Types of Business Loans
Several loan structures are available to businesses, each designed for different needs. Term loans, credit lines, equipment financing, and government-backed options.
TL;DR
The main business loan types: secured and unsecured term loans in flexible amounts, revolving credit lines, equipment financing with the asset as collateral, and Finnvera-guaranteed loans for higher-risk situations. Your choice depends on the purpose, amount, and your company's risk profile.
Choosing the Right Loan Structure
The loan structure you choose affects your cost, flexibility, and cash flow. Term loans offer predictability with fixed payments. Credit lines offer flexibility to draw and repay as needed. Equipment financing uses the purchased asset as collateral for lower rates. Government-backed options help newer companies access capital they would not qualify for otherwise.
Secured Business Loans
A secured loan requires collateral: real estate, equipment, inventory, or business assets. Collateral reduces the lender's risk, which translates to competitive rates for well-secured loans. Secured loans are available in flexible amounts and longer terms (up to 120 months). The downside: if you default, the lender can seize the pledged assets. Processing takes longer (1 to 2 weeks) because the collateral must be appraised. Secured loans suit established companies with assets to pledge and a need for the lowest possible rates.
Unsecured Business Loans
Unsecured loans require no collateral. The lender decides based on your company's financials, credit history, and revenue stability. Interest rates are higher because the lender takes on more risk. Unsecured loans are available in flexible amounts. Approval is faster (often within 1-2 hours) because there is no collateral appraisal. Unsecured loans are the most common choice for SMEs needing quick funding for growth, marketing, hiring, or bridging seasonal revenue gaps.
Revolving Credit Lines
A credit line gives you access to a set amount (10,000 to 300,000 EUR) that you draw from as needed. You pay interest only on the amount currently drawn, not the full limit. Typical rates run 6% to 12% on the drawn amount, plus a small commitment fee (0.5% to 1%) on the undrawn portion. Credit lines renew annually or are open-ended. They work well for managing cash flow variability, covering unexpected expenses, or maintaining a financial buffer.
Equipment Financing
Equipment financing (or leasing) uses the purchased asset as collateral. This means competitive rates because the lender can repossess the equipment if you default. Common for vehicles, machinery, IT infrastructure, and medical equipment. Terms match the equipment's useful life (12 to 84 months). Down payments of 10% to 20% are typical. At the end of the term, you may own the equipment outright (hire purchase) or return it (operating lease). Equipment financing preserves your cash and borrowing capacity for other needs.
How to Choose the Right Type
Match your loan type to your specific business need. The wrong structure can cost you thousands in unnecessary interest or lock you into inflexible repayment schedules.
- ✓Term loan — for a specific amount for a planned investment with predictable monthly repayments
- ✓Credit line — when financing needs vary month to month and you want to pay interest only on what you use
- ✓Equipment financing — when purchasing a specific asset that can serve as collateral for lower rates
- ✓Finnvera-backed loan — if your company is under 3 years old or has been declined by other lenders
- ✓Working capital loan — for short-term funding under 12 months to bridge a temporary cash flow gap
Frequently Asked Questions
- Which loan type has the lowest interest rate?
- Secured loans and equipment financing offer the lowest rates at competitive rates. The collateral reduces lender risk, which directly reduces your rate. Unsecured loans start higher for well-qualified borrowers.
- Can I combine multiple loan types?
- Yes. Many companies maintain a credit line for working capital flexibility alongside a term loan for a specific investment. Lenders assess your total debt load when approving additional facilities.
- What is a Finnvera-guaranteed loan?
- Finnvera is a state-owned financing company. They provide partial guarantees (typically 50% to 80% of the loan amount) to banks, helping companies that might not qualify for standard bank lending. This is common for startups, growth companies, and businesses expanding internationally.
- How do credit lines compare to overdrafts?
- Credit lines are separate facilities with defined limits and terms. Overdrafts are attached to your business bank account and allow temporary negative balances. Credit lines offer higher limits and more structured terms. Overdrafts are simpler but more expensive (rates of 10% to 18%).
- Is equipment financing the same as leasing?
- Leasing is one form of equipment financing. Finance leases (hire purchase) transfer ownership at the end of the term. Operating leases do not. Both let you use the equipment immediately while spreading the cost over time.
- Do I need a personal guarantee?
- For unsecured loans above 100,000 EUR, many lenders require a personal guarantee from the company's main owners. This means you are personally liable if the company cannot repay. For smaller amounts and secured loans, personal guarantees are less common.
- Which loan type is fastest to obtain?
- Unsecured term loans from online lenders are the fastest: application to funding in 1 to 3 business days. Credit lines take 3 to 7 days. Secured loans and equipment financing take 1 to 3 weeks due to collateral assessment.
- Can a sole trader (toiminimi) get all these loan types?
- Yes, but with limitations. Sole traders qualify for unsecured loans and credit lines up to about 100,000 EUR. Equipment financing is available regardless of company form. Larger secured loans may be harder to obtain because sole traders have unlimited personal liability.
