How to Get a Bank Business Loan

Bank Business Loans

You can get business loans from many different lenders. But most business owners go to the places they’re familiar with: banks.

Getting a business bank loan is different from getting other types of loans. They’re harder to get. There’s often more paperwork and more waiting. It can be a hassle.

On the other hand, banks have huge amounts of assets. This helps them offer low interest rates. And they’re absolutely everywhere. You could apply for dozens of bank business loans without much difficulty.

We’ll take a look at the advantages and disadvantages in more detail later. First, let’s look at the process of getting a bank business loan:

1. Understand What Kind of Loan You Need

There are lots of options when it comes to business loans from banks. Term loans, invoice factoring, SBA loans, cash advances, lines of credit, and more are available.

Spend some time figuring out which kind of loan will fit your needs. Getting the wrong type of loan could put you in a more difficult position than you started in the first place.

You’ll also need to know how much money you want. The average business loan in 2018 was over $660,000. You might need double that–or a small fraction. But you need to know how much you’re applying for. The amount of your loan will determine other things, including terms and how likely you are to get approved.

The biggest factor in choosing the type and value of the loan you need is what you’re using the loan for. Are you looking to buy a new building? Hire a few new employees? Finance equipment? Improve cash flow? You can do all of these with a business loan. And they all might benefit from different types and amounts of loans.

2. Prepare Your Documents

Banks require a lot of information from you before deciding whether to give you a loan. Here are some of the most common things they’ll request:

  • Personal ID
  • Resume
  • Business plan
  • Business credit report
  • Income tax returns
  • Business financial statements
  • Proof of collateral
  • Franchise agreements and other legal paperwork

Every bank will have different requirements. Consult with your lender to see what they need, and make sure to provide as much documentation as possible. The more details you provide up front, the faster the bank will be able to make a decision.

3. See If You Qualify

Once you’ve started gathering information about your business, you’ll be able to see what kind of loan you qualify for. For example, some loans require a certain amount of monthly revenue, and you might find that you don’t make quite that much after you’ve gathered your papers.

You’ll also want to take a look at your personal and business credit reports. Most banks offer the best loan rates to business owners with credit ratings in the mid-600s or higher. Businesses can have credit scores too, and yours should be above 700 if you want the best terms.

There are usually other requirements, too. You might need a minimum amount of monthly revenue, time in business, or business experience. Every lender has their own requirements, so you’ll need to consult your bank.

4. Submit Your Application

Once you’ve collected all of this information and figured out what kind of loan you should apply for, you can submit your application. This can be a complicated process; banks often have many requirements and you’ll need to prove that you can meet them. That means a lot of paperwork.

Be extra careful when filling out your application. You can fix mistakes later, but it will delay the process (which can already take a long time).

5. Wait While the Bank Makes a Decision

Once you’ve submitted your application, you wait. Possibly a long time.

For example, you might wait two to three months to get a Small Business Administration (SBA) loan. Even a traditional loan from a bank could take a month or more. If you need cash fast, this can feel like an eternity.

To speed up the process, it’s important that your application is complete. Don’t skip out on any details, and don’t try to obscure facts, even if they don’t reflect well on your business.

Because of all this work, it’s important to apply for a business loan as early as possible. Of course, you don’t always know when you need funding. But when you think there’s a chance, it’s worth starting your application.

While you’re waiting, the bank will be looking over your application, checking your credit history, and determining how much of a risk it is to lend you money.

6. Get Approved

If the bank decides that lending to you is an acceptable risk, you’ll get approved. How likely you are to get a business loan depends on your application and where you apply for a loan.

Institutional lenders, for example, approve around two-thirds of applications, while big banks approve around 25%. Credit unions can be very selective, as well.

Of course, many factors affect whether the lender approves your loan. Once you’re at this point in the process, though, the decision is out of your hands.

7. Get Your Money

If you’re approved, the bank will deliver the money at its earliest convenience. It could be a couple days. It could be a week. It depends on the bank. Unfortunately, the payment schedule can be unpredictable. If you need cash as fast as possible, you might be put in an awkward situation while you’re waiting for the money to come through.

8. Start Making Payments

Once you’ve received the money from your loan, you start making your monthly payments. These are determined ahead of time by the amount of money you borrow, the interest rate, and the loan term. A large loan paid off over a short period of time is going to have much higher monthly payments than a smaller loan with a longer term.

You may have some flexibility to negotiate the terms earlier in the process, but once you start making payments, you’d best be on time and able to make your payments.

Making your first payment is the end of the process. You’ve successfully gotten a business loan from a bank!

Advantages of bank business loans

Now that you’ve seen the process for getting a business loan from a bank, let’s talk about why you might want to do so.

  1. Working with a bank is convenient. You probably already bank somewhere that offers business loans, and you might have a relationship with a banker there. That helps a lot in moving things along.
  2.  Banks can offer very low interest rates—sometimes as low as 2%. That’s almost like getting free money. As we saw, getting approved at a big bank can be more difficult. But it’s often worth trying.
  3. You can get SBA loans through banks. These loans are great for small business owners because the SBA guarantees 85% of them. So if you default, you’re only on the hook for 15%. That’s a huge safety net that makes it easier to borrow a lot of money if you need it.

But there are some disadvantages to getting a loan from a traditional lender, too.

Disadvantages of bank business loans

So why might you decide not to get a business loan from a bank? Here are a few reasons.

  1. Banks require high credit scores. If you don’t have a score in the mid-600s or higher, you won’t get the best terms—and you might not get approved at all. Banks give the best terms to borrowers with credit scores over 700.
  2. Bank loans come with long wait times. You could wait a few months before you get approved—and it could still be a few days after that when you get your money. This can put you in a tough spot if you need cash for something pressing, like repairing equipment.
  3. Banks often ask for collateral. Especially if a bank thinks you’re a high risk, they could ask you to put up an asset to back your loan. That means if you default, you’ll lose it—probably something like a building or a vehicle. Putting your business on the line to get a loan isn’t always a smart decision, but you’ll probably have to do it if you get a loan from a bank.
  4. You’ll need to do more paperwork. Banks require a lot of information, including business plans, financial records, and tax returns. If you’re good at filing all of your information, this shouldn’t be too hard. But few people are organized enough to have everything on hand right away. Alternative lenders often require much less documentation.
  5. Banks prefer larger companies. More than 70% of small businesses want loans under $250,000. But it can be tough to find banks willing to make those smaller loans.

Is a Bank Business Loan Right for You?

Banks are usually the first stop for businesses when they’re looking for a business loan. And it’s understandable—there are some big advantages to getting business funding from a bank.

But banks reserve their best terms for borrowers with a great history of successful business. That can be tough for people with bad credit or only a few months in business.

And no matter what your credit history, you’ll probably be waiting at least a couple months to get your money. In the fast-moving world of business, that can feel like a lifetime.

Business owners should think carefully about whether a bank business loan is the right choice. If you have bad credit, need money fast, or haven’t been in business for long, a business loan from an alternative lender might be a better right choice for you. Below are some helpful links to inquire about and see if you qualify for a bank business loan.

Popular Bank Business Loan References

  1. Bank of America
  2. PNC Bank
  3. Chase Bank
  4. CitiBank
  5. Wells Fargo
  6. Capital One
  7. U.S. Bank
  8. Citizens Bank
  9. TD Bank
  10. M&T Bank