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Updated Nov 20, 2023

How to Get a Bank Loan for Your Small Business

Need funding? A small business bank loan can be a good option, if you qualify for it. Here are some tips to make it easier to get a bank business loan.

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Andrew Martins, Business Operations Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Unless your small business is completely self-funded or backed by investors, you’re likely going to need a small business loan to help you start or grow your business. Commonly offered by banks, business loans offer a much-needed infusion of cash to help cover most costs, though many small business owners find it hard to be approved. When seeking a business loan from a bank, it’s important to keep the following information and tips in mind so you can get approved more quickly and easily.

What are the types of bank loans for small businesses?

When looking at potential financing options, here are some of the more common types of business loans to consider.

Business term loan

This loan is your traditional bank term loan option, provided by a financial institution, and it operates similarly to a personal loan in some aspects. Businesses often seek this type of loan when they need funds for major investments, business upgrades, acquisitions or other major needs. 

Depending on the agreement, these loans tend to feature a fixed interest rate, with the lender requiring a monthly payment or quarterly payment schedule. These loans also have a fixed end date, with intermediate-term loans running for three years or less and long-term loans running for 10 years or possibly longer.

Line of credit

When considering a business line of credit, think of it like a credit card. If approved, your small business is able to borrow up to a certain amount of money from the bank. As you accrue debt, you pay interest only on the amount you’ve used so far. 

As long as you stay within the credit limit, this option provides much more flexibility in how the money is used. This option is great for small businesses that have a steady flow of income, a decent credit history and, in some cases, are willing to put assets up as collateral. [Read related article: What Is a Revolving Line of Credit?]

Editor’s note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Commercial mortgage

If your business is looking to acquire a location to expand, a commercial mortgage is the type of loan you need. A commercial mortgage is secured through a lien on a commercial property and acts similarly to a home mortgage. 

Suppose your credit history is nonexistent or unflattering. In that case, a bank can require that the business owner or any principals personally guarantee the loan, promising to pick up the tab in the event the business goes under. While most residential mortgages typically last for 30 years, commercial mortgages are significantly shorter.

Equipment lease

Not unlike leasing a car, an equipment lease spreads out the cost of a major equipment purchase over a set amount of time. Most lessors don’t need a large down payment on a lease.

Once the lease has run its course, you can opt to return the equipment. Alternatively, you can pay the rest of the equipment’s value based on the life of the lease and the appreciation of the item in question. Though the monthly payments will be lower than the upfront cost of just purchasing a piece of equipment, it’s important to note that interest will add to the price tag.

Letter of credit

A letter of credit is a guarantee from a bank that a seller will receive the correct payment owed on time. The guarantee comes in two different flavors: seller protection or buyer protection. In the former, the bank agrees to pay the seller if the buyer fails to make their payments; this is generally offered for international transactions. 

Funds for this type of letter are sometimes collected from the buyer upfront in a sort of escrow. Buyer protection is offered in the form of a penalty to the seller, like a refund. Banks provide these letters to businesses that apply for one and have the credit history or collateral required.

Unsecured business loan

An unsecured business loan doesn’t require the borrower to provide any collateral against the amount they’re borrowing. Since it’s friendlier to the borrower than the bank, the lender charges a significantly higher interest rate than it would for a loan backed by collateral. This kind of loan is most commonly provided through an online lender or alternative lender, though traditional banks have been known to offer unsecured loans to customers with an existing relationship with the institution. 

Without any assurances in the form of collateral, unsecured business loans are often much harder to obtain than other loans. The inherent risk involved in an unsecured loan naturally means it will generally be offered as a short-term loan to alleviate the lender’s risk.

How do you get a bank loan for your business?

Follow these steps to get the funding your business needs.

1. Research lenders to find the right one.

Evaluate the best business loans side by side across several factors to determine which loan fits your needs. Key factors include:

  • Interest rate
  • Rules and requirements, such as origination fees
  • Qualifying criteria, such as credit scores and annual sales volume
  • Collateral requirements
  • How quickly you can get funding
  • Additional paperwork requirements

2. Get your financials in order.

Ask the bank what information it will need when going through the application process relative to the type of loan you’re seeking and the size of the request. To this end, you should generally try to have three years’ worth of business and personal tax returns on hand as well as year-to-date profit and loss figures, balance sheets, accounts receivable aging reports, and inventory breakdowns, if possible. 

If you have a CPA or bookkeeper, you can usually get all of that information from them. However, the best accounting software [See our QuickBooks review or Xero review] can just as easily generate most of that information as well.

3. Create a business plan.

If you’re seeking a loan as a startup, it’s imperative that you also have your business plan drawn up. If you don’t have that laid out in writing just yet, there are plenty of free resources that you can use, including local Small Business Development Centers, SCORE and Economic Development Centers.

4. Estimate how much you’re going to need. 

If you need a loan for a one-time purchase or another financing option, it’s also important to have estimates for the work or purchase ready to show the loan officer.

“Lenders want to see that you’ve carefully thought through your business goals, know how much you need to achieve them and have a specific plan to use the money wisely,” said small business content writer Karen Axelton. “Whether your goal is to open a second location or buy new machinery, run the numbers to see how much it will cost. Also calculate how loan repayments will affect your business budget going forward.”

5. Complete and submit your application (and regularly check on it).

Your final step is to complete the loan application. This process will look different for each loan. For example, some banks tout their quick applications as a selling point, whereas SBA loans are known for their tedious, lengthy applications. 

Once you’ve filed your application, you’ll get an answer within a period that the bank has likely stated outright. Typically, this period is at least one week and is often much longer. The good news is that, since many bank loan applications are submitted online, your completed application should give you access to an online portal. You can usually track your application’s status and follow up with your contact at the bank to request updates.

6. Review the final loan offer.

At the end of a successful loan application, the bank will draw up a loan contract specific to your business. You should go through this final loan offer carefully to make sure that everything looks right. All collateral, interest rate, term length and fee provisions in the contract should align with what you and the bank have previously discussed. If everything checks out, you’re all set to sign on the dotted line.

Key TakeawayKey takeaway
Carefully consider the type of loan your business will need and the type of agreement you will have to enter once approved.

What are the requirements for getting a business loan?

When applying for a business loan, it’s imperative that you keep a bank’s requirements in mind. Each bank has its own loan application forms. Many institutions offer their applications online, though some still require you to fill out a paper form. The bank may have a preferred method of applying based on the loan amount and the kind of loan you’re seeking.

In addition to how a bank prefers to receive a loan application, you should also pay attention to the prerequisites that a bank needs in order to be considered for approval. Many factors go into a potential approval, so prior to applying, be sure to check on the following:

  • Credit score: A high credit score shows that you’re reliable when it comes to paying down your debt. A good credit score not only can make or break your application, but it also affects the interest rate and loan term length the bank offers you.
  • Purpose of the loan: Some loans come with stipulations for how they’re used. For instance, a lease is generally used to obtain equipment, while a mortgage is for real estate purchases.
  • Available collateral: If your credit score isn’t good enough, some lenders will make an exception if you can put some valuable items (usually property) up as collateral. If you fail to meet the agreement’s repayment guidelines, you can lose that collateral to the bank, which will likely sell the assets in question to recoup some of its losses.
  • Cash flow: Banks want to know you have a steady income stream. Traditional lenders could be skittish about approving your loan without a consistent cash flow. Many lenders require a certain amount of revenue before even making such a consideration.
  • Financials: Cash flow history is one type of document that the bank will want to see prior to approving a loan. You will also need to show well-researched financial projections for your business. 
  • Business plan: Any type of lender can ask for your business plan before reviewing an application. There are many resources available to help you get started on writing an effective business plan for your organization.
  • Capital: Working capital refers to how much money the company has on hand to cover operating costs. You may be considered a high-risk investment if you don’t have any working capital.
TipTip
Only you know your business’s financial situation. Gathering the appropriate information can assuage a lender’s concerns about your business’s ability to repay financing.

What are the benefits and risks of getting a business loan?

The below pros and cons of small business bank loans are worth considering as you decide whether to apply.

Benefits of small business bank loans

  • They come with inherent safety nets. Backed by the federal government, banks and most of their loans come with assurances that many nontraditional and online banking lessors don’t. Also, bank loans generally carry lower interest rates than loans from online lenders, minimizing your risk of taking on prohibitively expensive debt.
  • They may offer longer terms. Often, you can repay a bank loan over a longer period than other types of business funding. This means that your monthly payments will be lower, easing the financial burden associated with loans. For example, a $100,000 loan you repay over 10 years requires $100,000/10 = $10,000 in repayments per year. That’s $833.33 per month, which is much more reasonable than paying back $100,000 over one year, or $8,333.33 per month.
  • They may offer flexible use terms. Some bank loans don’t limit the ways in which you can use your proceeds. In cases where limitations do exist, minor deviations might not be a problem if you keep paying on time. Of course, you shouldn’t ignore or neglect your loan’s use terms; that would be highly ill-advised. However, with bank loans, you typically get more leeway if you accidentally make purchases outside your contract’s limitations and keep making timely payments,

Risks of small business loans

  • You could choose the wrong loan. After deciding that your small business would benefit from a business loan in the short term, you must nail down exactly what type of loan you want to pursue. Failing to do so can result in lost time, sunk costs and other major headaches for any small business. It’s how you lose resources you could put toward obtaining solutions that actually meet your needs. 
  • You could wait too long for funding. When you need funding sooner than later, small business bank loans might help only sometimes. That’s because it can take up to six weeks for your funds to be disbursed. At that point, the opportunity for which you need funding might already be off the table. Similarly, if you plan to use the loan proceeds for an urgent bill payment, slow funding disbursal could be a major risk.
  • You could fail to repay. Obtaining the funding you need to grow your company doesn’t always guarantee business success. If your growth pursuits don’t lead to enough revenue to repay your loan, you could wind up defaulting. Your lender could then seize your assets, and you could have to file for bankruptcy. This is a risk inherent to any and all loans, but since bank loans are often larger, the risk may be especially pronounced.

Alternatives to bank loans

As a small business owner, you have many loan options to choose from for financing. Each type of loan comes with its own set of stipulations, requirements and other criteria that may make one a better fit for your financial situation and repayment abilities than others.

Bank loans are not your only option. You can work with alternative lenders to secure the funding you need. Alternative lenders are an option to consider if your business doesn’t qualify for a traditional loan. Here are three alternative lending options to consider:

  • Online loans: Online lenders are normally more flexible with loan qualifications, and the turnaround time is faster, but the rates may be higher than traditional loans. Lendio is one such online lender. You can submit an application through its secure interface. 
  • Microloans: Microloans offer a small amount of money to help you cover certain costs within your company. Microloans usually have a relatively low interest rate. The disadvantages of microloans include a shorter time frame to pay back the loan, and some lenders require that the money from the microloan be spent on specific expenses like equipment purchases.
  • Invoice factoring: Through invoice factoring, you can borrow money against your clients’ unpaid invoices. To start, a factoring company will advance you between 80 percent and 90 percent of your unpaid invoices’ total. Then, the factoring company becomes responsible for collecting the unpaid invoices. Once client payment occurs, the factoring company sends you the remainder of your outstanding invoices’ total, minus fees.
Did You Know?Did you know
In addition to loans, you can also pursue financing through crowdfunding, venture capital and angel investors.

Terms to watch for in a business loan contract

Besides the type of loan you apply for, consider the details of the loan. Each loan comes with its own interest rate and loan term, among other points of consideration that are as equally important as the type of loan you take on. It’s important to read the contract in full to make sure there aren’t hidden terms or fees.

When applying for a bank loan, check the following:

  • Rates: Aside from the amount of money you wish to borrow, the loan rate – otherwise known as the interest rate – is something you absolutely must determine. Loan rates differ based on the type of loan you’re seeking, the bank you’re borrowing the funds from and your personal credit score, among other things. When seeking out a business loan, you want one with a low interest rate, if possible. Depending on the type of loan, you may see rates range anywhere from 3 percent up to 80 percent annual percentage rate. 
  • Term: A business loan’s term is the length of time you have to pay the loan off. Like the loan rate, you generally want a shorter loan term if you can afford the payments. The longer your rate is, the more interest you will pay over time, and the more your loan will cost overall.
  • Banking relationship: To be considered for a bank business loan, many institutions require that you have an existing relationship with them first. If this is not the case, you’ll need to open an account with a bank and establish a working relationship with it over time.

Banking on success

Small business bank loans can help you fund your boldest business goals if you qualify for them. Of course, the idea of taking on a substantial amount of debt to fuel your growth might seem intimidating. However, countless small business owners have successfully used loans to take their operations to the next level without incurring financial danger – and so can you.

Max Freedman contributed to this article. Source interviews were conducted for a previous version of this article.

author image
Andrew Martins, Business Operations Insider and Senior Writer
Andrew Martins is an award-winning business and economics expert who has spent years studying trends and profiling small businesses. Based on his on-the-ground reporting and hands-on experience, Martins has developed guides on small business technology and finance-related operations. In recent years, he focused on the small business impacts of the 2020 presidential election and the COVID-19 pandemic. Martins, who has a bachelor's degree in communication, has been published on trusted financial sites like Investopedia, The Balance and LowerMyBills, on technology outlet Lifewire and in the New York Daily News.
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