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Starting your own business is an exciting — and potentially nerve-wracking — adventure. As you start planning, one of the first challenges you might face is affording your overhead costs. Average startup costs can range in the first year. If you can’t afford those costs out of pocket, you need a small business loan.

In this article, we’ll cover nine different types of business loans to help you decide which is best for your business. You'll also learn about eligibility requirements and the pros and cons of small business loans.

What is a small business loan?

A small business loan is an amount of business funding that you borrow from a lender and pay back over time, usually with interest. There are several types of small business loans, as we’ll discuss below. Some are traditional loans with strict terms and others offer more flexibility.

Do you need a small business loan to start your business? Not necessarily — in fact, only around applied for a loan in 2023. Many business owners opt for out-of-pocket funding, private loans, or other funding options. However, a small business loan is still a reliable option for new businesses of all sizes. Many banks and fintech platforms offer flexible terms to help business owners afford their startup costs.

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The different types of small business loans

There are several different types of business loans available to new business owners in the U.S. Below, we’ll cover nine of the most common.

1. Term or traditional loans

A term loan, also called a traditional loan, is a standard loan from a bank that you must repay within a set term. There are three types of business term loans:

• Short-term loans: Repayment in one to two years
• Mid-term loans: Repayment in two to five years
• Long-term loans: Repayment in up to 25 years

When compared to other funding options, such as credit cards or a business line of credit, traditional loans offer relatively low interest rates . However, they often have strict eligibility requirements. Depending on your lender, you may need a credit score of at least 670 and six months to one year of business history.

#2. SBA loans

The Small Business Administration (SBA) partners with financial institutions to provide funding for small businesses. These loans can range from , and offer repayment terms .

The SBA doesn’t provide funding for business loans, but it backs the funds provided by lenders. That way, lenders are inclined to loan larger amounts to small business owners, as they know their investment is insured. The two main types of loans offered by the SBA are:

• 7(a) loans: These loans have guaranteed amounts and capped interest rates.
• 504 loans: These long-term loans have fixed rates for equipment, real estate, and other business assets

SBA loans are ideal if you need to borrow a large amount. However, like traditional loans, they have strict eligibility requirements. As a borrower, you must do business in the U.S. and have good credit and a sound business plan. You're also required to have already used alternative financial resources.

#3. SBA microloans

Along with 7(a) and 504 loans, the SBA also . The maximum repayment term for an SBA microloan is six years, and interest rates are generally between 8% and 13%. Eligibility requirements vary for each lender, and many lenders .

An SBA microloan can be a great choice if you need funding for repairs, expanding your business, ordering more inventory, and other expenses. Keep in mind that you can't use microloans to buy real estate or pay off other debts.

#4. Equipment financing

Equipment financing is a special type of loan for business equipment. These loans are secured by the equipment, similar to an auto loan. Interest rates and repayment terms depend on your lender and the type of equipment you’re buying.

Most lenders require a down payment of around 10% to 20% on the equipment. This can be a helpful loan option for a restaurant, agricultural company, or other business that relies on expensive equipment.

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