In an ideal world, cash flow would always be steady, and funding growth would never be a concern. But the reality is that businesses sometimes need access to additional capital – whether to bridge cash flow gaps, invest in new opportunities, or navigate unexpected challenges.
Enter business loans.
Whether you’re a business that’s just starting out or already established, finding the best business loans for your needs will enable you to thrive and scale with confidence.
Let’s get started.
TL;DR
- Business loans provide capital to commercial entities for various purposes like operations, expansion, and equipment purchases.
- They come in different types tailored to specific needs, such as term loans, short-term loans, working capital loans, equipment financing, and more. These loans can be categorized as secured (requiring collateral) or unsecured (based on creditworthiness).
- To select the best loan, businesses must first understand their financing needs by asking questions about the purpose, amount needed, and repayment capabilities. You also need to research and choose the right lender that aligns with your objectives, considering factors like interest rates, terms, and customer service.
What Are Business Loans?
Business loans are a type of financing specifically designed for commercial entities rather than individuals. They provide businesses with the capital they need to fund operations, expand, purchase equipment, handle unexpected expenses, or take advantage of other business-related opportunities.
How business loans are typically used
Business loans are financing options designed to give companies access to the funds they need for growth and stability. Depending on loan terms, credit approval, and the type of account a business operates, these loans can help manage cash flow, cover expenses, and support expansion.
- Business expansion – Many small businesses use loans to open new locations, expand services, or enter new markets. A business line of credit or small business loan can provide the loan amount needed to seize growth opportunities while maintaining good standing with a bank or lender.
- Inventory purchases – To meet seasonal demand, businesses often draw funds from a revolving credit line or transfer funds directly from their business bank account to suppliers. This helps ensure steady inventory levels and smooth operations without straining daily cash flow.
- Equipment purchases – Loans allow businesses to purchase essential equipment or technology without tying up money from a business checking account. Equipment financing, or even an unsecured business line of credit, can help spread payments over time at competitive interest rates.
- Hire new employees – Adding staff is one of the most common uses of small business loans. Financing ensures payroll and related costs are covered while revenue grows, helping the business manage cash flow effectively until hiring translates into higher income.
- Renovations – Renovating or expanding facilities often requires more capital than what’s available in a standard business bank account. Loans or a business line of credit give businesses the flexibility to pay contractors, purchase materials, and finance improvements that enhance long-term value.
- Tax payments – Businesses sometimes face large or unexpected tax bills. Financing options such as a small business line or term loan help companies pay these obligations on time, avoiding late fees while protecting working capital.
The Different Types of Business Loans
| Loan Type | Description | Repayment Terms | Pros | Cons |
| Term Loans | Lump sum repaid in installments with interest at fixed intervals. | 7 to 25+ years | – Predictable payments
– Good for long-term investments – Competitive rates |
– Requires good credit
– Early repayment penalties – Lengthy approval |
| Short-Term Loans | Similar to term loans but with shorter repayment periods. | 3 to 18 months (sometimes longer) | – Fast approval/funding
– Less strict credit requirements – Good for cash flow gaps |
– Higher interest rates
– Not for long-term needs – Risk of debt cycle |
| Working Capital Loans | Funds short-term operational needs (inventory, payroll, cash flow, seasonal). | Short-term (varies) | – Flexible
– Fast approval – No long-term commitment |
– Higher interest
– May require collateral – Risk of debt cycle |
| Business Line of Credit | Revolving credit up to a set limit; pay interest only on funds used. | Ongoing, revolving | – Pay interest only on used funds
– Continuous access – Secured or unsecured |
– Risk of over-borrowing
– Possible unused line fees – Variable interest |
| Equipment Financing | Loan to purchase equipment, with equipment as collateral. | Varies; tied to equipment value | – Acquire updated equipment
– Equipment secures loan – Tax depreciation benefits |
– Equipment may outdate
– Can be costly – Loan capped by equipment value |
Business loans come in various forms, and before applying for financing, you first need to understand the different types of business loans and which ones are the best fit for you.
Term loans
A traditional form of financing where your business receives a lump sum of money and repays it in installments over a fixed term, with interest. Payments are made at fixed intervals, and depending on your loan, that could mean making payments weekly, bi-weekly, or monthly.
The repayment terms for this type of business loan range from seven to over 25 years.
Pros of term loans
- Predictable monthly payments
- Suitable for long-term investments
- Competitive interest rates with established lenders
Cons of term loans
- Requires a good credit history for favorable terms
- Early repayment might come with penalties
- Lengthy approval process with traditional banks
Short-term loans
Short-term loans are similar to traditional term loans, but they have a shorter repayment period. This type of loan is designed to address your immediate business needs. The repayment terms of short-term loans are usually three to 18 months, though there may be other lenders that offer longer repayment terms.
Pros of short-term loans
- Quick approval and funding process
- Less strict credit requirements
- Suitable for temporary cash flow gaps
Cons of short-term loans
- Higher interest rates
- Not ideal for long-term financing needs
- Can create a debt cycle if not managed well
Working capital loans
Working capital loans are a type of financing designed specifically to address a business’s short-term operational needs, such as managing cash flow, purchasing inventory, covering payroll, handling unexpected expenses, or bridging seasonal fluctuations.
These loans are not meant for long-term investments or assets, but rather to provide the necessary funds to ensure that a business can continue its daily operations smoothly.
Working capital loans can be subcategorized into more specific types, including merchant cash advance, business line of credit, invoice financing, etc. (Keep reading to learn more about these subcategories.)
Pros of working capital loans
- Flexibility
- Fast approval and disbursement
- No long-term commitment
Cons of working capital loans
- Higher interest rates
- Potential debt cycle
- May require collateral
Business lines of credit
A business line of credit (LOC) is a financing option where businesses can draw money up to a set limit and only pay interest on the amount drawn.
With an LOC, the lender offers a fixed amount of money that you can borrow or draw from, and you only pay interest on the amount owed. You can continue to borrow funds from your LOC up to the established credit limit, and as you repay the principal amount borrowed, that money becomes available to draw from again, much like a revolving credit card.
Pros of business lines of credit
- Pay interest only on the amount used
- Continuous source of capital
- Can be secured or unsecured
Cons of business lines of credit
- Potential for over-borrowing
- Fees for unused credit lines in some cases
- Variable interest rates can increase costs
Equipment financing
These loans are tailored for purchasing equipment, where the equipment itself often serves as collateral. With equipment financing, you can secure the necessary machinery, vehicles, or technology your business needs without draining your cash reserves.
The loan amount is typically determined by the value of the equipment being purchased. As you repay the loan, you build equity in the equipment, and once the loan is fully repaid, the equipment is entirely yours. However, failure to meet repayment terms might result in the lender seizing the equipment, given its role as collateral.
Pros of equipment financing
- Enables acquisition of updated equipment
- The equipment itself can secure the loan
- Potential tax benefits through depreciation
Cons of equipment financing
- Your equipment might become outdated before paying off the loan
- Can be more expensive than other financing options
- Loan amount is limited to the value of the equipment
Secured vs. Unsecured Business Loans
| Secured Business Loans | Unsecured Business Loans | |
| Collateral | Required (e.g., equipment, real estate) | Not required |
| Basis for Approval | Value of collateral + borrower profile | Borrower’s creditworthiness |
| Pros | – Lower interest rates
– Higher borrowing limits – Longer repayment terms |
– No risk to assets
– Faster approval – Flexible use |
| Cons | – Risk of losing assets if you default
– Longer approval due to collateral valuation – May require insurance on collateral |
– Higher interest rates
– Smaller loan amounts – Stricter credit requirements |
| Best for | Businesses with valuable assets seeking larger or long-term financing | Businesses needing quick, smaller, or collateral-free funding |
Business loans and financing options also come in the form of two main categories: secured and unsecured. These categories differ primarily in terms of collateral requirements, risk levels, and often, the terms they offer.
Here’s a breakdown of secured vs. unsecured business loans.
Secured business loans
These loans require borrowers to provide collateral, which can be seized by the lender in case of default.
Pros of secured business loans
- Lower interest rates: Since lenders have collateral as security, they might offer lower rates.
- Higher borrowing limits: Collateral can increase the amount lenders are willing to offer.
- Longer repayment terms: Secured loans might have more extended repayment periods.
Cons of secured business loans
- Risk of asset loss: If you default, the lender can take the collateral, whether it’s equipment, real estate, or other assets.
- Approval time: Valuation of the collateral might prolong the loan approval process.
- Stringent requirements: Lenders might require insurance on the collateral, adding to costs.
Unsecured business loans
These loans do not require borrowers to put up collateral. They’re based on the borrower’s creditworthiness.
Pros of unsecured business loans
- No risk to assets: Borrowers won’t risk losing assets as there’s no collateral involved.
- Faster approval: Without the need for collateral evaluation, the approval process can be quicker.
- Flexibility: Often used for various purposes without the stipulations that sometimes come with secured loans.
Cons of unsecured business loans:
- Higher interest rates: Lenders charge more due to the increased risk of not having collateral.
- Lower loan amounts: Typically, unsecured loans offer smaller borrowing amounts.
- Stricter credit requirements: Lenders might require a strong credit history to approve the loan.
How to Decide on the Best Business Loans for Your Company
Now that we’ve covered the basics of business loans and the financing options available to you, let’s discuss how you can decide which type of financing is right for your business.
Understand your needs
First things first. If you want to secure the best business loan, you need to select the right financing option. And the best way to do that is to understand your needs. Asking the following questions will help you decide which funding solution is appropriate for your business.
- Do you need funding for short-term or long-term business needs?
- What will you use the money for?
- How much capital do you realistically need?
- Do you have assets you’re willing to use as collateral?
- How quickly do you need the funds?
- Do you have a clear plan for repayment?
- What monthly payment can your business budget accommodate?
- Is your cash flow predictable or does it fluctuate seasonally?
Each of these questions will guide you in determining the right financing fit, ensuring you select a loan that aligns with your business goals and capabilities.
For example, if you have urgent funding needs, then it might make sense to apply for an MCA or invoice financing, as these options offer quicker access to funds. On the other hand, if you’re looking to fund a large purchase or initiative that you’re willing to pay off over the long term, then a traditional term business loan could be a better option.
Whatever the case, you won’t be able to figure out what’s best if you don’t take the time to understand your business needs. So, sit down, assess your company’s current situation, and map out a clear financial strategy.
Build a strong credit history
Your credit history plays a big role in determining the types of financing you can tap into. That’s why having a strong credit history (business and personal) is incredibly beneficial.
A strong credit score opens doors to better loan terms, lower interest rates, and a broader range of financing options. Conversely, a weak or patchy credit history might limit your choices and result in higher interest rates or more stringent terms.
As such, make it a point to proactively monitor and manage your credit. Doing so will provide you with a competitive edge when seeking the best business loan opportunities.
Choose the right lender
Different lenders offer varied terms, interest rates, and loan products, so it’s essential to select one that aligns with your business needs and financial situation. You can’t really implement “trial and error” with lenders because making multiple loan applications in a short time can negatively impact your credit score and create an impression of financial instability.
So, it’s critical to do your research. Read up on the latest lender reviews and talk to other merchants who have experience with business loans and financing.
Once you’ve narrowed your options, read up on the offerings and fine print of each lender. Pay close attention to their:
- Interest rates
- Repayment terms
- Collateral requirements
- Prepayment penalties
- Customer service and support
- Loan duration or term length
- Eligibility criteria
- Processing times for loan approval and fund disbursement
- Any special conditions or covenants
- Grace periods, if any
- Additional fees or charges
From there, engage in open dialogue with potential lenders, asking pointed questions and ensuring that the terms align with your business objectives.
Consider Stax Lending
When it comes to business funding, you have a variety of options. Take the steps above to assess your needs and capabilities, and make a decision based on your current financial situation.
That said, if you opt for a business loan, Stax Lending is one option you should consider. It enables you to tap into various loan options so you can get funding for your business.
The process is simple: fill out an application and get a credit decision in as little as 15 minutes.
From there, an advisor will get in touch to discuss your funding needs and options. You can choose from various loan types and execute your funding agreement online. If everything is in order, you can get funded in as little as 24 hours.
Final Words
Business loans serve as vital tools for companies to navigate financial challenges, seize growth opportunities, and invest in resources. Given the variety of loan types available, you really need to assess your unique needs and diligently research potential lenders.
Doing so will help you select the best business loans—ones that align with your objectives and ensure sustainable growth. Remember, the right loan can propel your business forward, but it’s the informed decisions behind its acquisition that truly make the difference.
Are you a Stax merchant who needs access to funding? Learn more about lending options or get in touch. We’re happy to discuss your specific needs.
FAQs about Business loans
Q: What are business loans?
Business loans are a type of financing specifically designed to provide commercial entities with the capital they need to fund their operations, expand, purchase equipment, handle unexpected expenses, or seize business opportunities.
Q: What types of business loans are available?
Business loans come in various forms such as term loans, short-term loans, working capital loans, equipment financing, merchant cash advances, and invoice financing. These loans can also be classified as secured or unsecured.
Q: What is the difference between secured and unsecured business loans?
Secured business loans require borrowers to provide collateral, which can be seized by the lender in case of default. Whereas unsecured business loans do not require collateral and are based on the borrower’s creditworthiness.
Q: How can a business choose the best loan?
The selection of the best business loan should start with understanding the company’s financing needs, which includes understanding the purpose of the funds, the amount required, and the repayment capabilities. The selection of a suitable lender is also critical, taking into account their interest rates, repayment terms, and customer service.
Q: How can a business secure a loan quickly?
Short-term loans and services like invoice financing and merchant cash advances offer quicker access to funds.
Q: What is the role of a company’s credit history in securing a business loan?
A company’s credit history majorly impacts its accessibility to different forms of financing. A strong credit score provides access to better loan terms, lower interest rates, and a broader range of financing options, while a weak credit history may restrict these choices.
Q: What should the company consider when choosing a lender?
When choosing a lender, businesses should consider their interest rates, repayment terms, collateral requirements, and customer service. The business should look for alignment between the lending conditions and their operational objectives.
Q: What factors could prevent a business from securing a loan?
Some common problems that prevent businesses from securing loans include a poor credit score, insufficient revenue, unsteady cash flows, or a lack of physical assets that can be used as collateral for secured loans.
Q: How can a business improve its chances of securing a loan?
To improve the chances of securing a loan, a business can focus on building a strong credit history, maintaining steady revenue and cash flows, establishing tangible assets, and developing a clear business plan for the utilization and repayment of the loan.
Q: Can a business secure a loan without collateral?
Yes, unsecured business loans allow businesses to secure a loan without offering any collateral. However, these loans may come with higher interest rates and stricter credit requirements due to the increased risk faced by the lender.
