Disclaimer: Information in the merchant cash advance articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the merchant cash advance articles often covers financial products that Biz2Credit does not currently offer.

As a small business owner, you don’t want to remain in startup mode forever. Eventually, you will want to take your business to the next level. But to do so, you need financial resources.

Choosing the right type of loan for your business’s needs is crucial, whether you want to expand your business, need inventory or equipment financing, have to fill in seasonal gaps in revenue, or fulfill unpaid invoices.

The truth is, there isn’t a one-size-fits-all commercial loan that is best for every small business context. At each stage of your business, one type of loan will likely prove more useful than another.

In this article:

• Learn about small business loans and financing options that can help your small business.
• Explore term loans, working capital loans, small business merchant cash advances (MCAs), and more funding solutions.
• Discover the best merchant loans that can help your business thrive.

Important Types of Business Loans

While many types of business loans serve varying needs, some work better for small businesses than big ones. These include business term loans, working capital loans, commercial real estate loans, and business lines of credit, and MCAs. Here’s a closer look at each one.

Business term loans

A business term loan is one of the most frequently used commercial loans. This is because it serves various small business needs and offers many benefits for business owners.

A term loan can be used to grow your business, whether it be through opening another business location (real estate or a franchise), buying new equipment, or increasing your inventory or other offerings for your customers. Term loans can also sometimes be used to consolidate or refinance business debt or hire new workers.

Term loan advantages

• Flexibility: You can use the money for practically anything without impacting your business’s operational cash flow or working capital.
• Consistency: The lender gives you the full borrowed amount of money upfront, and you make regular monthly payments until the loan is paid off.
• Competitive interest rates: Term loans typically have lower interest rates than other types of business loans.
• Tax-deductible: You can deduct the interest you pay on a term loan from your business’s taxes.
• Long repayment terms: Commercial term loans usually have a repayment period of one to 25 years, depending on the lending criteria and the purpose of the loan money. For instance, if the term loan is used for equipment, a lender will usually offer a repayment schedule that matches the life expectancy of the equipment. But if you’re purchasing commercial property, some lenders will allow you the maximum time to pay back your loan.

Business term loans are usually best for businesses that have been operating for at least 18 months and have more than $250,000 in annual revenue.

Term loan disadvantages

• Long turnaround times: Many banks and financial institutions can take months to make a decision on your loan. This is because they have stringent lending requirements and want borrowers with nearly perfect credit histories.
• Difficult eligibility requirements: Traditional lenders have strict qualification requirements, including a high personal credit score, at least a year in business, and annual or monthly revenue requirements.

Thankfully, there are commercial loan options that are good for business owners who need fast funding or don’t have the best credit scores.

Working capital loans

Before diving into how a working capital loan works, let’s first look at what working capital is.

Working capital is the money your small business uses each day to pay for operational expenses, such as payroll, supplies, inventory, utilities, and your business’s rent or mortgage. In other words, it’s the capital your business needs to operate.

A working capital loan can be used to boost your business’s level of working capital. It can also be used for many of the same purposes as a term loan, whether for purchasing inventory or equipment, hiring new staff, or growing your business.

Working capital loans consist of various types of business financing, including short-term loans and invoice factoring.

Working capital loan advantages

• Easy to get: The primary advantage of a working capital loan is that it is relatively easy to qualify for.
• Flexible repayment terms: Short-term loans tend to be more flexible than standard term loans, with weekly or even daily payments.
• Fast funding: The best merchant loans and working capital loans can be processed quickly, and could even provide same-day funding.

A working capital loan will help you meet a shorter-term business need, and you often don’t even need collateral or perfect credit to qualify for the loan.

Working capital loan disadvantages

• Interest rates: Working capital loans typically come at higher interest rates, especially if your loan is unsecured and doesn’t have collateral. This means that repayment of the loan will cost you more overall.
• Short repayment window: You also usually have a shorter time to pay back a working capital loan, so again it should serve a short-term business need or disruption in your cash flow, and it’s not suitable for long-term needs.

Merchant cash advance (MCA)

While technically not a loan, it is a subset of a working capital funding, merchant cash advances get their own section because they work a bit differently from traditional loans. In MCAs, cash advance companies provide businesses with upfront cash in exchange for a percentage of future credit card or debit card sales.

Rather than charge interest, the company charges a factor rate that represents the full amount of money the business will repay to satisfy the loan.

MCA advantages

• Fast funding: The primary benefit to MCAs is that MCA businesses work quickly, sometimes approving and completing funding in the same day you apply.
• Flexibility: Good cash advance companies offer flexible repayment terms and, since you pay back the loan based on your profits, you only pay when you’re doing well.
• Lower eligibility: The best merchant loans are available to all kinds of businesses, from startups to solopreneurships. As long as your business is profitable, you can qualify.

Businesses that use merchant account loans like these typically do so to navigate seasonal downturns or financial emergencies. They just need an influx of cash to get through a tough time and pay it back later.

MCA disadvantages

• Confusing terms: With terms like factor rates and fast repayment windows, small business merchant cash advances can be difficult for new business owners to understand and work with.
• High long-term cost: Since you’re repaying based on a factor rate rather than a loan principal, the amount you pay back may wind up being higher than a loan principal.

Commercial real estate loan

A commercial real estate loan is a secured loan that can help your small business seize new opportunities.

Funding from a real estate loan can provide financing to:

• purchase a new building to operate your business from
• grow your business
• acquire a new business or second location
• renovate or expand your current business
• refinance and consolidate your existing business loans

Commercial real estate loans use your business’s existing real estate property or property you plan to purchase as collateral.

Commercial real estate loan advantages

• Investment opportunity: Purchasing commercial real estate provides a real investment opportunity for you. Once your loan is paid off, you retain ownership of the property. You can also make significant capital gains when you purchase real estate, offering you the benefits of long-term investments because real estate value tends to go up over time.
• Lower interest rates: Commercial mortgage loans also usually come with lower interest rates than unsecured loans.
• Lower credit requirements: Depending on the lender, the credit requirements might be lower than with some loans because the loan uses collateral.
• Additional income streams: If you have extra space available in your commercial building or property, you can potentially rent it out to generate more income, which can help you make your commercial real estate loan payments more manageable.

Commercial real estate loan disadvantages

• Higher eligibility requirements: Most lenders will require that you’re in business for at least 18 months or more to qualify for a commercial real estate loan. Many lenders will also require that your business is already bringing in steady revenue, typically around $250,000 or more annually.
• High fees and upfront costs: Commercial mortgage financing has higher fees than other small business loans, including origination fees and closing costs. Depending on the lender, you may be required to put down a hefty down payment for a real estate loan.
• More responsibility: Commercial real estate ownership also comes with more responsibilities. For instance, you’ll be responsible for the upkeep and maintenance of the premises. When you lease commercial real estate, it falls back on the landlord to deal with those things.
• Market risk: While commercial estate does tend to go up in value, there’s always the chance it could go down. This could affect your borrowing power later on or prevent you from recovering your full investment if you decide to sell at some point.

Commercial real estate may be a good long-term play for your business, but it’s not as strong of a short-term solution as the best merchant loans.

Business lines of credit

Business lines of credit can help provide your business with quick cash when you have a short-term gap in your business’s cash flow. You can use a business line of credit to pay for unexpected business expenses, operating expenses, or other needs.

Rather than a lump-sum disbursement you typically have with a term loan, the lender approves you for a set amount up to a predetermined limit. You can then access the credit as needed, up to the limit provided.

Business lines of credit advantages

• Only pay for what you use: The biggest advantage is that you only pay interest on the amount of financing you access from the line of credit.
• Flexibility: Once approved, a line of credit is accessible immediately, whenever you need it. The line of credit allows you greater freedom in managing your business’s cash flow, particularly during downturns in your business. It also provides a way for you to seize a business opportunity that might be time-sensitive.
• Lower interest rates: Business lines of credit usually have lower interest rates than a credit card, particularly when you show that you have strong business revenue and your credit score is higher.
• Improve your credit score: If you don’t have the best credit score, a business line of credit is a great way to improve it. You might have to pay a higher interest rate than a business owner with a flawless credit record, but it will still be lower than some other business loans.

A business line of credit can be a good alternative to merchant account loans and other short-term financing if you’re not sure how much money you actually need.

Business lines of credit disadvantages

• Lower limits: A business line of credit usually offers you a lower financing amount than other financing, such as a term loan. So it may not be helpful if you need a larger cash infusion into your business.
• Potential for mismanagement: As with credit cards, there is always the potential to mismanage the funds, though if you are a savvy business person, it’s unlikely this will happen to you. Still, it’s best to remain aware and think every expenditure through before utilizing your line of credit.

What Financing Types Are Available to Small Businesses?

The three primary ways of financing your small business are through a traditional lender like a bank or credit union, loans backed by the U.S. Small Business Administration (SBA), or an online lender or lending marketplace.

Traditional bank financing

Recently, it has become more challenging to qualify for a commercial loan through a traditional financial institution. Their credit requirements have become more rigorous, and the approval and application process is lengthy.

Traditional lenders exhaustively scrutinize tax returns, financial statements, personal credit scores, business credit history, accounts receivable and payable, and more.

In the end, many small business owners are turned down for their commercial loans, which is one reason why cash advance companies may be more appealing.

SBA financing

The U.S. Small Business Administration (SBA) offers several commercial loan programs for small business owners, including term loans, commercial real estate loans, SBA microloans, lines of credit, loans for veterans, and more.

The premise behind an SBA loan is they offer a guarantee to a third-party lender, such as a bank or online loan provider, that the government will back up the loan if the borrower defaults. The SBA guarantees 75% of the loan if it’s more than $150,000 and 85% of loans that are $150,000 or less.

The SBA 7a loan is one of the more popular SBA loan programs, and it makes up to $5 million available to small business owners. This type of financing can be used to:

• purchase, renovate, or refinance real estate
• purchase equipment, inventory, or supplies
• consolidate debt
• increase working capital
• acquire another business

The SBA’s loan eligibility process is as stringent as traditional banks, if not more so. As with commercial financing, you’ll need a sound business plan and prove your creditworthiness.

Moreover, the SBA will take a deep dive into your government debt obligations, such as student loans and taxes. All government debts must be current before the SBA will consider a business loan.

If you can pass the rigorous qualification and approval process, the SBA offers 5 to 10 years to pay back a 7(a) loan, sometimes more if it’s a real estate loan (up to 25 years).

Online financing

Online lenders, funding providers and marketplaces have quickly become one of the best financing options for commercial financing. You’ll find some of the best merchant loans from online lenders.

Today’s business landscape is constantly evolving and highly competitive. This means that when a small business owner has a business opportunity or needs a cash infusion, time is of the essence. Most business owners don’t have months to wait to see if their small business loan application will receive approval.

This has ushered in a new and better way to get financing for your small business. An online funding providerlike Biz2Credit can have fast funding from your commercial loan in your bank account, often within a few days rather than months.

The Bottom Line

The most important commercial loan is one that you can receive when your business needs it. Various factors will influence which type of business loan is best for your company. Chances are, at different points in operating your business, you will benefit from multiple types of commercial loans.

The important thing is to grow your business and seize opportunities that facilitate that growth. Biz2Credit is a commercial funding specialist that has successfully facilitated hundreds of loans and other financing for small business owners and entrepreneurs. We can do the same for you.

FAQs

Why do businesses need financing?

Business financing can help small business owners invest in growth, acquire inventory, purchase real estate, navigate economic challenges, and a lot more. Business funding can help small businesses reach the next level or avoid bankruptcy.

What are some of the most common short-term funding solutions for businesses?

Businesses can use term loans, merchant cash advances, business lines of credit, and alternative funding solutions like invoice financing.

What’s the difference between a term loan and working capital loan?

Depending on the type, a working capital loan might actually be a term loan. A term loan is simply a loan that provides an upfront lump sum that must be repaid, plus interest, within a pre-negotiated term. Some short-term loans are designated working capital loans, although working capital financing like MCAs or invoice factoring are not term loans.

What is an SBA loan?

The U.S. Small Business Administration (SBA) offers loan programs to help small businesses gain access to financing. Working with approved traditional or online lenders, the SBA offers to partially guarantee a percentage of a loan, meaning that if the borrower fails to pay it back, the SBA will pay that percentage to the lender. This lowers the risk to the lender and helps more business owners access funding.

What is an MCA business?

An MCA business is one that specializes in merchant account loans like small business merchant cash advances (MCAs). This type of financing provides an upfront lump sum of cash to a business in exchange for a percentage of future receipts. The best merchant loans can be valuable short-term resource for small businesses.

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