When it comes to small business financing, a bank loan is usually the first thing that comes to mind. Banks are the largest providers of small business loans. This tried-and-true financing staple isn’t easy to obtain but offers distinct benefits to those who qualify.
Overview of bank loans
Small business bank loans are tailored toward established, profitable businesses with a solid track record and assets. A healthy personal credit score also weighs strongly in the bank’s decision. Typical loan amounts are $200,000 or more at an interest rate of less than 10%. The required down payment is usually about 25% to 30%, and repayment terms may be seven years or more.
A traditional bank loan generally requires collateral for approval. Real estate is preferred for this purpose, but certain equipment and vehicles may be allowed as well. Even after putting up collateral, a personal guarantee from the borrower is often required.
In addition to their own small business financing, many banks also offer a wide variety of loans from the U.S. Small Business Administration (SBA). These loans are partially backed by the federal government and only require a 10% down payment. SBA microloans are one of the few bank loan options available to startup businesses.
Bank loan pros and cons
Bank loans (including SBA loans) are the coveted financing industry staple.
- These loans have some of the lowest interest rates of all types of small business financing.
- Terms of seven years or longer help make repayment manageable.
- Small businesses may borrow substantial amounts of $200,000 or more.
- To protect their bottom line, banks approve only the lowest-risk applicants. This means businesses just getting started or struggling financially will likely have to look elsewhere for financing.
- The application process is time consuming. Expect to spend 25 hours or more just taking care of the necessary paperwork. Once that’s completed, you may have to wait two to six months before approval and disbursement. If your business needs working capital quickly, bank loans may not be your best option.
Although it isn’t easy to get a bank loan, the low interest rates, generous loan amounts and long repayment terms make this type of small business financing an excellent choice for well-established, thriving small businesses with appropriate collateral.
How to get bank loans
To apply for a small business bank loan, visit a bank branch and speak with a representative. In addition to filling out forms, you’ll need to provide the bank with several statements and documents. Here are some of the most commonly required:
- Business overview and history
- Financial plan
- Business and personal income tax returns for the past three years
- Business licenses, incorporation documents and franchise agreements
- Profit and loss statements, cash flow statements, balance sheets and projected financial statements for your business
- Personal information, including address, work experience and education
- Business address, contact information and tax ID number
- Personal credit score and history
To protect your credit score, don’t apply for bank loans with multiple lenders simultaneously.
Because of the low profit margin involved, many larger banks prefer not to deal with small business financing. Some exceptions include US Bank and Wells Fargo, both of which have solid small business lending programs. Local community banks are another good option because these establishments often cater to and welcome successful small businesses.
At the end of the day, many businesses won’t qualify for a bank loan or won’t have the time to go through the long application and disbursement process. For these businesses, online lenders may provide a good alternative.
Online lenders specialize in simplifying the loan application process and in offering credit to a wider variety of businesses, at competitive interest rates and often more quickly than banks. You can compare loan options from online lenders here:Compare business loans
For more information about small business loans and other small business essentials, visit NerdWallet’s Small Business Guide.