The 7 Loan Types Explained: From Term Loans to LOCs (Which Fits Your Business?)

Running a business often feels like juggling—balancing cash flow, paying suppliers, and still having enough left to grow. If you’ve ever found yourself wondering, “Which loan type actually fits my business?”, you’re not alone. The truth is, the wrong financing choice can drain profits, while the right one can supercharge growth. And here’s the kicker: today’s financing options are far more flexible than most business owners realize.

But before we dive in, imagine this: you’re eyeing a new piece of equipment, or maybe you need extra working capital for seasonal inventory. Do you go for a term loan, a line of credit, or something else entirely? Choosing correctly can save you thousands in interest and headaches later.

In this article, we’ll break down the 7 major loan types for businesses—from term loans to lines of credit—so you can finally match the right financing tool to your unique situation. Keep reading, because the part you’ve been waiting for is how each loan type plays out in the real world.

Why Loan Choice Matters More Than You Think

Too many entrepreneurs jump into financing decisions without understanding the ripple effects. High interest rates, hidden fees, or poor repayment terms can sink profits fast. On the flip side, choosing a funding option tailored to your needs gives you:

• Predictable cash flow (no sleepless nights about payroll)
• Flexibility to expand at the right time
• Better creditworthiness for future financing

Ever signed a contract and later felt that sting of regret? That’s what happens when you pick the wrong loan. Let’s make sure that doesn’t happen again.

1. Term Loans: The Classic Workhorse

Term loans are straightforward: you borrow a lump sum upfront and repay it over a set period with interest. Banks often prefer this structure, which makes them easier to negotiate if you have good credit.

• Best for: Large, one-time investments (equipment, renovations)
• Pros: Predictable payments, potential tax benefits
• Cons: Requires strong credit; less flexibility

Recommended Tool/Resource: Business Loan Comparison Calculator – Run different scenarios side by side before committing.

2. SBA Loans: Backed by the Government

If you’ve heard of the U.S. Small Business Administration (SBA), you know these loans are designed to help small businesses secure financing when traditional banks hesitate. They often come with lower interest rates and longer terms.

• Best for: Expanding businesses with strong growth plans
• Pros: Lower rates, longer payback periods
• Cons: Lengthy approval process, strict eligibility

Here’s what most experts miss: SBA loans aren’t just for struggling companies. Many thriving businesses use them strategically for growth.

3. Business Lines of Credit (LOCs)

A line of credit works much like a credit card: you borrow only what you need, when you need it, up to a set limit. Interest is charged only on the amount used.

• Best for: Managing cash flow gaps or emergencies
• Pros: Flexible; interest only on usage
• Cons: Variable rates; easy to overspend

Engagement trigger: Which would you prefer—structured monthly payments or the freedom of dipping into credit when needed? Comment below with your pick!

4. Equipment Financing

Need new machinery, vehicles, or tech gear? Equipment financing lets you use the item itself as collateral, making approval easier.

• Best for: Businesses needing tangible assets fast
• Pros: Easier approval; ownership after payoff
• Cons: Equipment depreciation risk

Recommended Tool/Resource: Equipment Lease vs. Buy Calculator – See which saves more money over the long term.

5. Merchant Cash Advances

Merchant cash advances (MCAs) aren’t technically loans. Instead, you get a lump sum upfront in exchange for a percentage of future sales. They’re fast but expensive.

• Best for: Businesses with consistent card sales but weak credit
• Pros: Quick access; no collateral
• Cons: Very high costs; can choke cash flow

Think of MCAs as the “fast food” of business financing: convenient, but not exactly healthy if overused.

6. Invoice Financing

If unpaid invoices are strangling your cash flow, invoice financing lets you borrow against them. Lenders advance you a portion upfront, then collect once your client pays.

• Best for: Service businesses with long client payment cycles
• Pros: Smooths cash flow; no need for collateral
• Cons: Fees eat into profits

Ever had clients who take 60+ days to pay? Invoice financing turns “waiting” into “working capital.”

7. Microloans

Small but mighty, microloans are typically under $50,000 and designed for startups or underserved businesses. They’re often available through nonprofits or community lenders.

• Best for: New entrepreneurs or small-scale projects
• Pros: Easier to qualify for; supportive lenders
• Cons: Limited loan amounts

Now, the part you’ve been waiting for: Which of these loan types gives your business the runway it needs?

Industry Benchmarks: Loan Costs in Numbers

Let’s put some numbers on the table so you can compare. These are average benchmarks, though actual terms vary.

Loan Type	Average Interest Rate	Typical Repayment Term
Term Loan	6% – 13%	1 – 10 years
SBA Loan	5% – 9%	5 – 25 years
Business Line of Credit	7% – 25%	Revolving

Engagement trigger: Did these numbers surprise you? Drop a comment with your experience securing a loan.

Why Most Businesses Fail at Loan Decisions

Here’s the hard truth: most businesses don’t fail because they lack loans—they fail because they pick the wrong type. Grabbing a fast MCA when a line of credit would’ve been smarter, or taking a long-term loan for a short-term problem, leads to financial traps.

Your challenge now? Don’t just pick the easiest loan—pick the smartest one for your situation. Revisit your goals, map out cash flow, and then align the right financing option. And remember: lenders make money on your confusion; you make money when you’re clear.

Final Call-to-Action: Which loan type do you think fits your business best? Share your experience below—we’d love to learn what worked (or didn’t) for you.