Key Takeaways
Business bank loans offer flexible terms and attractive interest rates. When applying for a business bank loan, businesses should prepare for longer wait times for approval and longer funding times. Types of business bank loans include term loans, equipment loans, microloans, and lines of credit.
Do you have big plans for your business? If your company is established, a business bank loan can be a convenient and viable solution.
Business bank loans are generally available to business owners who can prove their company's financial health. It's also advantageous to have a strong credit rating. Most banks will review your credit profile and ask for a personal guarantee to secure the funding. Banks offer common loan types, such as term loans and lines of credit, in amounts that are usually larger than those offered by online lenders.
While business bank loans typically offer attractive terms, there's no guarantee that you'll get a loan. In fact, the Federal Reserve's 2023 Small Business Credit Survey found that large banks approved only 66% of applications, compared with 76% for small business banks. In some cases, you may find that an alternative is a much better fit for your company. Let's take a closer look at the pros and cons of business bank loans and some alternatives to find the best solution for your business.
What is a bank business loan?
A bank business loan is a type of commercial financing available to qualified businesses. The funds from such loans are usually used to cover operating expenses, purchase equipment, pay vendors, or grow the business.
Examples of bank business loans include:
Term loans: Fast financing in a lump sum with interest over a specified period of time. Equipment loans: Designed to finance the purchase of business equipment such as machinery or large trucks, spreading the cost over a longer period and often using the equipment as collateral. Microloans: Microloans are small, short-term loans for startups and small businesses, typically for small amounts under $100,000. Line of credit: Flexible access to funds, with multiple withdrawals allowed up to a set credit limit, and interest paid only on the outstanding balance.
These loans can be obtained from banks and credit unions, and more recently, online lenders have begun offering this type of loan as well.
Bankrate Insights
Traditional business loans are different from loans provided by the U.S. Small Business Administration (SBA loans). SBA loans can also be obtained from banks and other lenders, but they typically have longer repayment terms and lower interest rates than traditional loans.
Weighing the pros and cons
Let's take a quick look at the pros and cons of bank business loans.
Pros Cons Longer period Document submission required Attractive interest rates Not suitable for startups Flexible use Long waiting period for approval Borrower incentives Slow to raise funds
Benefits of bank business loans
These loan products have many benefits that are worth considering. Here are some business loan benefits you should know about.
Large loan amounts at attractive interest rates
Business bank loans are usually larger than loans from online lenders. Banks tend to offer larger loans because borrowers generally have higher credit scores. Plus, borrowers can prove they've managed their debt responsibly in the past.
Borrowing costs also tend to be lower with business bank loans than with alternative lenders: Small businesses pay an average interest rate of 8 percent to 9 percent when borrowing from a traditional bank, compared with a cap of 30 percent or more with online lenders. Borrowers also pay between 11.50 percent and 16.50 percent interest on SBA loans.
Business Loan/Lender Type Average Interest Rate Traditional Banks 7.98% to 8.86% for term loans Online Lenders 6% to 70% SBA Loans 11.50% to 16.50%
Longer Periods
Business bank loans allow you to extend the term and pay in monthly installments until the balance is paid in full, with some banks offering terms of five to seven years.
Extending your loan term can make your monthly payments more affordable and won’t cause problems for your business’ cash flow. Just remember that you’ll pay more in interest over the life of the loan.
Online lenders typically offer loan terms up to two years and may require weekly or daily repayments.
Flexible use
In most cases, you'll be able to see how much of the loan proceeds you'll use for business-related expenses. Some lenders may ask how you plan to use the funds during your application to determine the likelihood of you defaulting on the loan.
Even if your expenses deviate slightly from the amounts you stated on your loan application, lenders usually won't dispute them as long as you make your loan payments on time.
Borrower Incentives
It's not uncommon for some banks to offer perks to new and existing customers. If you already have a business checking account with the bank's lending institution, these might include things like a lower APR or a discount on automatic payments. Plus, as lending institutions report your payment activity to credit bureaus, you'll start building business credit.
Disadvantages of bank business loans
Unfortunately, there are drawbacks when deciding whether to apply for a business loan from a bank.
Strict Eligibility Criteria
Most traditional banks require a good or excellent personal credit score, substantial business revenue, and a history of business operations for some time. Some banks may also require a good business credit score.
If you can't meet these requirements, you may not be approved for financing. Online lenders are a little more lenient, but you'll still pay a premium in the form of a higher interest rate to get the financing.
Documentation Requirements
If you're applying for a bank business loan, you'll probably need a lot of paperwork. Most banks will ask for copies of your personal and business details, financial documents, license information, etc. You may also be asked to submit a list of your current liabilities, accounts receivable, and accounts payable.
Not ideal for startups
Another drawback of bank business loans is that they are conditional on how long you’ve been in business: unless your business has been in business for more than two years and is operating profitably, you’re unlikely to qualify for a loan.
However, some online lenders will approve your business if it's only been in business for six months, and some don't have minimum age requirements if you meet their eligibility requirements, which may be a better option for a startup.
Long waiting periods and funding times
Some banks allow you to apply online, while others only accept business loan applications in-person. Either way, it's not uncommon to wait days or even weeks for a loan decision. But if you apply online or with an alternative lending institution, you'll likely hear back within 24 hours.
Banks also tend to have much slower grant times than online lenders. Even if your application is officially approved, it may take several days for the loan to be disbursed. Some online lenders will grant your loan the same day or the next business day.
How to decide if a bank business loan is right for you
The main criterion for whether to take a bank business loan is whether you qualify for the loan. If you qualify, a bank business loan has many advantages, including low interest rates and established relationships with lenders. A bank business loan may be a good idea for your business if:
You have good credit and are profitable You want to build a relationship with the bank You already use the bank for your business checking account You may be applying for a new loan in the future You want to get the best interest rate possible
Alternatives to bank business loans
If you want to consider ways other than bank loans to secure the capital you need for your business, consider the following alternatives.
business credit card
Business credit cards are easy to get if you have good or excellent credit. Although starting interest rates aren't as low as loans from a bank or credit union, these cards offer a lot of perks. Some issuers offer interest-free introductory periods, rewards programs, and discounts on certain purchases. You may even be able to avoid paying interest if you pay off your balance in full each month.
SBA Loans
SBA loans are offered through private lenders and are partially guaranteed by the U.S. Small Business Administration. Low interest rates and fees make them affordable for small business owners. The big drawback is the waiting period, which often takes several weeks to receive loan funds.
Online Loans
Online loans are offered by alternative lenders. Any business owner who doesn't meet the guidelines set by traditional banks may qualify. You can expect quick approval and quick funding, but the terms may be less favorable. Be prepared to pay higher interest rates to take advantage of these loan products.
Business loans for bad credit
A bad credit business loan is a business loan designed for business owners with poor credit. This type of loan is known for having lower credit score requirements and less stringent qualification requirements. Bad credit business loans come in many forms, including term loans, line of credit microloans, and invoice factoring.
venture capital
You can also look for private investors or venture capital firms to introduce your business and see if anyone is interested in investing.
Crowdfunding
There are many crowdfunding platforms where business owners can post their business ideas and goals and ask individuals to donate. Some of the most well-known crowdfunding platforms include Kickstarter and GoFundMe.
Conclusion
Bank business loans come with attractive interest rates and long repayment terms, and most banks also offer a range of business loans that you can apply for now and in the future.
But you'll need to qualify for a business loan. Many banks have strict eligibility requirements, such as high creditworthiness and revenue. Banks also tend to require a long list of documents, so you can expect a lengthy application and funding process.
Whether you choose to take out a bank business loan or not, research multiple lenders to see which one can give you the best loan offer.
FAQ
Is it risky to get a business loan?
As with any borrowing, there can be some risk involved. Defaulting on loan repayments could put your business or personal assets at risk. But if managed responsibly, a business loan can be a valuable tool to help grow and manage your business.
What are the disadvantages of a business bank loan?
Business bank loans have strict eligibility requirements and require applicants to submit detailed documentation. Approval timelines can be quite long and funding can be slow.
Why are bank plans good for business?
Bank loans offer many advantages such as large loan amounts, long loan tenures, attractive interest rates, and the ability to use the funds for a variety of purposes.