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- Larger banks tend to offer the widest range of business loan products and higher loan amounts
- Your business’s needs and qualifications can help you narrow down the best bank for a small business loan
- Bad credit and subprime borrowers may have better luck applying for a loan with online or alternative lenders
Small businesses typically need a steady cash flow to succeed. But ebbs and flows in business and opportunities to grow mean businesses sometimes need an infusion of cash.
One way to get additional capital is by securing a small business loan. According to the 2022 Small Business Credit Survey by the Federal Reserve Banks, 40 percent of businesses applied for loans, lines of credit or cash advances, with 65 percent stating their reason for applying was to meet operating expenses and 53 percent were seeking financing to expand their business or pursue new opportunities.
While there are many types of lenders small business owners can turn to, many prefer to work with a traditional bank as they offer hands-on, in-person service. If that’s your philosophy, read on to learn how to choose a bank for your small business and what to consider when researching the best banks for business loans.
1. Consider the different kinds of banks
Many business owners turn first to large national banks, like Bank of America or U.S. Bank. But most banks offer small business loans.
Small business owners may find borrowing opportunities with regional and small community banks, along with credit unions. In fact, in 2022, loans at least partially approved at small banks were higher than at big banks.
|Bank type||Applicants at least partially approved|
Source: 2022 Small Business Credit Survey
The pros and cons of each type of bank should be among the factors you consider when choosing a bank for your small business.
Big banks may offer more types of loans and larger maximum amounts, but there may be more fees associated with them. And as outlined above, it is more difficult to get your loan approved.
Conversely, small banks and credit unions sometimes offer a more personalized service. You may personally know the lending manager, and the bank or credit union may be heavily involved in the community. Additionally, fees may be lower. However, loan amounts may be smaller.
2. Determine your business’s needs
Before deciding on the best bank for your business loan, you must determine the loan’s purpose. This will help you choose a type of loan.
The most common types of funding available from banks include:
You may want a term loan for long-term funding or a line of credit to fill temporary gaps. You might want a specialized loan that fits a specific purpose, like an equipment loan or commercial mortgage. Or, if you don’t mind the wait, you might want the interest rate caps that government-backed SBA loans offer.
After you’ve chosen a loan type, determine how much money you want to borrow and how much you can comfortably repay.
3. Assess your business’s qualifications
Each lending institution will have its own loan requirements. But there are several common requirements. Among the factors often considered are the company’s annual revenue, time in business, business plan, business credit score and owner’s personal finances.
Some lending institutions are transparent about their requirements and publish them on their website. Others won’t reveal that information until you either talk to a loan officer on the phone or start your application.
4. Search for matching banks that offer small business loans
Now that you’ve determined the purpose of your loan, the amount of funding you need and the amount you can afford to repay each month, it’s time to start looking for the best bank for your business loan.
Compile a list of banks that offer small business loans. Consider including institutions from all categories — large and small banks and credit unions. This list should also include any bank in which you already have a business checking account or a personal account.
5. Compare rates, fees and other details
For each lending institution you consider, compare their lending requirements. You may want to create a chart listing their interest rates, term lengths, fees, minimum credit scores and minimum annual revenue.
Additionally, you may want to compare the interest rate each institution charges to the national median. Just remember that lenders offer a range of rates — the rate you receive will depend on your and your business’s creditworthiness, among other factors.
6. Gather your information and apply
Once you’ve completed this evaluation and chosen the best bank for your business loan, it’s time to gather the necessary business documents and submit your application or applications.
Common documents that lenders require include the following:
- Business licenses and registration
- Legal documents, including third-party contracts and lease agreements
- Business plan
- Financial documents, including bank statements, tax returns, balance sheets, income statements, cash flow statements, accounts receivable and business debt schedule
Traditional lenders often have more extensive documentation requirements than online and alternative ones. The bank or credit union you select will list their required documentation. It typically includes your company’s financials, articles of incorporation and your personal and business tax returns.
You may be able to apply online, but many traditional lenders will require you to call or make an appointment to apply in person.
The bottom line
Choosing the right bank for your business loan takes time and work. But it’s an important decision. You will have a relationship with this bank for months or years as you repay your loan. So, systematically go through these steps to select the best bank for your business’s loan.
Frequently asked questions
When searching for a bank business loan, consider factors like your business’s needs and qualifications as well as bank interest rates, repayment terms, fees and eligibility requirements. This will help you narrow down your list of potential banks and choose the perfect one for your business.
Securing a business loan from a bank depends on various factors, including credit score, time in business, annual revenue and collateral. It can be challenging for a newer business or a business with poor credit to get approved, but an established business with strong financial health may secure a loan with ease.
The bank loan that is best for a business depends on the needs of the business as well as the available loan types and funding amounts. Businesses will need to compare lenders to determine which is best, as there are pros and cons to every business bank loan.