Key takeaways

  • Business bank loans offer flexible terms and attractive interest rates
  • Businesses should expect longer waiting periods for approval and slower funding times when applying for a business bank loan
  • Types of business bank loans include term loans, equipment loans, microloans and lines of credit

Got big plans for your business? A business bank loan could be a convenient and viable solution if your company is established.

Business bank loans are generally available to business owners who can demonstrate that their company is in good financial health. It also helps if you have a solid credit rating. Most banks will review your credit profile and require a personal guarantee to secure funding. Banks offer common loan types, such as term loans and lines of credit, for larger amounts than online lenders typically do.

Although business bank loans generally offer attractive terms, getting one is by no means guaranteed. In fact, the 2022 Small Business Credit Survey by the Federal Reserve Banks found that big banks only partially approved 68 percent of financing applications for small businesses. Sometimes, you may discover that an alternative is far more suitable for your company.

What is a bank business loan?

A bank business loan is a type of commercial financing that qualified businesses can obtain. Typically, the funds from these loans can be used to cover operating costs, purchase equipment, pay vendors or help grow your business. 

Examples of bank business loans include:

  • Term loans: Provide a lump sum to be rapid over a specified term with interest.
  • Equipment loans: Designed to finance the purchase of business equipment, including machinery and semi trucks, helping spread costs over time and often using the equipment as collateral.
  • Microloans: Microloans are small, short-term loans tailored for startups and small businesses, offering smaller sums, typically under $100,000.
  • Lines of credit: Flexible access to funds, allowing for multiple withdrawals within a set credit limit, with interest only paid on the outstanding balance.

These loans can be obtained from banks and credit unions. More recently, online lenders have also begun offering these types of loans.

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Bankrate insight
Conventional business loans are different than loans offered by the U.S. Small Business Administration, which are known as SBA loans. While SBA loans can also be obtained through banks and other lenders, they typically provide longer repayment terms and lower interest rates than conventional loans.

Compare pros and cons

Here’s a quick look at some of the pros and cons of bank business loans:

Pros Cons
Longer terms Documentation requirements
Attractive interest rates Not ideal for startups
Flexible use Lengthy waiting periods for approval
Borrower incentives Slow funding times

Bank business loan pros

These loan products have their fair share of advantages that make them worth considering. Here are some business loan benefits to be aware of.  

Generous loan amounts with attractive interest rates

Business bank loans are typically larger than loans from online lenders. Banks are more inclined to offer larger loans since borrowers generally have strong credit scores. Plus, they can demonstrate that they’ve previously responsibly managed debt obligations.

Borrowing costs also tend to be lower with business bank loans than you’ll find with alternative lenders. On average, small businesses pay 6 percent to 7 percent for loans from traditional banks, compared to the cap of 30 percent or higher with online lenders. And the average borrower pays 13.5 percent in interest for SBA loans.

Business loan/lender type Average interest rate
Traditional banks 6% to 7%
Online lenders 6% to 70%
SBA loans 13.5% on average

Longer terms 

You could get an extended term with a business bank loan and pay monthly installments until the balance is paid in full. Some banks offer terms of five to seven years. 

An extended loan term allows you to get a more affordable monthly payment that doesn’t cause cash flow problems in your business. Just remember that you’ll pay more in interest over the loan term.

Online lenders often offer terms capped at two years; they sometimes require weekly or daily payments.

Flexible use

You can see the loan proceeds for any business-related expenditure in most instances. Some lenders ask how you intend to use the funds when you apply to determine the likelihood of defaulting on the loan. 

Even if your spending deviates slightly from what you indicated in the loan application, the lender typically won’t object if you make timely loan payments. 

Borrower incentives 

It’s not uncommon for some banks to offer new and existing customers perks. If you already have a business checking account with a bank lender, these may include reduced APRs and autopay discounts. Additionally, you’ll start building business credit if the lender reports payment activity to the credit bureaus. 

Bank business loan cons

Unfortunately, there are drawbacks when deciding if you should apply for a business loan with a bank. 

Stringent eligibility guidelines 

Most traditional banks require a good or excellent personal credit score, substantial business revenue and a certain amount of time in business. Some may also require a good business credit score.

 You likely won’t be approved for funding if you cannot meet these requirements. Online lenders are slightly more lenient, but you’ll pay a premium in the form of a higher interest rate to access capital. 

Documentation requirements 

You’ll likely need a mountain of paperwork when applying for a bank business loan. Most banks require copies of your personal and business details, financial documents, license information and more. You may also be asked to provide a list of current debts, accounts receivable and accounts payable.

Not ideal for startups 

Another downside of bank business loans is the time in business requirement. Unless your business has been open for two or more years and is operating profitably, the likelihood of qualifying for a loan is low. 

However, some online lenders will approve you for a loan with just six months in business. Others don’t have a minimum time in business requirements if you meet the eligibility criteria. These might be better options for startups.

Lengthy waiting periods and funding times

Some banks allow you to apply online; others only accept business loan applications at a physical location. Either way, waiting several days or even weeks to receive a lending decision isn’t uncommon. But if you apply with an online or alternative lender, you’ll likely hear back within 24 hours or less. 

Banks also tend to have far slower funding times than online lenders. Even once your application is formally approved, it could be several days before your loan proceeds are disbursed. Some online lenders fund loans as soon as the same or the next business day. 

Bank business loan alternatives

If you’d prefer to look beyond bank loans to secure the funds you need for your business, consider these alternatives: 

Business credit cards

Business credit cards are easy to obtain with good or excellent credit. Starting interest rates aren’t as low as loans from banks and credit unions, but these cards have plenty of perks. Some issuers offer interest-free introductory periods, rewards programs, discounts on select purchases and more. You may even be able to avoid paying interest if you pay your entire balance off each month.

SBA loans

SBA loans are offered through private lenders and partially backed by the U.S. Small Business Administration. They come with lower interest rates and fees to make borrowing more affordable for small business owners. The significant downside is the waiting period for a lending decision, and it often takes several weeks to receive the loan proceeds.

Online loans

Online loans are offered by alternative lenders. You could be eligible if you’re a business owner who doesn’t meet the guidelines set forth by traditional banks. Expect quick approvals and fast funding times, but you’ll likely get a less favorable term. Anticipate paying more interest to access these loan products.

Bad credit business loans

Bad credit business loans are any business loan designed for business owners with poor credit. These types of loans are known for having lower credit score requirements and less daunting eligibility requirements. Bad credit business loans come in various forms, including term loans, lines of credit microloans, and invoice factoring.

Venture capital

You can also try looking for individual private investors or venture capital firms. You can present your business and see if anyone is interested in investing.

Crowdfunding

There are many different crowdfunding platforms where business owners can post their business ideas or goals and ask individuals to donate to their efforts. Some of the most well crowdfunding platforms include Kickstarter and GoFundMe.

Frequently asked questions

  • As with any borrowing, there can be some risks involved. If you default on the loan, your business or personal assets may be at risk. But if managed responsibly, business loans can be a valuable tool to help grow or manage your business

  • Business bank loans have strict eligibility requirements, and applicants must provide extensive documentation. The approval timeline can also be quite lengthy, and funding can be slow as well. 

  • There are many benefits to bank loans, including generous funding amounts, long loan terms, attractive interest rates and the ability to use the funds for a variety of purposes.