Types of Business Loans Every Small Business Owner Should Know
When you run a small business, there will come a time when you need extra capital. Maybe you’re covering payroll during a slow season, buying new equipment, or preparing to expand into a bigger space. That’s where business loan options come in.
The challenge is that there are many different types of business loans, and they all work differently. Some are secured, some are unsecured, some give you a lump sum, and others work more like a credit card. Knowing the differences can save you time, money, and stress.
Why Loan Choice Matters
Not every loan works for every business. A short-term loan might cover seasonal inventory, while a long-term loan makes more sense for buying real estate. The type of loan you choose affects your repayment schedule, your interest rates, and even how your balance sheet looks when you go back to review accounting basics.
Before you apply, it’s smart to look at your cash flow, your goals, and your credit history. Lenders will be looking at all of these anyway.
Borrowing money should feel like a tool and not a burden. If the repayment terms fit your sales cycles, you can responsibly manage debt without putting pressure on your day-to-day operations.
Term Loans
A term loan is one of the most common types of small business loans. You borrow a lump sum upfront and pay it back over a set period of time, usually with monthly payments.
- Pros: Predictable payments and often lower interest rates.
- Cons: You’ll need strong credit, collateral, and a strong track record in business.
If you’re considering opening a second location for your business, a five-year term loan could cover the build-out and initial costs. You can budget around your fixed payment schedule, and by the time the loan is paid off, your new location may already be generating strong revenue. Term loans are one of the most widely used business loan types because of this predictability.
SBA Loans
The Small Business Administration (SBA) backs loans offered by lenders. That guarantee reduces the lender’s risk, which can mean better rates and longer repayment terms for you.
There are a few main programs:
- 7(a) Loans – flexible and widely used.
- 504 Loans – designed for real estate and equipment.
- Microloans – smaller loans, good for limited funding needs.
The main tradeoff is that the application process can be lengthy, and you’ll need to show detailed financials and a clear business plan. Still, SBA loans are one of the strongest types of small business loans because they give you access to capital that might typically be unavailable.
Lines of Credit
Think of this as a flexible pool of funds you can tap into when needed. You only pay interest on what you use, making it a good option for uneven cash flow or unexpected expenses.
Some are unsecured, while others require collateral. That’s why many business owners ask: is a small business loan secured or unsecured? The answer is—it depends on your credit and the lender’s policies.
Imagine running a landscaping company in Colorado. You might have strong sales in the summer but slower months in the winter. A line of credit gives you the ability to pay employees, keep up with equipment maintenance, and cover utilities until the busy season returns. Without that flexibility, many seasonal businesses would struggle to survive.
Equipment Financing
If you need machinery, vehicles, or technology, equipment financing might be the right fit. The equipment itself usually serves as collateral, which makes lenders more willing to approve. Repayment terms often match the life of the equipment, so you’re not stuck paying for something after it’s obsolete.
Let’s say you’re running a small brewery. Brewing systems and canning machines don’t come cheap, and paying cash may not be realistic.
With equipment financing, you spread out the cost over time, keeping more working capital free for marketing, staffing, and day-to-day expenses. Because the lender uses the equipment as security, approval can be faster compared with other loan types.
Invoice Financing and Factoring
Unpaid invoices can slow you down. With invoice financing, you borrow against receivables. With factoring, you sell them outright to a third party. Both give you fast access to cash, though they come with fees that can add up if used too often.
This option can be especially helpful for B2B companies that rely on long payment cycles. If you regularly wait 60 or 90 days for clients to pay, invoice financing can prevent cash flow gaps. Just be cautious—relying on factoring for every invoice can reduce your margins, so it’s best used as a stopgap measure rather than a long-term solution.
Merchant Cash Advances
This is one of the fastest, but most expensive, ways to access capital. You get a lump sum upfront and repay it through a percentage of future credit card sales. It’s best reserved for emergencies, since daily repayments can strain your cash flow.
A merchant cash advance might look appealing when you need money immediately, but the effective annual percentage rate can be much higher than a traditional loan.
Many business owners compare it to payday lending—it solves a short-term problem but can create long-term financial stress. If you’re looking over different types of business loans, this should be the last option on your list.
Microloans and Community Lending
Microloans are designed for smaller amounts, often less than $50,000, and are offered through nonprofits or community lenders. They can be easier to qualify for than bank loans, and many programs provide business coaching on top of financing—help with accounting basics, creating a business plan, and even understanding different types of business structures.
This is where Energize Colorado plays a strong role. Through partnerships with local lenders and community organizations, microloans are paired with mentoring, workshops, and guidance that help you become more loan-ready. If your business is in its early stages or located in a rural community, microloans can be the bridge to larger financing in the future.
Secured vs. Unsecured Loans
All the different types of business loans fall into one of these categories:
- Secured loans: backed by collateral like property or equipment. Usually lower interest rates, but you risk losing the asset if you default.
- Unsecured loans: no collateral required, but higher interest rates and stricter qualifications.
Which one makes sense for you depends on your financial history and the risk you’re willing to take on. Most small business lending options involve some form of collateral, even if it’s just a blanket lien on assets. Truly unsecured loans are rare, and they’re typically limited to companies with strong revenues and excellent credit.
As you go over business loan requirements, think about what you’re willing to pledge and what you want to keep separate from the financing arrangement.
What Lenders Look For
Business loan requirements vary by lender, but most will want to see:
- Your credit score (personal and business).
- A clear business plan with revenue projections.
- Financial statements and tax returns.
- Proof of your business structure and ownership.
Lenders need to know that your business is financially stable and has a plan for growth, and that’s where Energize Colorado comes in.
While we don’t cover startup costs or large renovations that require permits, we can provide you with guidance on preparing your application, improving your financial readiness, and connecting you with the right small business lending options. This kind of support can be just as valuable as the funding itself, because it enables you to succeed once you do secure financing.
Another thing lenders want to see is consistency. If your bookkeeping is organized, your tax filings are up-to-date, and your business plan is realistic, you’re far more likely to get approved. Energize Colorado offers resources that help you strengthen these areas so that when you apply, you’re presenting your best financial picture.
Making the Right Loan Choice for Your Business
The right type of business loan should line up with your cash flow, your repayment ability, and the stage your business is in, whether you’re comparing SBA loans, lines of credit, or equipment financing.
Besides providing access to small business lending options, we offer resources to guide you through creating a business plan, reviewing accounting basics, and preparing the documents most lenders want to see. We want to make sure you’re not just applying for a loan, but doing it in a way that sets your business up for long-term growth.
At the end of the day, financing should move your business forward, not hold it back. With the right knowledge and the right support, you’ll be in a stronger position to borrow responsibly, invest wisely, and build a business that thrives. Energize Colorado is here to connect you with both the funding and the education you need to make that happen.