What are the Different Types of Franchise Loans?

There are numerous motivations for businesses to seek financial assistance, and luckily, there is a wide array of financing alternatives accessible to fulfill those needs. Although having multiple options for loans can be advantageous, it is crucial to conduct thorough research before proceeding with any application.

In order to secure financing for your business, it is important to select the appropriate type of business loan. Various factors, such as your eligibility criteria, intended use of the loan, and desired loan terms, can all impact your choice of the most suitable business loan for your specific situation. Outlined below are thirteen of the most commonly encountered varieties of business loans.

Advantages and Disadvantages of SBA Loans 

While SBA loans can be an affordable financing option for businesses, offering lower interest rates compared to traditional bank loans, they often come with extensive borrowing requirements. To qualify, a personal credit score of 680 or higher is typically necessary, and the loan application process can be lengthy, taking several weeks or even months to complete.

SBA Loans: 

SBA loans represent a form of business financing that receives a guarantee from the U.S. Small Business Administration (SBA). This guarantee minimizes the lender's risk by promising to repay up to 85% of the loan amount if the borrower defaults. The interest rates for SBA loans can vary from approximately 2.8% to 13% in 2021, with each SBA-approved lender determining the specific annual percentage rate (APR). The repayment terms for these loans can extend up to 25 years, depending on the chosen loan program.

The following are three popular types of SBA loans:

Ideal for business expansion, working capital, or acquisition of existing companies, with eligible businesses being able to borrow up to $5 million.

Useful for purchasing fixed assets like equipment or real estate, and potentially for property upgrades. Eligible businesses can borrow up to $5 million.

Assist businesses in meeting working capital needs by purchasing inventory, supplies, or equipment, with potential access to loans up to $50,000, depending on qualification.

Term Loans: 

Term loans are a common choice when businesses seek small business loan options. They involve borrowing money from traditional banks, credit unions, or online lenders and repaying the funds over a predetermined period, often at a fixed interest rate. The terms and conditions of term loans can vary, but well-qualified businesses might enjoy the following benefits:

Advantages and Disadvantages of Term Loans 

Businesses with good personal and business credit scores can potentially obtain competitive interest rates on term loans, especially from traditional lenders. Online lenders often offer faster application and funding processes. However, personal guarantees and collateral may be required for this type of funding.

Short-term Loans: 

For businesses in need of quick cash with repayment terms under three years, short-term business loans provide a suitable solution. Some online lenders can provide funding in as little as one day. The details of a short-term loan, can be influenced by various factors, but well-qualified businesses might find the following features:

Advantages and Disadvantages of Short-term Loans: 

Short-term loans offer fast funding speed and easier qualification terms, making them advantageous for certain situations. However, some borrowers may encounter higher APRs and additional fees, such as origination or prepayment penalties. Certain lenders may also require daily or weekly payment drafts.

Startup Loans: 

Startup businesses may need to wait at least one year before qualifying for specific business funding options. To cater to new businesses in need of financing, startup loans are available in various forms, including SBA microloans, online loans, and business credit cards. The interest rates, fees, loan amounts, and repayment terms can vary significantly, making it essential to compare multiple loan options when seeking financing for startups.

Advantages and Disadvantages of Startup Loans: 

Startup loans offer opportunities for businesses with limited or no established credit history. However, they can be relatively expensive methods of borrowing money. On the positive side, startup loans tend to have more accessible qualification requirements, even for new businesses, and can contribute to building better business credit in the long run.

Business Lines of Credit: 

A business line of credit provides a flexible financing option where businesses can borrow money as needed and pay interest only on the amount borrowed. Similar to a credit card, the issuing bank approves a credit limit, and businesses can repeatedly access that credit line during the draw period by using and repaying the funds. After the draw period, which typically lasts 12 to 24 months, the repayment period begins and can extend up to five years.

Advantages and Disadvantages of Business Lines of Credit: 

Business lines of credit offer flexibility and serve as an ongoing source of funding. They are particularly useful for projects with undetermined costs. However, obtaining favorable borrowing terms for a business line of credit typically requires good credit and may involve collateral or personal guarantees. Additionally, interest fees usually start immediately upon fund withdrawal, without a grace period like credit cards offer.


Microloans are a financing option that provides small loan amounts with short repayment terms. They often feature low or nonexistent interest rates and have less stringent qualification criteria compared to other business loans. Nonprofit organizations typically offer microloans, focusing on supporting underserved small business owners, including women and minorities. Eligible businesses can typically borrow up to $50,000.

Advantages and Disadvantages of Micro Loans: 

Microloans serve as a means for underserved small business owners to receive capital for starting or growing their businesses. However, microlenders may request a personal guarantee and collateral to secure funding.

Invoice Factoring: 

If your business invoices other businesses for products or services, invoice factoring can provide a financing solution. With invoice factoring, your business sells its outstanding B2B invoices to a third party. The factoring company may advance a significant portion, usually between 70% and 95%, of the total invoice value upfront. They then collect the outstanding payments from your customers, deduct a factor fee (typically 0.5% to 5% per month, per outstanding invoice), and return the remaining amount to you. There are two types of invoice factoring:

Advantages and Disadvantages of Invoice Factoring: 

Invoice factoring allows businesses to access cash from outstanding invoices before the due date. Qualifying for this type of financing is often easier than for other business loans. However, factoring companies may assess the creditworthiness of your customers during the application process. Additionally, this fast cash flow solution can be expensive, particularly if your customers frequently pay late.

Invoice Financing: 

Invoice financing is a funding option similar to invoice factoring but with a distinct approach. Instead of selling outstanding invoices to a third party, you leverage your invoices as collateral to secure a cash advance, typically up to 80% of their value. Unlike factoring, you retain control over collecting payments from your customers, and once the payments are received, you repay the lender who provided the cash advance.

Advantages and Disadvantages of Invoice Financing: 

Invoice financing allows you to secure a loan using your invoices as collateral without involving a factoring company that contacts your customers. This maintains the confidentiality of your business while leveraging its accounts receivable for funding. However, invoice financing can be costly, with lenders charging fees ranging from 0.5% to 5% per week until your invoices are collected and the loan is repaid.

Working Capital Loans: 

Working capital loans are designed to assist businesses in covering day-to-day operational expenses, making them suitable for seasonal businesses or those experiencing temporary cash flow gaps. These short-term loans are available from online lenders and traditional financial institutions and can be offered as SBA loans, term loans, lines of credit, or invoice factoring. The terms and APRs for working capital loans can vary significantly, ranging from 3% to 99%.

Advantages and Disadvantages of Working Capital Loans 

Working capital loans often have more lenient qualification requirements, making them accessible to a wider range of businesses. However, the cost of the loan will depend on factors such as your creditworthiness, loan type, and other considerations. If your FICO score is below 600, you might still qualify for funding, but the borrowing terms may be less favorable.

Merchant Cash Advances: 

Merchant cash advances provide financing based on future revenue. When applying for this type of funding, a merchant services company evaluates your daily credit card sales and determines the amount they are willing to advance to your business. Repayment is typically structured as a percentage of your daily credit card sales and collected through automatic bank drafts. The fees associated with merchant cash advances, known as factor rates, commonly range from 1.2 to 1.5.

Advantages and Disadvantages of Merchant Cash Advances 

Merchant cash advances offer quick access to cash for businesses with high credit card volumes and can be easier to qualify for compared to other funding options, even with bad credit. However, the convenience comes at a higher cost, as factor rates are generally higher than interest rates on traditional loans. The daily repayment structure can also potentially impact future cash flow.

Equipment Financing: 

Equipment financing is suitable for businesses seeking funds to purchase equipment or machinery. The equipment itself serves as collateral for the loan, and if you default, the lender can repossess and resell it to recover their losses. The presence of collateral often leads to competitive interest rates, with APRs typically ranging from 8% to 30%. Loan amounts depend on the equipment cost and other factors, while repayment terms can extend up to 25 years.

Advantages and Disadvantages of Equipment Financing 

Your creditworthiness plays a significant role in securing equipment financing, as good credit improves approval odds and can result in better interest rates. However, bad credit can make it challenging to obtain competitive loan offers. It's important to note that having collateral may provide more favorable borrowing terms.

Commercial Real Estate Loans: 

Commercial real estate loans are designed for businesses seeking funding to purchase commercial properties. The property being acquired serves as collateral, and in the event of default, the lender can foreclose and sell it to recover their investment. Qualification, APR, and loan amounts depend on factors such as property value, revenue, debt, creditworthiness, cash flow, down payment, and the chosen lender and loan type.

Advantages and Disadvantages of Commercial Real Estate Loans 

With good credit and a favorable loan-to-value (LTV) ratio, commercial real estate loans can offer low APRs, with some lenders providing rates as low as 3%. However, bad credit and working with hard-money lenders can result in higher interest rates, along with potential prepayment penalties and balloon payments, making the loan more expensive.

Personal Loans for Business Use: 

Some business owners utilize personal loans for business expenses, although not all lenders allow this practice. This option can be suitable for new businesses without an established business credit score, as approval primarily relies on personal credit. Personal loans typically offer smaller loan amounts, and the maximum borrowing capacity depends on your personal debt-to-income (DTI) ratio. As of August 2021, the average interest rate on personal loans was approximately 9%, according to the Federal Reserve.

Advantages and Disadvantages of Personal Loans for Business: 

Personal loans can provide an easy financing solution for certain business owners, as they rely on personal credit. However, using personal credit for business purposes exposes you to personal liability, and if your business struggles with loan repayments, it can negatively impact your credit scores. It's important to note that some lenders may not allow the use of personal loan funds for business purposes.