Types of Business Loans & When to Use Each

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Ask ten lenders what "business loan" means and you'll get ten different answers. A term loan, a line of credit and a merchant cash advance all get lumped under one label. In practice, they work almost nothing alike. Pick the wrong one, and you overpay for money you didn't need that fast. Or you get turned down for something a different lender would have approved in a week.

El Paso borrowers run into this constantly. A contractor waiting on a 60-day invoice doesn't need the same product as a restaurant stocking up before the holidays. Neither one needs what a manufacturer buying a $400,000 press brake needs. Three different problems, three different tools.

This guide breaks down eight common financing types in plain terms. It covers what each one actually is, when it fits, and when it doesn't. Want the bigger-picture starting point first? Our Ultimate Guide to Business Loans for El Paso Entrepreneurs covers the broader picture for local borrowers. Come back here once you're ready to pick a lane.

Term Loans and SBA Loans

Start with the two most familiar shapes: the term loan and the SBA loan. Both hand you a lump sum upfront. Both expect fixed payments back. The real difference is who's backing the loan, and how much paperwork that guarantee costs you.

Term Loans

A term loan is the plain vanilla of business financing. You borrow a fixed amount, agree to a rate, and repay it in equal installments over a set period. That's usually one to five years for smaller amounts. Banks, credit unions and online lenders all offer some version. Approval leans on time in business, revenue and personal credit. A two-year-old company with $40,000 in monthly revenue and a 680 credit score is a realistic candidate.

Term loans fit a single, defined expense well: buying out a partner, a one-time renovation, consolidating higher-cost debt. They fit poorly as a catch-all for month-to-month cash flow. A fixed payment doesn't flex when a slow month hits.

SBA Loans

An SBA loan isn't money the government hands out directly. It's a term loan from a bank or approved lender. The U.S. Small Business Administration guarantees a portion of the balance, typically 75% to 85% depending on the loan size, according to SBA.gov. That guarantee lets the lender approve borrowers who might not otherwise clear conventional bank underwriting, and it usually buys a lower rate and a longer repayment window in exchange.

The tradeoff is speed and paperwork. A term loan might fund in a week. An SBA 7(a) loan commonly takes 30 to 90 days between application and funding. The documentation list is long: tax returns, a business plan, use-of-proceeds detail, sometimes collateral. For the full eligibility and application walkthrough, see our SBA 7(a) loan handbook for El Paso businesses. Weighing an SBA loan against a conventional bank loan? We compare the two directly in Conventional vs. SBA Loans for El Paso Businesses. Franklin Funding also connects borrowers with our SBA loan program.

Lines of Credit and Working Capital

A line of credit flips the term loan model on its head. Instead of borrowing a lump sum and paying interest on the whole balance from day one, you get a credit limit. You only pay interest on what you actually draw. Pay it back, and the available credit resets, somewhat like a credit card but usually at a lower rate and a higher limit.

This structure fits recurring, unpredictable expenses far better than a term loan does. Picture a logistics company covering fuel between invoice payments, a retailer bridging inventory orders and sales, or a seasonal business smoothing out a slow quarter. All three are line-of-credit problems, not term-loan problems. The need repeats, and the amount changes month to month.

Qualification typically wants a credit score in the mid-600s or higher, plus at least a year of operating history. Some online lenders go lower on both. For a detailed side-by-side on when a line of credit beats a lump-sum loan, read Business Loan vs. Line of Credit: El Paso Guide. Franklin Funding's working capital loan programs cover both structures depending on what your business qualifies for.

Equipment Financing and Asset-Based Lending

Equipment financing is a term loan with one key twist: the equipment you're buying secures the loan. Need a forklift, a commercial oven, a delivery van or a CNC machine? The lender finances the purchase and holds a lien on the asset until it's paid off, similar to how a car loan works.

Because collateral backs the loan, equipment financing is often easier to qualify for than an unsecured term loan of the same size, and rates tend to reflect that lower risk. It's a poor fit if the money isn't going toward a specific, identifiable piece of equipment. That's the broader idea behind asset-based lending: whether it's equipment, inventory or receivables pledged as collateral. The loan amount and terms track the value of what's pledged, not just your revenue and credit profile.

For El Paso businesses in construction, manufacturing or logistics, this is often the cheapest way to add capacity without draining cash reserves. Our full equipment financing guide for El Paso businesses covers financing structures, typical down payments and lease-versus-loan tradeoffs.

Revenue-Based Financing, Invoice Factoring and Merchant Cash Advances

These three get grouped together because none of them look like a traditional loan. All three price risk daily or weekly instead of annually. That makes them fast. It also makes them more expensive than a term loan or SBA loan. Treat them as tools for speed and access, not tools for the lowest possible cost of capital.

Revenue-based financing advances a lump sum against a fixed percentage of your future revenue. It's repaid daily or weekly until the total (principal plus a fixed fee) is satisfied. Repayment scales with sales, so a slow week costs less in absolute dollars and a strong week costs more. That suits businesses with real volume but choppy timing: restaurants, retailers, seasonal operators. Approval leans on monthly revenue rather than credit score, so it's reachable for newer or credit-challenged businesses a bank would decline outright. Our revenue-based financing guide and revenue-based financing program cover qualification and true cost in more depth.

Invoice factoring solves a narrower problem: money you've already earned but haven't collected yet. You sell your outstanding invoices to a factoring company at a discount, and they advance 80% to 95% of face value within a day or two. Then they collect the balance (minus their fee) once your customer pays. It's built for B2B businesses carrying 30-to-90-day payment terms, especially trucking, logistics, staffing and contractors billing municipalities or large general contractors. Because approval hinges on your customers' creditworthiness rather than yours, factoring often works for businesses that can't get approved anywhere else. Read Invoice Factoring for El Paso Contractors or explore Franklin Funding's invoice factoring program.

A merchant cash advance (MCA) advances cash against future credit card or debit sales. It's repaid through a fixed daily percentage of card transactions or a fixed daily ACH withdrawal. It's the fastest product on this list, often funding in 24 hours, and the least regulated, which is exactly why it carries the highest effective cost. Annualize the factor rate, and the cost is sometimes equivalent to 40% to 150% APR. Treat an MCA as a last resort for a genuine emergency, not a routine funding tool. Read our MCA alternatives guide before signing one. Franklin Funding's merchant cash advance program is structured with more transparent terms than most direct MCA providers offer.

Bridge Loans and Commercial Real Estate Financing

A bridge loan is short-term financing that carries you from one financial position to another, usually six to eighteen months. It's priced higher than permanent financing because the lender is pricing in the short hold and added risk. Contractors use bridge loans to cover material costs and payroll while waiting on a progress payment. Investors use them to close on a property fast, then refinance into permanent commercial real estate financing. That happens once the asset stabilizes.

Commercial real estate loans, in contrast, run long (often 10 to 25 years) and are secured by the property itself, used for buying, refinancing or renovating a commercial building. Rates land lower than a bridge loan because the collateral and repayment horizon are both steadier. The two products often work in sequence: bridge now, permanent financing later, once the property or the business qualifies for better terms. Our commercial bridge loans guide covers structures, typical rates and exit-strategy planning in more depth.

Loan Type Decision Matrix by Use Case

Here's how all eight stack up side by side. Each one is matched to the use case it's actually built for.

Frequently Asked Questions About Types of Business Loans

Get Started: Match Your Business to the Right Loan Type

Reading about eight loan types is one thing. Getting matched to the right lender for your specific situation is another. Franklin Funding works with a network of lenders across the Borderplex region who specialize in exactly the products covered above, from SBA-backed term loans to same-day revenue-based financing.

Ready to find out what you actually qualify for? One application reaches our full lender network in minutes, with no obligation and no hard credit pull to check your options.