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 2022 Small Business Credit Survey found that 43 percent of businesses rely on large banks for financial services, while 30 percent use small banks.
If you’re in the market for a small business loan, read on to learn more about the types of loans offered by banks and their pros and cons.
Types of small business loans offered at banks
Banks offer several different small business loan types designed for particular funding needs, including the amount of funding available and repayment terms.
|Term loan||Can be used by established businesses and startups to cover many costs, including buying new equipment or expanding your business. High revenue is typically required to qualify.|
|Line of credit||Similar to business credit cards, a line of credit can be used by companies that have consistent expenses of varying amounts. These come with a set limit with the ability to use credit as needed.|
|SBA 7(a) loan||Up to $5 million available. Money can be used for almost any purpose, including working capital, payroll, expansion and equipment.|
|SBA 504 loan||Up to $5.5 million available. Funds can be used for long-term financing for real estate and large equipment.|
|Commercial real estate loan||Designed for businesses that want to open a physical location. The money can be used to purchase property or lease space. May be able to borrow as much as $5 million.|
|Equipment loan||For businesses that need to finance equipment purchases. These loans are secured by the equipment you buy. The amount available depends on the purchase being made.|
Pros and cons of a bank business loan
Bank business loans generally offer attractive terms. However, as with any financing, 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.
- Longer terms: Banks offer longer loan terms, some as long as five to seven years.
- Attractive interest rates: Banks often offer lower rates than online lenders. Small businesses with good credit often pay an average of 6 percent to 7 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.
- Documentation requirements: Applying for a small business loan with a traditional bank typically requires submitting extensive documentation.
- Not ideal for startups: Banks often have minimum requirements for the time your company has been in business. The standard requirement is two or more years 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.
Requirements to get a bank small business loan
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. Some lenders, however, may accept scores as low as the mid-500s.
Various business credit bureaus, such as Dun & Bradstreet, Equifax and Experian, review a business’s credit score. The scoring models used by each bureau vary.
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. Some lenders are comfortable with revenue as low as $40,000, while others want an annual revenue of $100,000 or more.
3. Years in business
Typically banks require applicants to have one to two years in business to qualify for a loan.
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.
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.
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. Typically, online lenders have more flexible requirements and borrowing guidelines than traditional banks. However, 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.
Frequently asked questions about bank small business loans
Yes, 43 percent of businesses applied to a large bank for financing and 30 percent applied to a small bank, according to the 2022 Small Business Credit Survey. Additionally, 53 percent of applications from small businesses for loans, lines of credit and merchant cash advances were fully approved in 2022, and 26 percent were partially approved.
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.
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.