Types of small business loans offered at banks

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Running a small business requires capital to cover everything from purchasing equipment and inventory to financing new projects, paying staff and funding growth.

There are many types of small business loans available to help cover these costs, but it’s important to find the best one for your business and its unique needs. Banks of all sizes offer loans designed with small businesses in mind, but the vast majority of borrowers immediately turn to large banks. The 2023 Small Business Credit Survey found that 44 percent of businesses rely on large banks when applying for business loans, while 28 percent use small banks.

If you’re in the market for a small business loan, read on to learn more about the types of business loans offered by banks and their pros and cons.

Bank loan options for small businesses

Banks offer several different small types of small business loans designed for particular funding needs, including the amount of funding available and repayment terms.

Pros and cons of a bank business loan

Most types of business loans from banks generally offer attractive terms. But like any type of business loan, there are pros and cons to consider before signing on the dotted line. Here are some of the loan benefits and drawbacks to be aware of.

Pros

• Longer terms: Banks offer longer loan terms, some as long as five to seven years.
• Attractive interest rates: Banks often offer lower interest rates than online lenders. Small businesses with excellent credit often pay an average of 7 percent to 8 percent for loans from traditional banks. Online lenders can charge up to 60 percent or more depending on the loan type and the business’s credit score.
• Flexible use: Unless your loan is for a particular asset or purpose, the proceeds from a bank business loan can typically be used for any business-related expense.
• Borrower incentives: Banks frequently offer incentives to attract prospective borrowers, such as reduced APRs and autopay discounts.

Cons

• Documentation requirements: Applying for a small business loan with a traditional bank typically requires submitting extensive documentation.
• Not ideal for bad credit or startups: Banks often have minimum requirements of a 670 credit score and two or more years in business with proof that you’re operating profitably.
• May be long waiting periods for approval: It’s common for banks to take several days or weeks to provide a lending decision.
• Slow funding times: Banks typically take longer to provide funding once a loan is approved. It can take several days to receive the loan proceeds.

Can I use a personal loan from a bank for my business?

Qualifying for a small business loan at a bank can be challenging since banks typically look for experienced, established businesses with a strong credit history. But it may be possible to take out a personal loan instead.

Personal loans are a popular alternative to traditional business loans. They often don’t require collateral and have interest rates that won’t get as high as many bad credit business loans. But interest on personal loans is not tax-deductible. Personal loans are considered consumer debt and do not qualify for tax deductions like business loans.

Before applying for a personal loan to use for business expenses, borrowers should                                                   check with the lender to ensure there are no restrictions on using the loan for business purposes.

Requirements to get a bank loan for business

When you apply for a small business loan, banks will want to see a variety of information about you and your business to assess the risk of lending to you. Lenders may have specific requirements for minimum credit score, revenue, years in business and more. Here are some of the most common requirements to get a small business loan at a bank.

1. Credit score

Though specific requirements vary by lender, banks will likely consider your personal and business credit score. Banks typically review your FICO score to gauge your personal credit history and look for a score of at least 670.

If you already have established a business credit score, the lender may also look at that score to determine your creditworthiness. Various business credit bureaus, such as Dun & Bradstreet, Equifax and Experian, review a business’s credit score. You can build your business’s credit score by opening trade credit with suppliers that you work with, using a business credit card or business line of credit and making on-time payments.

2. Revenue

Similar to credit score requirements, revenue requirements may vary by lender and loan type. But it’s not unusual for banks to require that applicants meet a minimum amount of revenue to prove that they have the cash flow for a loan. Many national banks have a minimum requirement of $250,000.

3. Years in business

Banks typically require applicants to have a minimum of two years in business to qualify for a loan. Some banks will accept as little as six months in business or offer specific products to startup businesses.

However, low time-in-business requirements are hard to find with traditional banks since lending to startup businesses poses a higher risk. You can increase your chances of getting approved with less experience if you have a healthy flow of revenue.

4. Business plan

Many banks also like to see a business plan from small business applicants. A business plan outlines business goals and generally maps out a strategy for achieving those goals. This plan should also outline how you intend to use the loan funds and how additional financing will benefit your business.

5. Collateral

Because lending to small businesses often involves taking on more risk, traditional banks may ask for collateral to secure the loan. Depending on what type of loan you’re seeking, this could be the inventory, equipment or other assets you’re using the loan for. In some cases, it may be personal assets.

6. Documentation

When applying for a small business loan, gathering and preparing the necessary documents in advance is important. While specific requirements vary from lender to lender, you should be ready to provide personal financial documents such as bank statements, personal tax returns and business documents.

The business documentation requested may include tax returns, profit and loss statements, banking records and information about debts.

Alternatives to bank business loans

If you don’t qualify for a business loan from a bank or want to review other options, there are several alternatives to consider.

• Business credit cards: Business credit cards often offer rewards and the potential for a lower or introductory APR. Borrowing is also flexible — the card can be used when needed. You may also receive a business card decision and approval faster than a bank business loan.
• Online lenders: Online lenders feature quick and easy application and funding timelines. They are also typically more willing to work with business owners with bad credit and startups. But these lenders may also charge higher rates than banks, depending on your credit score and the loan type.
• Merchant cash advance: For businesses that generate a significant amount of sales through debit and credit purchases, a merchant cash advance (MCA) may be a good choice. MCAs provide a lump sum of cash, which you repay using a percentage of future card-based sales. That said, they typically have higher fees than other borrowing options.
• Invoice financing and factoring: Invoice financing and factoring are similar types of loans. Using invoice financing, you use the money you’re owed based on invoices for collateral to get a loan. And as you get paid for those invoices, you repay the debt. Using invoice factoring, a lending company buys the invoices directly from you. When the invoices are paid, the money goes to the factoring company instead of you. Factoring companies pay you 70 percent to 90 percent of an invoice’s face value upfront and then the remaining amount minus fees.
• Microloans: A microloan, as its name indicates, is a loan for a relatively small amount of money. Typically these loans are for $50,000 or less. The SBA estimates the average amount of a microloan is $13,000.

Bottom line

Before applying for a business loan offered by a bank, make sure to consider all your options. Compare different types of bank loans to determine which business loan offers the best terms, interest rates and loan features to suit your funding needs. A bank may be your best chance at a low-interest business loan if you have good-to-excellent credit. But funding times with a traditional bank may be slower than online lenders, and you may have to apply in person.

Frequently asked questions about a bank loan for business

• Do banks give loans to small businesses?

  Yes, 44 percent of businesses applied to a large bank for financing and 28 percent applied to a small bank, according to the 2023 Small Business Credit Survey. Additionally, 66 percent of applications for loans, lines of credit or merchant cash advances were at least partially approved at large banks. Seventy-six percent of applications were at least partially approved at small banks.

• How do I approach a bank for a small business loan?

  If you’re in the market for a loan, it’s important to be prepared when approaching a bank. You should know how much money you’re seeking to borrow and have a business plan ready to show a lender, along with any additional documentation or requirements they may have.

• Which bank is best for a small business loan?

  Many national and regional banks offer attractive rates and terms, but the best bank for your business loan will depend on your specific financial needs and qualifications. It’s important to review all your options before deciding which bank is best for your business loan.