business will want to make sure it has budgeted for any needed electrical work and installation. This is an example, not a quote for financing. The business owner will want to compare the cost of payments with the additional income that the oven is reasonably expected to generate after considering the cost of ingredients, labor, and utilities.

Consider the repayment schedule compared to the useful life of the equipment. Making payments on equipment that the business does not need anymore may create unnecessary strain on the business.

Equipment financing and leases may have different criteria for ownership and at the end of the term, so make sure the business understands whether it owns the equipment, must return the equipment, or may purchase the equipment.

Invoice Financing

Invoice financing may be appropriate when a business has completed work for a customer but is awaiting payment. The terminology around invoice financing may vary by provider, so it is important to understand the arrangement rather than focusing on the product name.

Invoice Financing Versus Invoice Factoring

Invoice–backed borrowing arrangements may be different from invoice factoring. With invoice financing, a business borrows against eligible, unencumbered receivables and is typically responsible for repayment. With invoice factoring, a business may sell invoices to a factoring company, which may also handle collections on the invoices.

The invoice finance guidance from the British business Bank distinguages invoice factoring from invoice discounting in part based on which party collects from customers. Although the guidance is for the UK market, this distinction raises an important question for every invoice financing provider: who will collect from your customers?

A contractor with a $40,000 invoice outstanding may consider invoice financing or a line of credit. The business owner will want to understand the advance rate, any fees, and what happens in the event of late payment from the customer.

Ask about whether invoices must be undisputed, whether the business much notify customers, and who is responsible for payment when a customer does not pay. Collection risk is not necessarily transferred with invoice factoring of every invoice.

SBA Loans

There are several types of SBA loans. Most typical business financing is provided by participating lenders or intermediaries backed by the U.S. Small Administration rather than by the SBA directly to the business.

SBA 7(a) Loans

SBA 7(a) loans may be used for most typical business needs, including working capital and equipment as well as some business acquisitions. Based on program information reviewed in October 2026 by the SBA, individual 7(a) loans may go up to $5 million. This is the program limit, not what a business may expect to qualify for.

SBA 504 Loans

SBA 504 loans may be used for major fixed equipment purchases, such as buildings and some long term machinery. They involve a Certified Development Company and a participating lender.

The 504 guidance from the SBA states that proceeds may not be used for ordinary working capital or inventory. A business seeking financing for payroll may need to consider another type of loan.

SBA Microloans

Microloans may be appropriate when a business needs up to $50,000 with a maximum repayment schedule of seven years according to information from the SBA reviewed in October 2026. Credit decisions are made by intermediary lenders with individual terms. Startups may be eligible.

However, just registering does not automatically mean that the business qualifies for financing. The U.S. Census Bureau's Business Formation Statistics distinguishes between EIN applications and employer business formations. A new business registration may still need to qualify for the criteria established by the type of financing it is seeking.

Ask the lender what documentation is required, what owner contributions are necessary, what guarantees are needed, and how long closing may take before agreeing to a purchase date for any SBA loan option.

Loan Comparison Table

These are the typical structures of each type of loan. Offers may vary, and equipment financing or SBA financing may also have the structure of a term loan.

Compare Offers Against Your Budget

Before you apply:

• Write down the amount you need and for what purpose
• The date by which the money must be available
• Cash you can expect to receive during the payment window
• Current commitments and other necessary operating expenses

Run the proposed payment against a slow month. The financing offer should still work if you get paid a little later than expected.

For more information, read the funding guide and information on working capital and term financing from Spartan Capital Group.

With a clear funding objective and payment budget in place, check out the available options on Spartan Capital Group's Apply Now page.