How to Choose Between the Different Types of Small Business Loans

Small Business Loans - 8 Min Read

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To increase your chances of success in obtaining a small business loan, preparation is key. Having your documentation and research prepared BEFORE you need a loan is ideal. That way, when you’re in need of a loan, you’ll have everything organized to help streamline the process.

Before you think about the type of loan or application process, you must first sit down and consider why you want a business loan in the first place. Then think about the types of small business loans that are available. What do you plan on doing with your loan? Do you know exactly how much you will need? What portion of it will go to overhead expenses? Equipment? Payroll?  

Determining how much money you will need, along with what you will use the money for, can be helpful before exploring small business financing options.

Understanding Loan Types  

Based on what you plan to do with your loan, you can then begin to research different types of business loans and which may be best for your business as well as what it will take to obtain that loan.  Here is a list of different types of loans available:

Working Capital Loans

Working capital loans are available to help finance the everyday operations of a company.  Instead of using these to buy assets such as real estate, these can be used to cover overhead expenses such as wages, accounts payable, etc. These loans are flexible, and small- to medium-sized businesses can choose how to spend the funds for their short-term operational needs.

Term Loans

With term loans, you get a lump sum of capital up front, and make regular payments on a set schedule over a period (or “term”) of time. Business owners can use a term loan as a means to purchase fixed assets needed for their business. There are a variety of term loans you may choose from including short-term loans, intermediate-term loans, and long-term loans.

SBA Loans

SBA loans are loans through the Small Business Association. While they’re funded by participating lenders, they’re backed by the government, who oversees the application and disbursal process. With the SBA’s involvement in the overall process, risk is minimized for lenders who can more easily access capital. The size of an SBA loan may vary as well as how a business owner can use the funds. 

Business Lines of Credit

A business line of credit is a predetermined credit line where the business owner can access funds as needed and pay interest or fees only on the amount they’ve accessed. This may be useful for business owners who have fluctuating month-to-month costs and need to be able to turn on a dime to tackle unexpected expenses.

Equipment Loans

Equipment loans are targeted toward business owners who need to replace or update equipment needed for day-to-day operations. In addition to banks, alternative lenders also offer this type of loan for small- and medium-sized businesses. An equipment loan can be used for restaurant, auto shop, and other specialty equipment.

Invoice Factoring

Invoice factoring is the practice of selling account receivables to an external financing company. Generally, the business selling the account receivables receives a lump sum advance, and the external financing company takes a percentage of the actual receivable when it’s paid before passing on the remainder to the business owner.

Merchant Cash Advances

A merchant cash advance (MCA) is a lump sum capital payment that you receive in exchange for a percentage of all future debit card or credit card sales until it’s repaid. The terms of your agreement with your MCA provider will determine the advance amount, payback amount, holdback percentage, and more. Before opting for an MCA, it may be helpful to consider your expected cash flow to help you determine whether this type of loan would be beneficial.

Personal Loans

Personal loans are funds borrowed from a bank or other lender that can be used for a variety of purposes. Depending on the terms of the loan, these funds can sometimes be used for business-related needs. However, not all personal loans can be used for business purposes, so be sure to confirm with your potential lender how you can use the funds before entering an agreement.


A microloan is any small short-term loan that’s extended toward a small business with limited credit. Freelancers, startups, and small family businesses often take advantage of microloans. Microloans can be taken out through the SBA, through a microlending organization, or through alternative financers.

The preferred type of business loan depends on the specifics of your business needs. In general, though, working capital loans are often a good choice for small- to medium-sized businesses. These loan types provide benefits such as flexibility, timeliness, and easy repayment, and they don’t impose unnecessary financial burdens.

Potential Uses for a Business Loan

Consider how you’ll put the loan to use. In many cases, this can help you decide between different types of financing. For instance, if you need a loan for new pizza ovens in your restaurant, a working capital equipment loan may be the best solution. Meanwhile, if you need a cushion for unexpected expenses, a business line of credit could be the perfect capital solution.

Do You Need Funding for Accounts Payable, Remodeling, or Expansion?

If you have a concrete plan for using the funds, then a working capital loan through Mulligan Funding could be the right solution. In addition to accounts payable, remodeling, and expansion, other typical uses for this type of credit include equipment, inventory, and even marketing 1. If you know that you need a certain amount of capital, then a working capital loan is an easy and quick way to get the funding you need to execute your plan.

Choosing a Lending Partner

Once you have decided on a loan type you must find the best lending partner for your financing needs. While there are a variety of institutions that offer loans, some may be easier to work with than others from a logistics and timing standpoint. Keeping in mind the needs of your business, let’s explore a few types of lenders:

Small Business Association (SBA)

Any small business loan through an SBA program is actually a loan through a bank or an authorized SBA lender. The Small Business Association guarantees that a percentage of a loan will be paid back to the lender if the loan should go into default. Some larger banks may be hesitant about lending to small businesses due to risk, and the SBA works to minimize that risk.

Traditional Large Banks

Large, traditional banking institutions often operate with guidelines designed to minimize risk. Large banks may also have a long approval process in which they review several aspects of a business before considering it for a loan.

Similar to the SBA, a large, traditional bank may require collateral to obtain funding in a way that can hamstring a business that needs access to some or all of their assets. Obtaining a loan without giving up access to pieces of capital or assets could be a challenge.

Alternative Lending

Traditional modes of lending for small businesses can require a great deal of time and usually some type of collateral to obtain a loan. This may make it difficult for some small businesses to get what they need in a timely fashion.

Alternatively, a working capital loan allows a business to continue running without having to worry about putting up its machinery, real estate, or any other assets as collateral. This leaves the business to operate as it normally would without having any of its assets tied up.

Working directly with a lending partner who is interested in building a relationship with you and your company means that the loan application can be processed in a timely manner.

Don’t Forget About Your Credit History

At this point, you have all the information you need to get started. It’s time to start collecting documentation and getting ready for the application process. But before you do, you may want to audit your business credit history to make sure that there are no errors or discrepancies.

Consider generating your business credit score from one of the major credit bureaus: Equifax or Experian. Depending on which credit bureau you choose, the cost of generating your report can vary. Once your report is generated, check every item for accuracy, and contact the credit bureaus to file a dispute if you believe there is an error on your report.

Prepare for the Loan Application

Ready to get started with the application process? When you choose Mulligan Funding, the process is simple. We understand that time is essential to small business owners, so our process involves a seamless application, approval within hours, and funding the business day after approval*. Although some of the processes and required documents may be similar to larger, traditional lenders, only a small number of simple supporting documents are typically required, such as a few months of business bank statements, and a cost-benefit analysis to get a sense of monthly average cash flow.

There are plenty of types of loans out there for small businesses, but don’t get overwhelmed and bogged-down by the decision-making process. Despite all the choices, it can be easy to narrow down your options and choose the loan that’s right for your needs. If you’re struggling, consider speaking with a financing expert who specializes in providing access to small business lending. Mulligan Funding can give you the information you need to make the best decision for your business.

Ready to take the first step toward securing a small business loan? Call Mulligan Funding at 855-326-3564 to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.