How to get a small business loan

Yes, there are different types of Small Business Administration loans, but all require a core set of documents. Here’s how you can apply to get a loan via the SBA.

If you’re planning to expand your business or upgrade your equipment, you’re likely considering the Small Business Administration (SBA) loan program.

To be considered for an SBA loan, you need to apply for a conventional loan under SBA guidelines with one of the organization’s banking partners. The SBA provides a loan guarantee to its partner lenders, allowing them to offer greater flexibility in terms and rates.

While there are different SBA loan programs, here’s what they have in common: All applications share a common set of paperwork that must be filed.

This core set includes the following:

Business structure and leadership

You’ll need to describe the purpose and structure of your business and provide a copy of your business plan, complete with projected financial statements. You’ll also need to describe your business and management experience. The lender will also gather personal information, such as previous addresses, educational background and criminal records for you and your leadership team.

Legal

You should be prepared to provide your articles of incorporation, franchise agreements, licenses or registrations required to do business in your state and industry, and any applicable lease documents.

Creditworthiness

Both your personal and business credit reports, income tax returns and bank statements will be reviewed. You’ll also need to provide business financial statements, including a profit and loss statement, cash flow and balance sheet and a complete accounting of all business debt and creditors. Most lenders have a collateral requirement and will determine which of your assets can be used as collateral through your financial statements.

Another factor lenders carefully examine is your debt-to-worth ratio. High personal investment with minimal company debt makes you a more attractive credit risk because you have more financial skin in the game.

Other financial measures of interest to the lender are the working capital you have on hand to manage the business, management of accounts receivable and payable, and how quickly you deliver your product or service after the order is placed.

Purpose of the SBA loan

Provide a detailed description of what you want to accomplish with your SBA loan and a thorough discussion of exactly how the money will be used to grow your business and, ultimately, improve productivity and profitability. You need to make a strong case that you are a good risk who will repay the SBA-serviced loan in full.

Before you gather these loan documents, talk to your lender about your goals for your business. That way, you can get suggestions about the product that best suits your needs and focus your efforts on applying for the right loan. Armed in advance with the right information, you’ll be well prepared to assemble a successful loan package.

SBA Loan Resources

Set up your business plan for success with an SBA Loan.

3 Tips for How to Get a Business Loan From a Bank

Understanding what your bank needs in the application process ahead of time can make the overall process easier to wade through.

Additional preparation, like having a business plan and your financials in order, can help ensure that you are approved for a business loan.

It is important to pick the right type of business loan for your specific needs since failing to do so will reduce your chances for approval.

This story is for any small business owner looking to obtain a business loan from a major bank as conveniently as possible.

Unless your small business is completely self-funded or backed by investors, you’re likely going to need a small business loan to help you start or grow your business. Commonly offered by banks, business loans offer a much-needed infusion of cash to help cover most costs, though many small business owners find it hard to be approved. When seeking a business loan from a bank, it’s important to keep the following information and tips in mind so you can get approved more quickly and easily.

What to consider when choosing a business bank loan

Business loans from a traditional bank are some of the most sought-after forms of financing options for small businesses because of the safety nets inherently found in traditional banking. Backed by the federal government, banks, and most of their products, come with assurances that many nontraditional and online banking lessors don’t. Also, bank loans generally carry lower interest rates than loans from online lenders.

As a small business owner, you have many options to choose from regarding the different types of business financing. Each type of loan comes with its own set of stipulations, requirements, and other criteria that may make one a better fit for your financial situation and repayment abilities than others.

After deciding that your small business would benefit from a business loan in the short term, you must nail down exactly what type of loan you want to pursue. Failing to do so can result in lost time, sunk costs and other major headaches for any small business. [Related: See Our Best Small Business Loans Picks Page]

“One of the biggest mistakes that small business owners make when applying for a business loan is choosing the wrong kind of business financing,” wrote Ben Shabat for “It’s best to investigate each kind of funding option … before applying for a business loan, that way you don’t waste time attempting to obtain a solution that might not actually address your financial problem.”

Editor’s note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Common types of small business bank loans

When looking at potential financing options, here are some of the more common types of business loans to consider:

Business term loan: This loan is your traditional bank loan option, provided by a financial institution, and it operates similarly to a personal loan in some aspects. Businesses often seek this type of loan when they need funds for major investments, business upgrades, acquisitions or other major needs. Depending on the agreement, these loans tend to feature a fixed interest rate, with the lender requiring a monthly payment or quarterly payment schedule. These loans also have a fixed end date, with intermediate-term loans running for three years or less and long-term loans running for 10 years or possibly longer.

This loan is your traditional bank loan option, provided by a financial institution, and it operates similarly to a personal loan in some aspects. Businesses often seek this type of loan when they need funds for major investments, business upgrades, acquisitions or other major needs. Depending on the agreement, these loans tend to feature a fixed interest rate, with the lender requiring a monthly payment or quarterly payment schedule. These loans also have a fixed end date, with intermediate-term loans running for three years or less and long-term loans running for 10 years or possibly longer. Line of credit: When considering a business line of credit, think of it like a credit card. If approved, your small business is able to borrow up to a certain amount of money from the bank. As you accrue debt, you only pay interest on the amount you’ve used so far. As long as you stay within that credit limit, this option provides much more flexibility in how the money is used. This option is great for small businesses that have a steady flow of income, a decent credit history, and in some cases, are willing to put assets up as collateral. [Related content: What Is a Revolving Line of Credit?]

When considering a business line of credit, think of it like a credit card. If approved, your small business is able to borrow up to a certain amount of money from the bank. As you accrue debt, you only pay interest on the amount you’ve used so far. As long as you stay within that credit limit, this option provides much more flexibility in how the money is used. This option is great for small businesses that have a steady flow of income, a decent credit history, and in some cases, are willing to put assets up as collateral. Commercial mortgage. If your business is looking to acquire a location to expand, a commercial mortgage is the type of loan you need. Commercial mortgages are secured through liens on a commercial property and act similarly to home mortgages. Suppose your credit history is nonexistent or unflattering. In that case, a bank can require that the business owner or any principals personally guarantee the loan, promising to pick up the tab in the event the business goes under. While most residential mortgages typically last for 30 years, commercial mortgages are significantly shorter.

If your business is looking to acquire a location to expand, a commercial mortgage is the type of loan you need. Commercial mortgages are secured through liens on a commercial property and act similarly to home mortgages. Suppose your credit history is nonexistent or unflattering. In that case, a bank can require that the business owner or any principals personally guarantee the loan, promising to pick up the tab in the event the business goes under. While most residential mortgages typically last for 30 years, commercial mortgages are significantly shorter. Equipment lease. Not unlike leasing a car, equipment leases spread out the cost of a major equipment purchase over a set amount of time. Most lessors don’t need a large down payment on a lease, and once the lease has run its course, you can opt to either return the equipment or pay the rest of the equipment’s value based on the life of the lease and the appreciation of the item in question. Though the monthly payments will be lower than the upfront cost of just purchasing a piece of equipment, it’s important to note that interest will add to the price tag.

Not unlike leasing a car, equipment leases spread out the cost of a major equipment purchase over a set amount of time. Most lessors don’t need a large down payment on a lease, and once the lease has run its course, you can opt to either return the equipment or pay the rest of the equipment’s value based on the life of the lease and the appreciation of the item in question. Though the monthly payments will be lower than the upfront cost of just purchasing a piece of equipment, it’s important to note that interest will add to the price tag. Letter of credit. A letter of credit is a guarantee from a bank that a seller will receive the correct payment owed on time. The guarantee comes in two different flavors: seller protection or buyer protection. In the former, the bank agrees to pay the seller if the buyer fails to make their payments and is generally offered for international transactions. Funds for this type of letter are sometimes collected from the buyer upfront in a sort of escrow. Buyer protection is offered in the form of a penalty to the seller, like a refund. Banks provide these letters to businesses that apply for one and have the credit history or collateral required.

A letter of credit is a guarantee from a bank that a seller will receive the correct payment owed on time. The guarantee comes in two different flavors: seller protection or buyer protection. In the former, the bank agrees to pay the seller if the buyer fails to make their payments and is generally offered for international transactions. Funds for this type of letter are sometimes collected from the buyer upfront in a sort of escrow. Buyer protection is offered in the form of a penalty to the seller, like a refund. Banks provide these letters to businesses that apply for one and have the credit history or collateral required. Unsecured business loan. An unsecured business loan doesn’t require the borrower to provide any collateral against the amount they’re borrowing. Since it’s friendlier to the borrower than the bank, the lender charges a significantly higher interest rate than it would for a loan backed by collateral. This kind of loan is most commonly provided through an online lender or other alternative lenders, though traditional banks have been known to offer unsecured loans to customers with an existing relationship with the institution. Without any assurances in the form of collateral, unsecured business loans are often much harder to obtain than other loans. The inherent risk involved in an unsecured loan naturally means it will generally be offered as a short-term loan to alleviate the lender’s risk.

Alternatives to bank loans

Bank loans are not your only option. You can work with alternative lenders to secure the funding you need. Alternative lenders are an option to consider if your business doesn’t qualify for a traditional loan. Here are two alternative lending options to consider:

Online loans: Online lenders are normally more flexible with loan qualifications, and the turnaround time is faster, but the rates may be higher than traditional loans. Lendio is one such online lender. You can submit an application through their secure interface.

Online lenders are normally more flexible with loan qualifications, and the turnaround time is faster, but the rates may be higher than traditional loans. Lendio is one such online lender. You can submit an application through their secure interface. Microloans: Microloans offer a small amount of money to help you cover certain costs within your company. Microloans usually have a relatively low interest rate. The disadvantages of microloans include a shorter time frame to pay back the loan, and some lenders require that the money from the microloan be spent on specific expenses like equipment purchases.

Terms to watch for in a business loan contract

Besides the type of loan you apply for, consider the details of the loan. Each loan comes with its own interest rate and loan term, among other points of consideration that are as equally important as the type of loan you take on. It’s important to read the contract in full to make sure there aren’t hidden terms or fees.

When applying for a bank loan, check the following:

Rates: Aside from the amount of money you wish to borrow, the loan rate – otherwise known as the interest rate – is something you absolutely must determine. Loan rates differ based on the type of loan you’re seeking, the bank you’re borrowing the funds from and your personal credit score, among other things. When seeking out a business loan, you want one with a low interest rate, if possible. Depending on the type of loan, you may see rates range anywhere from 3% up to 80% annual percentage rate.

Aside from the amount of money you wish to borrow, the loan rate – otherwise known as the interest rate – is something you absolutely must determine. Loan rates differ based on the type of loan you’re seeking, the bank you’re borrowing the funds from and your personal credit score, among other things. When seeking out a business loan, you want one with a low interest rate, if possible. Depending on the type of loan, you may see rates range anywhere from 3% up to 80% annual percentage rate. Term: A business loan’s term is the length of time you have to pay the loan off. Like the loan rate, you generally want a shorter loan term if you can afford the payments. The longer your rate is, the more interest you will pay over time and the more your loan will cost overall.

A business loan’s term is the length of time you have to pay the loan off. Like the loan rate, you generally want a shorter loan term if you can afford the payments. The longer your rate is, the more interest you will pay over time and the more your loan will cost overall. Banking relationship: To be considered for a bank business loan, many institutions require that you have an existing relationship with them first. If this is not the case, you’ll need to open an account with a bank and establish a working relationship with it over time.

Key takeaway: Carefully consider the type of loan your business will need and the type of agreement you will have to enter once approved.

What do banks look for in a business loan application?

When applying for a business loan, it’s imperative that you keep a bank’s requirements in mind. Each bank has its own loan application forms. Many institutions offer their applications online, though some still require you to fill out a paper form. The bank may have a preferred method of applying based on the loan amount and the kind of loan you’re seeking.

In addition to how a bank prefers to receive a loan application, you should also consider the prerequisites that a bank needs in order to be considered for approval. Many factors go into a potential approval, so prior to applying, be sure to check on the following:

Credit score: A high credit score shows that you’re reliable when it comes to paying down your debt. A good credit score not only can make or break your application but also impacts the interest rate and loan term length the bank offers you.

A high credit score shows that you’re reliable when it comes to paying down your debt. A good credit score not only can make or break your application but also impacts the interest rate and loan term length the bank offers you. Purpose of the loan: Some loans come with stipulations for how they’re used. For instance, a lease is generally used to obtain equipment, while a mortgage is for real estate purchases.

Some loans come with stipulations for how they’re used. For instance, a lease is generally used to obtain equipment, while a mortgage is for real estate purchases. Available collateral: If your credit score isn’t good enough, some lenders will make an exception if you can put some valuable items (usually property) up as collateral. If you fail to meet the agreement’s repayment guidelines, you can lose that collateral to the bank, which will likely sell the assets in question to recoup some of its losses.

If your credit score isn’t good enough, some lenders will make an exception if you can put some valuable items (usually property) up as collateral. If you fail to meet the agreement’s repayment guidelines, you can lose that collateral to the bank, which will likely sell the assets in question to recoup some of its losses. Cash flow: Banks want to know you have a steady income stream. Traditional lenders could be skittish about approving your loan without a consistent cash flow. Many lenders require a certain amount of revenue before even making such a consideration.

Banks want to know you have a steady income stream. Traditional lenders could be skittish about approving your loan without a consistent cash flow. Many lenders require a certain amount of revenue before even making such a consideration. Financials: Cash flow history is one type of document that the bank will want to see prior to approving a loan. You will also need to show well-researched financial projections for your business.

Cash flow history is one type of document that the bank will want to see prior to approving a loan. You will also need to show well-researched financial projections for your business. Business plan: Any type of lender can ask for your business plan before reviewing an application. There are many resources available to help you get started on writing an effective business plan for your organization.

Any type of lender can ask for your business plan before reviewing an application. There are many resources available to help you get started on writing an effective business plan for your organization. Capital: Working capital refers to how much money the company has on hand to cover operating costs. You may be considered a high-risk investment if you don’t have any working capital.

Key takeaway: Only you know your business’s financial situation. Gathering the appropriate information can assuage a lender’s concerns about your business’s ability to repay financing.

Get ready to apply for a business loan

Once you’ve found the right loan for your needs and considered what your bank will need from you, you will need to apply for the loan. Keeping the following three tips in mind will make the application process smoother, since you will already have the information available when asked by the potential lender.

Get your financials in order. According to one professional, an applicant should have their financials ready to go. To do this, ask the bank what information they will need when going through the application process relative to the type of loan you’re seeking and the size of the request. To this end, you should generally try to have three years’ worth of business and personal tax returns on hand as well as year-to-date profit and loss figures, balance sheets, accounts receivable aging reports, and inventory breakdowns if possible. If you have a CPA or bookkeeper, you can usually get all of that information from them, though accounting software like QuickBooks or Quicken can just as easily generate most of that information as well. Create a business plan. If you’re seeking a loan as a startup, it’s imperative that you also have your business plan drawn up. If you don’t have that laid out in writing just yet, there are plenty of free resources that you can use, including local Small Business Development Centers, SCORE and Economic Development Centers. Estimate how much you’re going to need. If you need a loan for a one-time purchase or another financing option, it’s also important to have estimates for the work or purchase ready to show the loan officer.

“Lenders want to see that you’ve carefully thought through your business goals, know how much you need to achieve them and have a specific plan to use the money wisely,” said Karen Axelton. “Whether your goal is to open a second location or buy new machinery, run the numbers to see how much it will cost. Also calculate how loan repayments will affect your business budget going forward.”

Key takeaway: For a smoother lending process, prepare your financial information and business plan in advance so it’s ready to go when you meet with your bank.

Bank loans

Get to know Bank Loans

Gerri Detweiler • January 7, 2021

How Do Bank Loans for Business Work?

A business loan works much as a personal loan does. Business loans are offered by banks (as well as other lenders) who, in exchange for the money they lend you, will charge interest on top of the loan amount and possibly an origination fee or annual fee. Typically, business term loans are paid back over a set amount of time, with regular repayments deducted from your business checking account. Lines of credit work similarly to credit cards.

Need more money? Sign up for Nav to see what options are available. Get started

What You Need to Know About Bank Financing for Business Loans

As a long-term financing option, traditional bank loans have a lot going for them. At the same time, there are a few drawbacks you should be aware of before diving in.

Pros of Bank Loans

Pros Very low, fixed interest rates

Predictable monthly payments

Helps build business credit

Professional banker relationship

Lending available for many uses

Traditional bank loans typically have lower interest rates than other financing options like credit cards, payday loans, or short-term loans from online lenders. And you may build your business credit when you make on-time payments if the lender reports payments to commercial credit agencies. (Many banks report to the Small Business Financial Exchange and may report to other credit reporting agencies.)

There should not be a lot of surprises as you repay the loan: you’ll know the terms of your loan when you sign your loan agreement. However, keep in mind that payments on lines of credit will vary, depending on how much you borrow. Additionally some loans may have variable interest rates, which means payments may change if the interest rate they are tied to may change. And some loans may feature balloon payments. Make sure you understand the terms of your loan before you sign.

Many banks offer you the assistance of a professional banker or loan officer at a local branch you can turn to when you have questions about your loan or other financial products that might benefit your company.

And there are many things you can use your business loan for, from stabilizing cash flow to buying equipment or financing commercial real estate. Many banks also offer SBA loans.

Cons of Bank Loans

Cons Lengthy paperwork

Longer wait time

Requires strong credit

Usually requires specific collateral

If you have less than perfect or even bad credit, you may have trouble qualifying for a traditional loan. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials.

And if you’re in a hurry, you may be disappointed: these loans can take longer to apply for: the whole process can last about one to three months.

If you don’t have a solid credit history and financial profile, you will likely need to provide collateral for your loan — if you qualify at all. Traditional lenders like a bank don’t want to lend to borrowers that have a weak personal credit score or a shaky business credit profile.

Most banks prefer to make larger loans, so if you’re looking for a few grand, you might be out of luck at the local bank where you have a checking account or personal loan. Even loans of $50,000—$250,000 may be too small for some lenders, since the larger the loan, the more profit they make.

Banks are often slow to approve or reject applications, and the reasons for rejection are often not clear. Borrowers often complain about the lack of transparency in the approval process. (Learn more about what lenders do and don’t have to tell you when they reject a commercial loan.)

Your application may be rejected simply because your business operates in an industry in which the bank doesn’t make loans (or has already reached a maximum amount of loans for the year). Industries like real estate, retail, and restaurants may be considered a higher risk, for example.

And if you run a startup, you may find it more challenging to get a traditional bank loan; it’s unusual for traditional lenders to loan to startups. Many will require at least two years in business and some require four to five years of sufficient revenues.

Still, if you are able to qualify for a traditional bank loan, it can be an affordable way to maintain cash flow or get funds to expand your business.

Best Banks for Small Business Loans Offers

There are three primary types of financial institutions that offer business loans to consider.

Traditional Banks

This is usually a business owner’s first stop for small business financing. If you have a longstanding relationship with your bank — maybe you’ve had both business and personal checking accounts with them for decades or have taken out a personal loan or personal line of credit — you may be able to qualify for a better financing product than if you walked into a bank you had no relationship with.

Community Banks

These banks are often locally owned and operated. They are invested in their communities, and may be more flexible and helpful for business owners. You may have a more personalized experience at a community bank.

Credit Unions

If you’re a member of a credit union, this might be a good bet for a great interest rate on a business loan. Credit unions tend to beat larger traditional banks in terms of offers for loyal customers since they are nonprofits that don’t have to pay state or federal taxes, and they usually pass these savings onto customers. They may also offer loans in smaller loan amounts than traditional banks.

Alternatives to Bank Loans

In the event that you don’t qualify for a traditional bank loan, you do have other options, though be aware that they may come at a higher price.

Online Lenders

Technology has, of course, changed the lending industry, and now online lenders are competing with traditional banks in a major way. Many offer streamlined application processes and faster payment, so consider them as well. They do, however, tend to charge more in interest and have faster payback periods, usually just a few months to a year or two.

Startup Loans

If your startup hasn’t been in business for long, you probably won’t qualify for a bank loan, but know that there are lenders that specialize in loans for startups, and they usually have a lower threshold for time in business or credit scores to get approved.

Equipment Financing

If you’re looking to purchase a vehicle for your business, or maybe heavy machinery or kitchen equipment, equipment financing could be a good solution. The equipment you are purchasing acts as the collateral for the loan, and rates tend to be reasonable.

Invoice Financing

Another alternative to traditional financing is invoice financing. You borrow against the value of outstanding invoices, minus a fee to the lender.

Which Bank Loan Is Right For My Business?

Choosing the financial institution to apply for a loan with is just one decision. You also need to determine which specific type of small business financing is right for you.

First, will you need a secured loan? Secured loans require collateral while unsecured loans do not. Most unsecured loans require higher credit scores and solid financials, though typically these are only offered to a bank’s best and most creditworthy customers. If that doesn’t describe you or your business, you may need to put up collateral to get a loan. Some traditional banks may not lend you money without collateral.

Be aware that sometimes what’s called an “unsecured loan” is a bit of a misnomer: though they don’t require specific collateral, banks may rely on a UCC lien and personal guarantee to secure the loan. Technically, these loans are “secured” by that lien and guarantee, though they are touted as being unsecured.

As an FYI, if you are applying for an SBA loan through your bank, keep in mind that you aren’t automatically discounted from being approved for SBA loans if you don’t have collateral. The SBA will generally take collateral if you have it, though, and that can include personal assets like real estate.

Moving on, what are you looking to do with the funds you obtain? There are specific types of loans for different purposes, like real estate loans and equipment financing.

If your credit isn’t top-notch, you will need to look at online lenders, who may offer credit even if your scores are lower than what the bank might approve.

“It’s very competitive,” says Coleman. “There are a lot of lenders out there willing to make these loans. The entrepreneur has a lot of choices of which lender to work with.”

Do you need more financing? Sign up for Nav to see what financing options are available for your business. Get matched

What are the Requirements to Qualify for a Small-Business Bank Loan?

While requirements to qualify for financing with traditional banks may vary in the details from one lender to another, in general, they look for companies that have been in business a minimum of two years, and that have solid financials. They will want to look at bank statements and tax returns. They may also require financial statements, such as an up-to-date profit and loss statement or a balance sheet. They may also require a business plan to get a sense of your business’ financial health and plans for growth.

Most banks prefer to see annual revenues of $1 million or more, as well as a low personal debt-to-credit ratio. In general, you’ll likely need personal credit scores in the 700s, but some banks will approve a borrower with a personal score of 680+ provided other business metrics demonstrate a healthy business and the ability to service debt. The SBA will sometimes approve a loan to a borrower with a FICO score of 660.

Many banks may also have a minimum amount they want you to apply for, and may not fund loans under say $250,000, preferring to deal with loan amounts of $500,000 or $1 million or more. The SBA is encouraging its lenders (including credit unions) to approve loan amounts under $150,000 by reducing the fees to lenders in those small loan amounts.

Bank Loan Rates & Terms

The better your credit reports and credit scores, the more loan options you will have at the bank. For example, a business line of credit is only available to the most creditworthy borrowers. In other words, the more stable and low-risk you are, the better loan terms and more competitive rates you will likely qualify for.

That being said, good credit scores are not necessarily a guarantee of credit approval, but it does provide more options to a more qualified borrower.

Best Uses for Bank Loans:

Traditional bank loans are one of the business financing options (along with SBA loans) with the most diversity in terms of how you can use them to grow your business:

Purchasing inventory

Buying equipment

Investing in commercial real estate

Refinancing

Acquiring other businesses

Maintaining steady cash flow

Debt consolidation

Purchasing Inventory

Borrowing to purchase inventory is a great use of capital, but you’ll want to make sure you understand the repayment terms.

A term loan from the bank typically does not offer loans with terms shorter than three or four years, so it might not be the best solution to meet short-term needs like purchasing quick-turnaround inventory. It doesn’t make sense to tie up capital making loan payments for several years for an asset, like inventory, that will be sold this year.

Buying Equipment

An equipment loan to pay for expensive equipment or machinery is a great use for a loan from the bank. The bank will likely use the equipment you are buying as collateral for the loan.

Investing in Commercial Real Estate

Many lending institutions offer commercial real estate loans specifically for buying land, office space, or retail space. SBA 504 loans may be another option, with the bank financing a portion of the loan. You may also use these loans to renovate or refinance real estate you already own.

Refinancing

If you already have a business loan that perhaps doesn’t have the best rates, you might decide to take out a new loan to refinance old debt. This might help you save money if the newer interest rate is lower than the old one, depending upon your loan purpose.

Be aware though, sometimes refinancing a short-term loan with a longer-term bank loan might reduce your periodic payment, but it could increase the total cost of the loan because more interest will accrue over the longer term. It might be an oversimplification, but most people would never buy a car with a 30-year mortgage or purchase a new home with a four- or five-year auto loan. In other words, short-term financing needs and longer-term financing needs are very different.

Acquiring Other Businesses

Ready to expand your empire? Not having the capital isn’t an excuse for a creditworthy business with a strong track record. If you’re looking to buy another business, a traditional bank loan could provide the funds you need to take your business to the next level.

Maintaining Steady Cash Flow

Running a business means that sometimes, cash flow will be bumpy. Having access to cash through a loan means you’ll always have the money you need to cover unexpected expenses, pay employees, and manage overhead.

This is another instance where a longer-term loan from the bank may or may not be the best solution depending on your business situation. A cash flow crunch is usually a short-term need and can sometimes be best met with a line of credit or other shorter-term financing.

Debt Consolidation

Another use for a loan is to consolidate debt. If you have balances on several business credit cards or loans, a debt consolidation loan can roll all those up into one monthly payment with one consistent interest rate that might help you save money. However, you’ll find that banks are often reluctant to make debt consolidation loans to borrowers with a significant amount of debt.

How to Apply for a Bank Loan

Each bank may have slightly different requirements for the application process, but you can expect to be asked for:

Information on your business, including contact information, industry, business entity, and time in business

Financials, including tax paperwork, bank statements, and balance sheet

Owners’ or officers’ information

Tax ID or social security number

Because bank loans can take a while to process, make sure you start the application well in advance of needing the funds. Spending a little extra time making sure you have everything you need can save time later.

Is a Business Bank Loan Right For You?

While there are many advantages of bank loans, you’ll want to carefully consider the pros and cons of applying for one. While banks may offer some of the best rates available, you have to be prepared to put in serious time and effort in the loan application process. Here are some other items to consider before pursuing a business bank loan:

You’ll likely need excellent credit to qualify. If you have poor credit, it may be worth waiting to apply for a business bank loan and working on your credit scores first. This will put you in the best position to get through the financing application process with relatively little difficulty down the road. (Get your free business credit scores here.)

Not all banks check or require good business credit. But if you don’t have high credit scores and/or a solid business credit history, you may fare better applying with online lenders for short-term loans or opening business credit cards to build your credit.

Banks want to see that your business is bringing in a healthy amount of cash flow. They will want to look at your business bank account statements to determine if you have a healthy enough average daily balance. They want to confirm that you have the cash flow to service debt. They will likely evaluate your business’ debt-to-credit ratio. Separating your personal and business finances is essential to help banks see what money your business is bringing in and boost your chances of getting a loan.

You’ll likely need to have an established business to work with a bank for business lending. Banks like to minimize their risk when it comes to small business loans, so you should expect they will require you to have a couple of years in business under your belt.

Banks will want to know the purpose of your loan. While bank loans are available for many uses, your lender will want to know how you are going to use the loan before offering you cash. And what you plan to use the money for may help a bank determine the best small business financing option for you. One use of a bank loan, for example, is to finance equipment. Bank equipment loans are often easier to qualify for than other bank loans because you can use the equipment being financed as collateral for the loan.

Nav’s Verdict: Bank Loans for Business

If you’re aiming to grow your business or simply keep cash flow even, business lending through traditional banks might be a good option.

But if you don’t currently qualify for a business loan, consider working on building your credit, so that, over time, you are more appealing to business bankers.