A Comprehensive Guide to Business Loans

A Comprehensive Guide to Business Loans
Learn about small business loans, funding, and credit options in our guide to business loans. We cover business loan types, eligibility, and how to apply.
by Deborah Findling Apr 29, 2021 — 7 min read
A Comprehensive Guide to Business Loans

Making the decision to take on business financing like a loan, line of credit, or credit card can be daunting. From navigating the paperwork required to apply to knowing where to start, when it comes to business loans, knowing what you don’t know can be overwhelming. 

According to the Federal Reserve’s 2020 Small Business Credit Survey, 43% of small businesses applied for new financing in 2019. Of these small businesses, owners applied for financing because they were most concerned about paying operating expenses like wages, securing credit, and making payments on their debt. Loans or lines of credit were the most common type of external financing, followed by credit cards.

For many small business owners, cash flow management problems are a commonly cited source of stress. Loans are one way you can invest in opportunities like expansion or covering your current expenses.

What is a business loan?

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

What are the different types of business loans?

Business loans can either be secured or unsecured. A secured loan means that the borrower offers collateral if they default on the loan. An unsecured personal loan, on the other hand, does not require collateral. There are many types of affordable loans small businesses may apply for. Here are a few examples of the most common types of business loans:


According to a survey from Square and Wakefield Research, of the 1,000 small business owners surveyed, 50% of women-owned small businesses had never taken outside financing in 2020 or prior to that. Despite the growth of women-owned businesses, it can still be difficult for women business owners to access capital. But there are resources available for those looking into loans for their small businesses.

Women-led businesses are not the only businesses that have had difficulty accessing capital. Minority-led businesses have also faced obstacles accessing financing. There are resources available to help bridge the lending gap between minority-led businesses and lenders.

What do you need to apply for a business loan?

As a small business owner applying for a loan, you have several places you can look when seeking a small business loan. Online lenders, banks, peer-to-peer lending sites, and lenders backed by the SBA are just a few of the types of lenders that provide loans. If you are a Square seller or processing with Square, you might be eligible for a loan through Square Loans.

When you apply for any type of loan, here is some of the documentation a bank or other lender may want to see:

Business loan eligibility

There are a few criteria that lenders consider when determining if applicants are eligible for a loan. Building a strong business credit score is one way to strengthen your case when applying for business credit and loans. Each lender has different minimum requirements and qualifications for what will make an applicant more or less eligible, but they typically include:

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 others. A lender determines the loan sizing that they might be able to provide a borrower, but this can be a tricky process, as borrowers may be counting on a larger loan than they may ultimately be qualified for. During the first round of the Paycheck Protection Program (PPP), Square facilitated over 76,000 loans with an average of less than $11,000 per loan. 

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. Microloans, for example, typically last only a few years. 

Type of loan Average loan terms
SBA loan 5-25 years
SBA microloan < 6 years
Bank term loans 3-10 years
Business line of credit A few months to years
Merchant cash advance 3-18 months
Equipment loan 2-10 years
PPP loan Loans issued before June 5, 2020 (2 years); Loans issued after June 5, 2020 (5 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.


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.

Deborah Findling
Deborah Findling is an Executive Managing Editor at Square. She also writes about investment, finance, accounting and other existing and emerging payment methods and technologies.


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