Are you trying to find the right loan for your small business?
Imagine this: you’re finally running your dream restaurant, things are going well, and due to a real estate opportunity, this might be the best time for you to expand!
A small business loan is the perfect tool that can fund this.
However, the question is where you can get one and what type of loan you’re getting.
In this day and age, there are plenty of loans to choose from, so if you don’t know what you are doing it can slow your growth instead of accelerate it.
Why?
Well, it’s simply because banks offer a variety of loan products specifically made for business expenses.
With over 25 years of experience as a banking expert and financial coach, I’ll reveal the best business loans banks offer.
So, if you’re in the market applying for a small business loan, keep scrolling down to learn more about the different types of business loans offered by banks.
Bank Loan Options For Small Businesses
According to the 2023 Small Business Credit Survey (SBCS), about 44% of businesses rely on large banks when taking out a business loan, while 28% use small banks.
Banks are often considered traditional lenders, and they are famous for offering low-interest business loans to business owners with good or excellent credit and if their business has been operating for at least two years.
Moreover, banks also offer personal loans that can be used for business expenditures.
If you’re confident about your credit, taking out a business loan through a bank can be in your best interest.
Here are a few of the different types of small business loans offered at banks that are specifically designed for funding business needs.
| Types Of Business Loans Offered At Banks | Description |
| Business line of credit | A business line of credit can be used to a certain agreed-upon limit and can be reused as you repay your debt. |
| SBA 7(a) loan | Government-backed loans like SBA 7(a) loans offer high loan amounts of up to $5 million. Funds from these loans can be used for almost anything, such as buying expensive equipment, renovation, expansion, payroll, and more. |
| SBA 504 loan | SBA 504 loans are available for up to $5.5 million. These funds are often used for long-term funding for large equipment purchases or real estate. |
| Commercial Real Estate Loan | Commercial Real Estate Loans are best suited for business owners who want to open a physical store. The funds from this loan can be used to buy property or lease space. |
| Equipment loan | An equipment loan is best if you want to purchase an expensive type of equipment. However, in equipment loans, it’s usually the equipment you’re buying will serve as collateral. |
| Term loan | The lender gives you a lump sum of funds you typically have to repay in two to five years. repayment terms of two to five years. |
Benefits and Disadvantages of a Bank Business Loan
Most business loans from banks usually have appealing loan terms and low interest rates.
However, just like with any type of business loan, there are certain advantages and disadvantages that you should consider before signing that loan agreement.
Here are several benefits and possible drawbacks that you should look at:
Pros
- Longer Terms: If you have good credit, banks will offer longer loan terms, up to five to seven years.
- Lower Interest Rates: Banks usually offer more attractive interest rates to entrepreneurs with excellent credit than online lenders.
- Flexibility: Your funds from the business loan can usually be used for any business-related ventures.
- Incentives: Banks frequently offer incentives to attract prospective borrowers, such as reduced APRs and autopay discounts.
Cons
- Complicated Requirements: Traditional banks often have more extensive requirements and eligibility qualifications, making it harder to get approved for a small business loan.
- Unsuitable for Startups or Business Owners with Poor Credit: Bank business loans, however, are not ideal for business owners with poor or fair credit. Generally, banks require a minimum of 670 credit score for a business owner to qualify.
- Longer Wait For Approvals: On the other hand, banks will take time to process your loan application. Unlike online lenders who can approve your loan in just one business day, banks will take time. Banks will take a few days or even weeks before giving a lending decision.
- Slow funding times: Since banks take longer to approve loans, it will take longer for you to get access to the funds.
6 Requirements To Get A Bank Business Loan
You’ll need to present different requirements, such as your personal and business information, so lenders can evaluate the risk of lending you the money.
However, every lender is unique, and they may differ in requirements for credit score, revenue, collateral, documentation, and more.
Here are some of the most common requirements to get a business loan at a bank.
1. Credit Score
Although requirements differ from lender to lender, banks usually check your personal and business credit score to assess your likelihood of repaying the loan.
Banks may also determine the loan amount depending on your credit score.
If multiple owners own your business, each lender must provide their credit scores.
Most lenders, including banks, often use FICO Scores ranging from 300 to 850.
If you’re unfamiliar with credit score ranges, I recently wrote a separate article about them and their meaning, so you better check that one out!
If your business is already established, you’ll need to provide a credit score ranging from 1 to 100.
Higher credit scores give you a better chance of loan approval, lower interest rates, and less strict loan terms.
So, if you currently have poor or fair credit, you might want to improve it before applying for a small business loan from a bank.
Here are a few tips on how you can improve your credit score:
- Consistently pay bills on time
- Lower your credit utilization ratio
- Use a secured credit card
- Ask for higher credit limits
2. Years in business
Banks and other lenders usually require borrowers to have been in business for at least two years to qualify for a loan.
But don’t lose hope; some banks accept businesses that have been operating for as little as six months or offer other financial products more suitable for startup businesses.
Traditional banks and lenders see startups or businesses with low time in business as a high risk, making it harder for them to qualify for a bank business loan.
However, improving your credit and having a healthy cash flow and revenue can increase your chances of loan approval.
3. Revenue
Not all banks require a minimum amount of revenue to qualify.
Lenders assess your revenue to ensure you have enough cash flow to repay the loan.
However, the amount of revenue will depend on the lender.
For instance, some online lenders require a $100,000 annual revenue to qualify for their financial products, while national banks have a minimum requirement of $250,000.
4. Business plan
You should never forget your business plan when applying for a business loan.
A strong, well-organized business plan is a blueprint for success.
Your business plan should indicate all your plans for the business, such as how you will use the money, how you will repay the loan, and more.
When a lender reads your business plan, they should have a clear vision of your strategies for growing your business.
Here are a few crucial points that your business plan should have:
- Executive Summary
- Company Description
- Products and Services
- Market Analysis
- Organization and management
- Product line
- SWOT Analysis (strengths, weaknesses, opportunities, and threats)
- Marketing and Sales Strategy
- Funding Request
- Financial Analysis
- Appendix
5. Collateral
Collateral is a valued item that you’ll pledge to give up if you can’t repay the loan.
If you’re taking out a secured loan from a bank, you must offer collateral.
Various types of collateral, such as real estate, vehicles, or equipment, can help improve your loan approval since they lessen the lender’s risk.
Lenders also evaluate the value of your collateral to determine how much funds you can borrow.
In most secured loans, however, the item you’re purchasing is usually the collateral.
For instance, if you take out an auto loan to buy a car, the car you bought will serve as collateral if you can’t complete the loan repayment.
6. Documentation
Before applying for a business loan, you must gather and prepare all necessary important documents required for the loan.
Usually, you can ask ahead of time or look at the bank or lender’s website to see what documents are needed.
Most lenders will most likely ask for some or all of these documents:
- Personal and business tax returns
- Personal and Business bank statements
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Business licenses and permits
- Business plan
- Employee Identification Number (EIN)
- Proof of collateral
- Commercial lease
- Existing debt schedule
- Legal contracts and agreements
- Financial projections
- Photo of Driver’s License
- Ownership and affiliations
- Legal contracts and agreements
- Articles of Incorporation
Can I Use A Personal Loan From A Bank for Business Expenses?
The truth is that qualifying for a business loan at a bank will be challenging, especially for startups.
Banks are more attracted to more experienced or established businesses that have been operating for a longer time, have a high credit score, and have healthy revenue.
And if you can’t qualify for a business loan, you might’ve already considered applying for a personal loan instead.
However, can you use a personal loan for business expenses?
Personal loans are mostly unsecured loans, meaning they often don’t require any form of collateral to qualify for the loan.
Most personal loans can be used for almost anything under the sun, covering both personal and business ventures.
Alternatives to Bank Business Loans
If your bank business loan application was recently denied, here are a few alternatives to consider:
Business credit cards
If traditional business loans seem out of reach, business credit cards might be your golden ticket.
They’re particularly useful for startups, offering perks like rewards and cash back on your purchases.
You can score an unsecured business credit card with a solid credit score without needing collateral. Just keep in mind that lenders might ask for a personal guarantee.
Crowdfunding
Platforms like Indiegogo and Kickstarter are fantastic for raising funds without repayment obligations.
By leveraging your social network, you can gather donations for rewards or early access to your products without collateral.
Equipment Financing
Equipment financing works much like an auto loan. Here, the equipment you buy acts as collateral, making it easier to secure the loan.
Invoice financing
Invoice financing allows you to use your unpaid invoices as collateral.
Companies offering this service will advance you a portion of the outstanding invoices, helping you manage cash flow effectively.
Types of Bank Loan Options For Small Businesses: Final Thoughts
If you plan to take out a business loan from a bank, ensure that you’ve researched every possible options and requirements.
Nowadays, there are various options of financial products to choose from.
There are several types of bank loans that have different loan terms and interest rates.
If you currently have a good or excellent credit score, it could be in your best interest to take out a loan through a bank.
Banks are known to offer lower interest rates and stricter loan terms for business owners with strong credit.
Remember, choosing the right loan is like picking the perfect dance partner. It needs to match your rhythm and goals.
Don’t let the paperwork scare you—think of it as the map to your treasure. With the right preparation and mindset, you’ll be waltzing into financial success in no time. Happy loan hunting!