How do business loans work?

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Small businesses make up a whopping 99.9% of all businesses in the US and create nearly two out of three jobs. If you’re a small business owner, securing the right business loan can be the key to growth and success. This guide explains how business loans work, what each type really costs and what lenders look for in 2026.

What is a business loan?

A business loan is money a lender gives your business that you repay over time with interest or fees. It works like a personal loan, but lenders judge your business’s revenue and time in business as well as your personal credit. Whether you’re planning to start a new business or growing an established business, a business loan can offer a way to access the money you need. Some of the most common types of business loans include short- and long-term loans, SBA loans, lines of credit, merchant cash advances, equipment loans and invoice factoring and financing.

How do business loans work?

Business loans give you a lump sum or a line of credit that you repay with interest, fees or both. Depending on the loan, you’ll make daily, weekly or monthly payments over a few months to 25 years.

Loans can be secured by collateral like real estate or equipment, or unsecured. Most unsecured loans still require a personal guarantee, which makes you personally liable if your business can’t repay.

You can borrow from banks, credit unions and online lenders. Requirements vary by lender and loan type, but many want your business to be at least six months old with more than $50,000 in annual revenue, and most will check your personal credit. Some financing, like invoice factoring, leans more on your customers’ credit than yours.

Online lenders are the most flexible, a good fit for newer businesses or lower credit scores, and can fund as soon as the next business day. Banks offer lower rates, especially to existing customers, but are stricter and can take weeks to fund.

What can you use a business loan for?

Here are seven of the most common uses for a business loan:

1. Working capital
2. Growth and expansion
3. Equipment purchases
4. Inventory purchases
5. Debt refinancing
6. Business acquisition
7. Startup costs

Types of business loans

Business loans are available in amounts as low as $1,000 up to $5 million or more. Here’s a list of the major types of business loans, how each works and the types of business loan interest rates you can expect.

Term loans

Term business loans offer a lump sum amount, repaid in installments with interest and fees. Term loans come in short-term and long-term loan options and are ideal for funding a large, one-time expense.

• Typical loan amounts: $2,500 to $2.5 million
• Typical starting rates: 6% APR
• Typical fees: Origination fee
• Typical loan term: Two to 10 years
• Best for: Funding a one-time purchase or expense

Term loans can be secured with collateral or unsecured — which typically require a personal guarantee from the business owner.

Highly rated marketplaces like Lendio let you quickly compare term loan offers from multiple lenders.

Lines of credit

A revolving business line of credit (LOC) is designed to cover ongoing capital expenses. It’s ideal for businesses that regularly need funds to purchase inventory or to cover unexpected costs. Business lines of credit may require collateral or be unsecured.

• Typical credit limits: $5,000 to $250,000
• Typical starting rates: 8% APR
• Typical fees: Origination fee, monthly or annual maintenance fee, withdrawal fee
• Best for: Ongoing expenses and working capital

Most LOCs are revolving, which means you can borrow against the line as you pay it down. Typically, each withdrawal turns into a short-term loan, with terms from one to two years.

Bluevine offers competitively priced lines of credit and accepts credit scores as low as 625.

SBA loans

Backed by the Small Business Administration (SBA), SBA loans offer competitive rates and high loan amounts to businesses that may not qualify for a bank loan. SBAs are often secured with collateral and require a down payment of at least 10%.

• Loan amounts: Up to $5 million per 7(a) loan, or up to $10 million combined with a 504 loan
• Typical rates:Variable 7(a) rates are capped at prime plus 3% to 6.5% depending on loan size — about 10% to 13.5% with prime at 7%
• Typical fees: SBA guarantee fee, other fees depending on the lender and loan program
• Typical terms:Up to 10 years for most uses and up to 25 years for real estate
• Best for: Small businesses with strong financials and good credit that can’t qualify for a bank loan

SmartBiz, one of our top choices for SBA loans, is now an FDIC-member bank that funds SBA 7(a) loans of $50,000 to $350,000 directly or through its lender network. Packaging fees and closing costs apply.

Vehicle and equipment financing

Equipment financing is best for businesses that need equipment and don’t want to tie up other sources of financing to pay for it. Because it’s collateralized, lenders may offer up to 100% equipment financing at competitive rates.

• Typical loan amount: 80% to 100% of the vehicle or equipment value
• Typical financing cost: 8% to 30% APR
• Best for: Buying the equipment you need to run your business

Equipment loans use vehicles or equipment as collateral. Most equipment lenders offer vehicle or equipment leases as well, which may offer lower upfront costs and lower monthly payments.

Learn more about how equipment financing works and whether buying or leasing is the right choice for your company.

Merchant cash advances

If your business relies on credit card sales, merchant cash advances (MCAs) offer quick access to funds, which are repaid as a percentage of future sales. MCAs are ideal for newer businesses, but APRs tend to run high and may require daily payments.

• Typical advance amount: $2,500 to $1 million
• Typical financing cost: 1.1 to 1.5+ times the advanced amount
• Best for: Accessing future revenue from consumer credit card sales

While merchant cash advances can provide a temporary cash flow solution, they’re not designed to cover long-term expenses. But they can be a lifeline to newer businesses and those with lower credit scores.

Consider a company like Fora Financial, which offers quick turnaround cash advances, even to bad credit borrowers.

Invoice financing and factoring

Invoice financing and factoring offer an advance on unpaid customer invoices. Instead of interest, you pay a monthly or weekly fee based on the invoicing payment terms. But these fees can be high compared to a typical business term loan or line of credit.

• Typical advance rate: 85% to 95% of unpaid invoice’s value
• Typical fees: 2% to 15% of your invoice’s value
• Typical terms: 90 days per round of financing
• Best for: Short-term financing needed to fill orders

The difference between invoice financing and factoring is that invoice financing allows you to maintain control of your unpaid invoices, while invoice factoring involves selling your unpaid invoices at a discounted rate.

How much does a business loan cost?

Your total cost depends on two things: the rate and how it’s quoted. Banks and SBA lenders usually quote an APR, which rolls interest and most fees into a yearly percentage. Merchant cash advances and some short-term lenders quote a factor rate instead — a flat multiplier on what you borrow.

For example, a $50,000 advance with a factor rate of 1.3 means you repay $65,000, so the advance costs you $15,000. If you repay it in six months, the equivalent APR is far higher than 30% because you’re paying that fee over just half a year.

Fees can add to your cost too. Watch for:

• Origination fees. Charged upfront, often taken out of your loan proceeds.
• SBA guarantee fees. Set by the SBA each fiscal year and often passed on to you.
• Draw or maintenance fees. Common on lines of credit.
• Prepayment penalties. Some lenders charge you for paying off early, while others offer discounts.

Cost surprises are common: 60% of businesses that borrowed from online lenders said their actual costs were higher than expected according to a 2026 Federal Reserve Report. Ask every lender for the total repayment amount in dollars before you sign.

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Where to get a small business loan

Small business loans are available from traditional banks, credit unions and online lenders, as well as government agencies.

• Online lenders. Many online lenders, like OnDeck and Bluevine, specialize in providing low-doc, quick turnaround business term loans and lines of credit. These lenders tend to offer a fast and convenient application process, but rates may run high.
• Online marketplaces. Business loan marketplaces like Lendio and Biz2Credit can be a great place to start your search for a business loan — especially if you’re not sure what type of financing you need. Compare term loans, SBA loans, lines of credit, MCAs, equipment loans, invoice factoring and more.
• Traditional banks. Many traditional banks, like BofA and U.S. Bank, offer small business loans, lines of credit and business credit cards. Having an existing relationship with a bank could snag you rate discounts and other benefits.
• Credit unions. Many local credit unions also offer small business loans to existing customers with competitive rates and terms — so it’s worth checking to see what you may qualify for.
• Alternative lenders. These are lenders that specialize in one or two types of loans, for example, merchant cash advances, invoice factoring and financing, and semi-truck loans and leasing. Because they’re specialized, you can often get more personalized service for your specific industry.

Be sure to check the eligibility requirements for a lender before applying. Most lenders offer a prequalification process so you can see if you qualify without impacting your credit score.

Common business loan requirements

While requirements vary widely by lender, be prepared to meet these general criteria when applying for a business loan:

• • Personal credit score. Lenders will consider your personal and sometimes business credit scores when evaluating a loan application. Depending on the loan type, you typically need a score between 520 to 700+ to qualify.
  • Annual revenue. Your company’s minimum annual revenue will also play a big factor in your ability to secure financing, especially if you’re a newer business. This requirement ranges anywhere from $50,000 to $1 million a year, depending on the loan type.
  • Time in business. Most lenders require a certain length of time in business to qualify for a loan. For loans through online lenders, you’ll need to be in business for at least three to six months, while banks like to see at least one to two years in business.
  • Down payment. Certain loan types, such as SBA loans, bank term loans, commercial real estate loans and equipment loans, may require at least 10% down.
  • Collateral. For secured loans, like SBA loans, collateral such as real estate, equipment, or inventory may be required to secure the loan.
  • Person guarantee. Most lenders ask owners to personally guarantee the loan, even when it’s unsecured. That means your personal assets could be on the line if the business defaults.

What documents are required to apply for a business loan

Be prepared to supply some or all of the following documents, depending on the lender:

• • • Bank statements. Lenders typically request several months of business bank statements, although low-doc online lenders may only require your last three months’ bank statements to determine your eligibility.
    • Financial statements.These may include income statements, balance sheets and cash flow statements for the past two years.
    • Business plan. A well-structured business plan outlining your company’s operations and financial projections may be required — especially for startup businesses or those applying for SBA loans.
    • Legal and business documents. These include documents like your business license, commercial lease agreements and articles of incorporation.

While these are typical requirements, each lender has its own specific criteria, and the documentation needed can vary widely based on the type of loan. No-doc business lenders tend to have the most minimal requirements around documentation.

Alternatives to small business loans

If you’re not ready to take out a business loan yet, consider one of these alternatives:

• • • Personal loan. Some lenders will allow you to use a personal loan for business expenses. This can be ideal for startups and businesses struggling to meet minimum revenue requirements.
    • Business credit card. For small cash flow needs, a business credit card may be a good option. It can help build your business credit score while earning points or cash back for every dollar spent.
    • Grants. For free funding you don’t need to repay, you might want to look into business grants. You may find opportunities through federal and state government agencies, as well as private corporations. Just keep in mind these can take months to apply for — and are generally quite competitive.
    • Investor financing. Funding from an angel investor can help take your business to new heights. But you’ll have to be willing to give up equity in your company in return.
    • Crowdfunding. Are you a startup or newer business thinking of expanding? You might want to look into crowdfunding — it’s a great way to judge interest in your area for your product or service and drum up funding.

Bottom line

Whether you’re looking to fund a one-time purchase, new equipment or an emergency expense, a business loan can help you reach the next stage of growth. Check out our guide to business loans to learn more about how they work and compare multiple lenders to find the best business loan for your situation.

Frequently asked questions

Can you have more than one business loan?

Yes, it is possible to have more than one business loan. For instance, a business might have a line of credit for managing cash flow, an equipment loan to pay for a fleet of vans and an SBA loan for real estate. However, carrying multiple loans at a time can impact your business’s creditworthiness and financial health.

How do business loan repayments work?

Repayments depend on the type of business financing. Term loans, lines of credit and other longer-term business loans usually come with monthly repayments due on a preset date. With many short-term financing options, repayments are withdrawn daily or weekly from your business bank account.

And like the repayment schedule, how long your loan term lasts will also vary greatly. Short-term financing can come with terms of only a few months, while equipment and property loans can have terms as high as 25 years.

What happens if I can’t repay my loan?

Defaulting will likely hurt your business credit, and it can also hit your personal credit if you signed a personal guarantee or the lender reports to consumer credit bureaus. You might also be on the hook for nonsufficient funds (NSF), overdraft or late payment fees, depending on the terms of your contract.

If you backed the loan with your business assets, real estate or the equipment you were purchasing, your lender can repossess these items to recoup the damages. And if you agreed to a personal guarantee, you may be responsible for covering the loan’s full cost through your personal income and assets.

To prevent these consequences, talk to your lender immediately if you’re worried about missing repayments. It may be willing to adjust your repayment plan or extend your loan term to prevent you from defaulting.

Will a small business loan affect my personal credit?

Yes, taking out a business loan can impact your personal credit score, but it depends largely on the structure of your business and whether you personally guarantee the loan. If you personally guarantee a business loan, especially if you’re a sole proprietor or partnership, your personal credit will be affected.