How to Choose Between the Different Types of Small Business Loans

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, are both prerequisites before exploring small business financing options.

Understanding Loan Types  

Based on what you plan to do with your loan, you can then being 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.  Because of their flexibility, working capital loans are one of the most favored choices for small- and medium-sized businesses.

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. Generally, term loans are larger loans, and repayment could last as long as 30 years. Many term loans feature unfixed interest rates that can fluctuate over time.  

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. The amount of capital available is generally quite limited due to the large applicant pool. And the application process can sometimes be tedious and time-consuming.  

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 is highly desirable 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. Alternative lenders often specialize in providing 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 unpaid invoices to a collection company. Generally, the business selling the invoices receives a lump sum advance, and the collection company takes a percentage of the actual invoice when it’s paid before passing on the remainder to the business owner.

Merchant Cash Advances

A merchant cash advance 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. While it’s a convenient form of capital, this type of loan should be considered with caution, since losing a portion of each sale can lead to cash flow problems.

Personal Loans

Personal loans are generally ill-advised for business owners. Business debt should be tied to your business, not to your personal credit. If possible, avoid personal loans in favor of other solutions, such as business lines of credit or working capital loans.


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 is probably 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 Lender

Once you have decided on a loan type you must find the best lender 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, especially if you are requesting a loan for the first time or your credit score isn’t perfect. 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 loan will be paid back to the lender if the loan should go into default. Many large banks may be hesitant about lending to small businesses due to risk, and the SBA works to minimize that risk.

Because the SBA doesn’t lend money itself, it is necessary to still go through a bank to obtain the financing, and because of this, it can be difficult to obtain financing.

Traditional Large Banks

Large, traditional banking institutions often operate with stringent guidelines designed to minimize risk, making them less incentivized to work with small businesses in a way that is business-friendly. Large banks 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 all of their assets. Obtaining a loan without giving up access to large 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 a significant amount of collateral to obtain a loan. This may make it difficult for some small business 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 lender 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.

You can get a free credit check from one of the major credit bureaus: Equifax, TransUnion, or Experian. 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.