How To Get A Small Business Loan From A Bank
Small business loans from banks may be difficult to qualify for, but businesses that meet the requirements are rewarded with low-cost, long-term funding.
If you’re a small business owner looking for long-term, low-interest loans, start your search for funding at your local bank. Although you may encounter strict requirements and longer processing and funding times, the tradeoff is affordable funding options that can be used to grow your business.
Keep reading to learn how to get a business loan from a bank.
Table of Contents
- What Is A Bank Small Business Loan?
- Types Of Bank Loans For Businesses
- Eligibility Requirements For Bank Business Loans
- How To Apply For A Business Loan From A Bank
- Alternatives To Bank Business Loans
- FAQs About Small Business Loans From Banks
- The Bottom Line On Bank Loans For Business
What Is A Bank Small Business Loan?
A bank small business loan is a loan that a business owner receives from a bank. This can be a traditional loan that provides a lump sum of cash, or a more flexible option like a business line of credit.
Bank loans typically offer low rates and long repayment terms but may be more difficult to qualify for than other types of business funding.
How Bank Loans For Businesses Can Be Used
Bank loans for businesses can be used for business expenses, including:
- Acquiring a business
- Startup costs
- Purchasing commercial real estate or land
- Renovating a business
- Purchasing supplies, inventory, or equipment
- Hiring employees
- Refinancing existing business debt
- Working capital
During the application process, you will need to state the purpose of your business loan. Depending on lender policies and the type of loan, there may be some restrictions on how funds are spent.
Types Of Bank Loans For Businesses
Many banks offer several types of small business loans. Here are some of the most common types of bank loans for businesses.
Eligibility Requirements For Bank Business Loans
While eligibility requirements vary by lender, type of loan, and other factors, there are a few general requirements to keep in mind before getting a bank loan for your business:
- Personal Credit Score: Banks will look at your personal credit score to determine if you qualify for a loan. If you do qualify, your score will be used to help determine your rates and terms. While score requirements vary, banks will typically want to see a score of 680 or higher before approving you for a loan.
- Personal Credit History: In addition to your personal credit score, recent defaults on loans, foreclosures, and bankruptcies may disqualify you from receiving a business loan. You should also be prepared to explain any negative credit items such as late payments, collections, or numerous inquiries.
- Business Credit Score: Some banks may also check your business credit score, which is based on factors like industry, company size, and payment history for business debt. Business credit scores range from 0 to 100, and the higher your score, the higher your odds for approval.
- Time In Business: Most bank loans require a business to be in operation for at least two years.
- Annual Revenue: A bank wants to make sure you have the income to repay the loan, so it will look at your annual revenue. While requirements vary by lender, most want to see a minimum of $100,000 in annual revenue.
- Industry: Your industry will also be considered when you apply for a bank loan. The bank will assess the risk of your business to determine if you qualify for funding. High-risk industries (such as gambling businesses or real estate investing) may not qualify for some types of bank loans.
Documentation Requirements For Bank Loans For Businesses
In addition to meeting the standard requirements for a business bank loan, you’ll also be expected to provide documentation during the application process. While your bank will provide you with specific documentation requirements, here’s a general idea of what you’ll need for a business bank loan:
- Driver’s license or other ID
- Business licenses & permits
- Articles of incorporation
- Business plan
- Loan proposal
- Resumes for all business owners
- Balance sheets, P&L statements, and other financial documentation
- Business & personal income tax returns
- Business & personal bank statements
- Future financial projections
Collateral Requirements For Bank Loans For Businesses
Collateral is typically required for certain types of bank loans, including larger loans. Collateral is business and/or personal assets that are used to secure the loan. If you default on the loan, the collateral can be seized and sold to repay the debt.
Even if specific collateral isn’t required, most loans require all owners to sign a personal guarantee (which makes you personally liable for the debt), or a blanket lien is attached to the loan, which gives the lender the right to seize all of your business assets to repay a loan that’s in default.
Some loans, such as equipment loans and commercial real estate loans, use the item being purchased as collateral to secure the loan.
Down Payment Requirements For Bank Loans For Businesses
A down payment may be required for your loan. Investing your own money into the loan shows the bank that you’re serious about repaying your debt.
Down payments vary but typically range from 10% to 30% of the borrowing amount.
How To Apply For A Business Loan From A Bank
Now that you know about business loans from banks, you should have a good idea of whether this is the right funding option for your business. Once you’ve made the decision to pursue a bank loan, you can apply by following these six steps.
Alternatives To Bank Business Loans
Business loans from banks aren’t the right choice for everyone. Whether you don’t meet requirements or you need fast funding, here are some alternatives to bank loans for businesses.
FAQs About Small Business Loans From Banks
The Bottom Line On Bank Loans For Business
If you meet the requirements and have the time to wait for approval and funding, you can’t go wrong with a business loan from a bank. Competitive rates and longer repayment terms make these loans a more affordable way to grow your business.
However, bank loans aren’t right for everyone. If you don’t qualify for funding or you want to explore other options, our guide on how to get a small business loan can help you every step of the way, from selecting your lender to submitting your application.