Types of Small Business Loans Offered at Banks

When looking for funding to grow a business or fund a purchase, the vast majority of borrowers turn to large and small banks to do the job. The 2023 Small Business Credit Survey found that 44 percent of businesses rely on large banks when applying for business loans, while 28 percent use small banks.

Bank lenders tend to offer a variety of types of bank business loans — and at competitive borrowing costs that you won’t find with other lenders. You’ll need to pick the type of business loan that best fits your funding purposes and look into whether you’re eligible for a bank business loan. Bank loans aren’t right for every business, so consider the pros and cons of using a traditional bank over other sources.

Types of bank business loans

Banks offer several different types of small business loans designed for particular funding needs. Consider which type of bank business loan will fit your funding purposes best.

Pros and cons of a bank business loan

Most types of bank business loans generally offer attractive terms. But like any type of business loan, 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.

Pros

• Longer terms: Banks offer longer loan terms, some as long as five to seven years.
• Attractive interest rates: Banks often offer lower interest rates than online lenders. Small businesses with excellent credit often pay an average of 7 percent to 8 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.
• Local branch support: Traditional banks offer bank branches where you can talk with a loan specialist about your loan face to face.
• Borrower incentives: Banks may offer incentives to attract prospective borrowers, such as reduced APRs and rewards programs.

Cons

• Documentation requirements: Applying for a small business loan with a traditional bank typically requires submitting extensive documentation.
• Not ideal for bad credit or startups: Banks often have minimum requirements of a 670 credit score or higher and two or more years in business with proof that you’re operating profitably.
• 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, whereas online lenders can often fund within 24 to 48 hours.

Can I use a personal loan from a bank for my business?

Qualifying for a small business loan at a bank can be challenging since banks typically look for experienced, established businesses with a strong credit history. But it may be possible to take out a personal loan instead.

Personal loans are a popular alternative to traditional business loans. They often don’t require collateral and have interest rates that won’t get as high as many bad credit business loans. But interest on personal loans is not tax-deductible. Personal loans are considered consumer debt and do not qualify for tax deductions like business loans.

Before applying for a personal loan to use for business expenses, borrowers should check with the lender to ensure there are no restrictions on using the loan for business purposes.

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.

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. Your personal credit history shows the bank how you might manage your business finances based on your personal financial habits.

If you already have established a business credit score, the lender may also look at that score to determine your creditworthiness. Various business credit bureaus, such as Dun & Bradstreet, Equifax and Experian, review a business’s credit score. You can build your business’s credit score by opening trade credit with suppliers that you work with, using a business credit card or business line of credit and making on-time payments.

Revenue

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. Many national banks have a minimum annual revenue requirement between $150,000 and $250,000.

Years in business

Banks typically require applicants to have a minimum of two years in business to qualify for a loan. Some banks will accept as little as six months in business or offer specific products to startup businesses.

However, low time-in-business requirements are hard to find with traditional banks since lending to startup businesses poses a higher risk. You can increase your chances of getting approved with less experience if you have a healthy flow of revenue.

Business plan

Many banks also like to see a business plan from small business applicants. A business plan outlines business goals and maps out a strategy for achieving those goals, especially for turning a profit. This plan should also outline how you intend to use the loan funds and how additional financing will benefit your business.

Collateral

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 collateral could be the inventory, equipment or other assets you’re using the loan to buy, or it could be other business assets.

Many business loans will also require you to sign a personal guarantee, backing the loan with your personal assets. If you fail to make loan repayments, the lender can seize any collateral you put up or personal assets if you sign a personal guarantee.

Documentation

When applying for a small business loan, gathering and preparing the necessary documents will help the application process go smoothly. 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 bank business loan or want to review other options, there are several alternatives to consider.

• Business credit cards: Business credit cards can often be approved more quickly than a bank business loan and may not ask for financial documents, speeding up the approval process. It usually offer rewards and the potential for a lower or introductory APR. Borrowing is also flexible — the card can be used when needed.
• Online lenders: Online lenders feature quick and easy application and funding timelines, often funding within 24 to 48 hours. They are also typically more willing to work with business owners with bad credit and startups. But 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 that advance a portion of your business’s unpaid invoices. Invoice financing allows you to get money based on invoices that you use for collateral to get a loan. And as you get paid for those invoices, you repay the debt. Using invoice factoring, you still get an advance of money based on invoices. But a lending company buys the invoices directly from you and collects the invoices from your clients. You get paid any money left over after the factoring company takes out 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. These loans are usually geared for businesses in underserved communities. The lender may provide mentoring and education to support the small business getting the loan. Loans may also offer lenient eligibility requirements and competitive interest rates.

Bottom line

Before applying for a bank small business loan, consider the types of bank business loans that will offer the best terms, interest rates and loan features to suit your funding needs. A bank may be your best chance at a low-interest business loan if you have good-to-excellent credit. But funding times with a traditional bank may be slower than online lenders, and you may need to meet strict requirements to be eligible, such as having two years in business.

Frequently asked questions about a bank small business loan

• Do banks give loans to small businesses?

  Yes, banks offer business loans to small businesses all the time, though you may be more likely to get approved at a small bank. According to the 2023 Small Business Credit Survey, 66 percent of applications for loans, lines of credit or merchant cash advances were at least partially approved at large banks. Seventy-six percent of applications were at least partially approved at small banks.

• How do I approach a bank for a small business loan?

  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.

• Which bank is best for a small business loan?

  The best bank for a small business loan will depend on your specific funding needs. You might choose to go with the bank where you do your business banking since you already have an established relationship. Or you may talk with several banks to decide which bank will offer you the best loan offer.