A Comprehensive Guide to Business Loans

This article is for educational purposes and does not constitute financial, legal, employment or tax advice. For specific advice applicable to your business, please contact a professional.

According to the Federal Reserve’s 2025 Report on Employer Firms, 37% of small businesses applied for financing in the past year, most often to cover operating expenses or fund expansion. Thus, chances are, if you’re a small business, you’ll require a business loan at some point. Needs for business financing included everything from startup costs and expansion funding to equipment and inventory purchases and addressing cash flow gaps.

Business loans provide essential capital, but understanding how business loans work is key to choosing the right one. From secured loans backed by collateral to unsecured options based on creditworthiness, different financing solutions cater to different needs. 

This business loan guide breaks down the types of loans, how business loans work, how difficult it is to get a business loan, and what to consider before borrowing — helping you make an informed decision for your company’s financial future.

What is a business loan?

A business loan is an agreement between a business owner and a bank or private lender where the business receives money for future repayment of the principal with interest. Lenders grant business loans specifically for business purposes. 

How do business loans work?

In short: Theyprovide capital that must be repaid in installments, typically with interest, according to a set repayment schedule. Companies typically use business loans for expenses like expansion, equipment, or cash flow, with terms and rates based on creditworthiness, collateral, and lender agreements.

Loans can be secured (backed by collateral like property or inventory) or unsecured (based on credit), with repayment terms ranging from months to years. Interest rates may be fixed or variable, and lenders evaluate factors like your business credit score, revenue, business history, and debt-to-income ratio. You can use a business loan to fund startup costs, working capital, or large investments. Repayment structures may include installment payments, lines of credit, or merchant cash advances.

Approval depends on the lender’s requirements, with traditional banks, online lenders, and SBA loans being common sources for business loans. What are the different types of business loans?

What are the different types of business loans?

Business financing comes in many forms, tailored to a wide range of business needs, risk levels, and repayment preferences. Most loan types fall into one of two categories: secured or unsecured. A secured loan means that the borrower offers collateral in the event of loan default. An unsecured loan, on the other hand, does not require collateral. There are many types of affordable loans for which small businesses may apply:

• Business line of credit: A business line of credit is flexible, revolving capital that provides access to cash.
• Business credit card: A business credit card is intended for business use rather than personal use and can help business owners build credit, which can translate into better loan rates.
• Business term loan: This loan is a lump sum of capital to be paid back in fixed increments over a set amount of time (called a term).
• Small Business Administration (SBA) small business loan: The SBA offers several different loans geared toward small businesses, including general small business loans, micro loans (loans typically under $50,000), and disaster loans.
• Equipment loan: Equipment loans are specifically designed for the purchase of business equipment. A small business may look into an equipment loan to replace old equipment or update their current equipment.
• Accounts receivable financing: Accounts receivable financing allows companies to receive early payment on outstanding invoices. Three common types of accounts receivable financing include traditional factoring, selective receivables financing, and asset-based lending.
• Merchant cash advance: A merchant cash advance is a loan repaid through a percentage of a business’s future credit or debit card sales, essentially borrowing against the business’s future earnings. A merchant cash advance operates less like a loan and more like  a cash advance. 

If you’re wondering how difficult it is to get a business loan, data shows minority and women-owned businesses face tougher access to financing. Often it’s because minority business owners have lower net worth and fewer assets, but small minority-owned businesses have access to a variety of financing options through the U.S. Small Business Administration (SBA).

Women-owned businesses can also face financing hurdles and are less likely to seek capital through traditional lending institutions. The SBA offers a variety of programs to provide women-owned businesses greater access to financing as well as contracting opportunities with the federal government. Thanks to many of these programs, women-owned businesses’ access to SBA loans increased 70% between 2021 and 2024. 

For existing Square sellers, there’s an additional path: Square Loans¹.
Eligible sellers benefit from:

• A surprisingly fast application and approval process — with funds available as soon as the next business day.
• Flexible use of funds for your business — whether for emergencies, slow periods, or growth opportunities.
• A simplified, stress-free process — pre-approval is built in, there’s no impact on your credit score to apply, and you won’t need to submit financials or meet with a banker.

How to choose the right business loan

Choosing the right business loan will depend on your company’s needs, financial health, and growth goals. Understanding key factors — such as loan types, interest rates, and repayment terms — can help you secure the best financing for your business.

How much do you need?

To determine the right loan amount for your business, start by calculating the exact costs of your intended expense — whether it’s equipment, inventory, marketing, hiring, or expansion. Create a detailed budget forecast, factoring in one-time costs (like machinery) and ongoing expenses (such as payroll or rent), and then add a buffer for unexpected needs. 

Avoid over-borrowing by financing only what you can comfortably repay based on projected cash flow. Excessive debt can strain business finances, hurt loan approval odds, or lead to higher interest rates. Use a business loan calculator to test different amounts and repayment terms, ensuring your monthly payments align with business revenue. A disciplined approach ensures you get the funding you need without unnecessary financial risk.

What will you use your business loan for?

The purpose for your business loan directly impacts which type of financing is the best fit. Lenders structure loans differently based on risk, collateral, and repayment terms. For example, a long-term asset like equipment often qualifies for a dedicated equipment loan (secured by the machinery itself), while short-term cash flow gaps are better suited for a business line of credit. 

Below are common business needs paired with the most suitable loan types:

• Buying equipment or machinery → Equipment loan 
• Filling cash flow gaps → Business line of credit
• Expanding to a new location → Term loan or SBA loan
• Purchasing inventory → Short-term loan or inventory financing
• Launching a marketing campaign → Unsecured term loan or credit line
• Refinancing existing debt → Debt consolidation loan

Matching your financing to the specific need ensures better terms, lower costs, and higher approval chances. Lenders almost always ask about the loan’s intended use during the application process, and being transparent can strengthen your credibility since a clear, justified purpose improves approval odds. 

Short-term vs. long-term business loan

When deciding between a short-term and long-term business loan, the key factors are how quickly you need the loan and the purpose of the funds. Short-term loans (typically repaid within a year or less) are ideal for immediate, smaller expenses with quick returns, while long-term loans (spanning several years) suit larger investments that generate value over time. Below is a quick comparison:

How do you match your business loan to your goals? Here are some simple rules of thumb:

• Choose short-term financing if you need to cover a temporary gap or an expense that will quickly pay for itself (e.g., a marketing push or seasonal inventory). 
• Opt for a long-term loan if you’re investing in assets or growth that will generate revenue over years (e.g., buying property or heavy machinery).

By aligning the loan term with your business’s timeline for return on investment, you can avoid over borrowing or straining cash flow.

What do you need to apply for a business loan?

If you’re a small business owner applying for a loan, you have several options to consider for small business financing:online lenders, banks, peer-to-peer lending sites, and lenders backed by the SBA. If you are a Square seller or processing with Square, you might be eligible for a loan through Square Loans.

Finance your business with Square

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Documents and financial information

When you apply for a business loan, the lender will need a variety of documentation.

• Information about how the loan will be used
• A business plan: describing all facets of your business
• Personal background and a financial statement
• Loan application history
• Business financial statements which might include a profit and loss statement, balance sheet, and projected financial statements,
• Income tax returns
• Resumes for your business’s owners to provide context for the experience you have in your industry. 
• Legal documents: Business certificate or license, commercial leases, and contracts you may have with third parties.

Business loan eligibility criteria

Lenders consider a variety of criteria to determine if applicants are eligible for a business loan. You can increase your chances of qualifying for a business loan by building a strong business credit score to strengthen your case for obtaining business credit approval and loans. 

Minimum application requirements

Each lender has different minimum requirements and qualifications for what will make an applicant more or less eligible for a business loan, but they typically include:

• Your business’s creditworthiness
• How many years your business has been operating 
• Collateral (if you’re under consideration for a secured loan)
• Cash flow
• Debt-to-income ratio
• The industry in which your business operates 

Business loan sizing 

Business loan sizing refers to the size or dollar amount of the loan, and it can be determined by several factors like debt-to-income ratio, credit score, and business revenue or collateral. A lender determines the loan sizing they might be able to provide a borrower, but borrowers should keep in mind that the loan amount for which they qualify may be smaller than they desire. 

How to improve your chances of business loan approval

When evaluating a business loan application, lenders assess a few key indicators of financial stability and repayment ability:The key factors lenders evaluate: 

• Credit score: Both your personal and business credit scores matter. A higher score can result in better loan terms and more borrowing options.
• Time in business: Lenders prefer companies that have been operating for at least 1–2 years, as this demonstrates stability and experience.
• Revenue and cash flow: Steady monthly revenue and positive cash flow indicate that your business generates enough income to cover loan payments. Lenders may look at recent bank statements, income statements, or profit and loss reports to evaluate this.
• Debt-to-income ratio:This metric compares your monthly debt payments to your gross monthly income. A lower ratio means you have more income available to take on new debt, which boosts your loan eligibility. 

To strengthen your business loan application, consider the following:

• Pay off any existing business debt if possible.
• Make sure you have clearly organized financials available for the lender to review, including a profit and loss statement, balance sheet, and income tax returns.  
• Present a solid business plan that includes your strategy for growth.

Financing and refinancing business loans

The term “financing” refers to the process of providing funds for businesses. There are two different types of financing — debt or equity financing. Loans fall into the debt financing category, which means they must be paid back with interest. Loans have a range of terms, from as short as a few months to as long as 25 years. Micro loans, for example, typically last only a few years. 

What is refinancing?
Refinancing a loan means that you are replacing an existing loan with a new one. This is something an owner might consider not only for a business loan, but a mortgage or an auto loan as well. You may consider refinancing if it allows you to reduce the interest rate or shorten the terms of the loan, and it can be applied to a mortgage or an auto loan as well.

Some business loan terms to know

Below is a glossary of financial terms and definitions that you should know in order to make informed choices around loans.

• Accounts receivable: Accounts receivable is money due to a business by its customers. This refers to outstanding invoices a company has or, more broadly, the money clients owe the business.
• Accounts payable: Accounts payable is money owed by a business to vendors or suppliers.
• Amortization: Amortization refers to spreading payment over multiple periods. Amortization can refer to loans or assets. An amortized loan requires the borrower to make scheduled, periodic payments applied to both the principal and interest.
• APR: APR, or annual percentage rate, refers to the interest rate typically applied to a loan or credit card. In another sense, it is the amount the borrower is charged for the loan expressed as an annual rate.
• Assets: Tangible assets are any property of monetary value that can be used as collateral. Examples of this include real estate, equipment, or a vehicle.
• Business credit: Business credit is any financial product (for example, a business loan or a business credit card) that allows a company to borrow money that can be used to purchase products or services.
• Business credit score: A business credit score is used to evaluate a business’s creditworthiness. High business credit scores can allow business owners easier access to loans, lower interest rates, and better repayment terms.
• Capital: Capital has several definitions. In finance, capital most commonly refers to financial assets in a bank or brokerage account. 
• Cash Flow: Cash flow refers to the amount of cash going in and out of a business.
• Collateral: Collateral is an asset (usually tangible) a lender accepts as security for a loan should the borrower default on the loan payment. Not every loan requires collateral, but generally loans of higher amounts will require it.
• Debt: Debt is liability or obligation to pay or render something. Under the terms of a loan, the borrower is required to repay the debt within a certain amount of time.
• Hold rate: A hold rate is a percentage of daily sales used to repay a loan.
• Interest rates: An interest rate is the percentage of principal charged by the lender for use of its money. APR and APY are two common ways to calculate interest on credit or loans.
• Lien: A lien is a legal right or claim against assets that are used as collateral to satisfy a debt. Liens can take several forms depending on the type of asset: a bank lien, judgment lien, mechanic’s lien, real estate lien, and more.
• Principal: Principal is the amount of money borrowed in a loan. This is the initial size of the loan, and it does not include the interest rate or other fees.
• Refinancing: Refinancing is the replacement of an existing loan with a new loan with different, sometimes more favorable terms.
• Term: The term of a loan is the amount of time in which you agree to repay the loan. These terms vary based on the type of financing.
• Underwriting: Underwriting is the process through which an individual or institution takes on financial risk in exchange for a fee. Underwriting in reference to a loan is when a lender assesses income, assets, debts, and other financial factors to decide how much risk they are taking on if they decide to offer you a loan.
• Working Capital: Working capital is a financial metric that assesses a business’s ability to pay its current liabilities. In other words, it’s the amount of money a business has that isn’t allotted to already existing debt.

Lines of credit, small-business loans, even credit cards — there are so many financing options to choose from, it can be difficult to decide what’s best for your business, let alone what all your options are. Listen to Square’s Paying it Forward podcast and hear firsthand from a small business owner who has taken out a loan and some of the unexpected obstacles she encountered along the way.