A business loan is borrowed money a company uses to fund its operations, growth, equipment, or day-to-day cash flow. In return, the business agrees to pay the money back over time — usually with interest and fees — to a bank, credit union, online lender, or private finance company.
Business loans come in a lot of shapes. Some are simple lump sums you repay in fixed monthly installments. Others are flexible lines of credit you draw from as needed. The right choice depends on why you need the money, how fast you need it, and how your business earns revenue.
How a business loan actually works
At the most basic level, four things define any business loan:
- Principal — the amount you borrow.
- Rate — the cost of borrowing, quoted as an APR, interest rate, or factor rate.
- Term — how long you have to repay (a few months to 25+ years for SBA loans).
- Repayment schedule — daily, weekly, or monthly payments pulled from your business bank account.
Lenders decide whether to approve you — and at what rate — based on things like your monthly revenue, time in business, personal and business credit, and industry. Stronger numbers usually mean bigger offers, lower rates, and longer terms.
The main types of business loans
Not every "business loan" is the same product. These are the ones you'll run into most often:
Term loans
A fixed amount of money paid back over a set period at a fixed or variable rate. Great for one-time investments like a build-out, equipment upgrade, or hiring push.
SBA loans
Loans partially guaranteed by the U.S. Small Business Administration. They usually have the lowest rates and longest terms — but also the most paperwork and the slowest funding timelines (weeks, not days).
Business lines of credit
A revolving credit limit you can draw from whenever you need cash, only paying interest on what you actually use. Ideal for smoothing out seasonal dips or covering unexpected expenses.
Equipment financing
A loan or lease used specifically to buy equipment — trucks, ovens, machinery, computers. The equipment itself typically serves as collateral, which makes approval easier.
Merchant cash advances (MCAs)
You get a lump sum in exchange for a percentage of future card sales. Fast and easy to qualify for, but usually the most expensive option — pay close attention to the factor rate.
Invoice financing
A way to unlock cash tied up in unpaid customer invoices. Useful for B2B businesses with long payment cycles.
What lenders typically look at
- Monthly revenue — the single most important number for most online lenders.
- Time in business — 6 months is a common minimum; 2+ years opens more doors.
- Personal credit score — matters more than you'd think, even for a "business" loan.
- Bank statements — usually the last 3–6 months to verify cash flow.
- Industry — some lenders won't fund certain industries (cannabis, adult, gambling, etc.).
Secured vs. unsecured
A secured loan is backed by collateral — equipment, real estate, inventory, or a personal guarantee. If you default, the lender can seize the asset. In exchange, you generally get lower rates and higher limits.
An unsecured loan has no specific collateral, but most still require a personal guarantee — meaning you're personally on the hook if the business can't pay. Rates are higher and limits are lower, but funding is often faster.
How much does a business loan cost?
Costs vary wildly by lender and product:
- SBA & bank term loans: often 8%–15% APR
- Online term loans: often 15%–45% APR
- Lines of credit: often 10%–60% APR (only pay on what you draw)
- MCAs: quoted as factor rates (1.15–1.50) that translate to very high effective APRs
Always convert everything to APR so you can compare apples to apples. Watch for origination fees, draw fees, and prepayment penalties too.
How to decide if a business loan is right for you
Before you apply, walk through a quick gut check:
- Do I know exactly what I'll spend this money on?
- Will that spending clearly grow revenue or reduce cost?
- Can my current cash flow comfortably cover the payments?
- Have I compared at least 2–3 offers before committing?
If you can answer yes to all four, you're in a solid spot to borrow. If not, hold off — the wrong loan at the wrong time can dig a bigger hole than the one you were trying to climb out of.
The bottom line
A business loan is a tool, not a magic fix. Used well, it can help you buy equipment, hire faster, launch a new location, or ride out a slow season. Used badly, it can eat into your margins for years.
When you're ready, compare a few reputable lenders side-by-side — look at total cost (APR), funding speed, and how the payments fit your cash flow, not just the sticker rate.