As a small business owner, it’s important to know your funding needs and which lenders and loan products offer the best fit. Finding out about your options and securing a loan can be a challenge, though.
In this article, you’ll learn about the pros and cons of getting a traditional bank loan and tips to help secure capital for your small business.
Pros of traditional bank loans for small businesses:
Familiarity: To get a traditional loan for your small business, contact the bank that you already have a relationship with as a first step, as the bank will already know you and your business. It’s a good idea to meet with a representative well before the application gets underway, too, as he or she may have advice that can make the process easier.
Lower interest rates: Traditional bank loans often offer the lowest interest rates of all lending options, which means that your payments will be more manageable. This helps you get the funds you need while keeping the cost of debt lower and freeing up cash flow.
Flexible repayment terms: Traditional bank loans can offer longer payment terms, usually ranging from 3-10 years. A longer term means lower monthly payments, especially when combined with a traditional bank’s lower interest rates, leaving you with more money to invest in your business.
Loan amounts: Traditional banks can make high-value loans, which helps with major costs, such as an expansion or financing the entire cost of a project with a single loan. These usually need business history, though, so they often aren’t available for start-ups without valuable collateral to back them.
Loan security: If a bank is confident in your business’s ability to repay a loan, the bank may extend an offer for an unsecured loan, meaning that no collateral is needed for the loan.
Cons of traditional bank loans for small businesses:
Strict eligibility requirements: Traditional bank loans need excellent personal and business credit, as well as a business’s financial history, so start-ups are less likely to be eligible and need to build strong credit before applying.
More complicated applications: Banks want to make loans with a low risk of failure, so the applications are thorough. Be prepared to give detailed information on the business, financial projections, and a persuasive proposal or business plan to show the bank that lending to you is a safe bet.
Collateral: If you’re ineligible for an unsecured loan, you may be asked to secure the loan with your home, car or another asset as collateral. If you can’t pay your secured loan, the lender has the right to seize the collateral for repayment.
Tips to help your business become loan-ready:
Know your ask: How much do you need and why? Answer these questions before applying for a loan. This will help you determine which lenders and products are the right fit for your financing needs.
Check your credit: Be sure all accounts are up-to-date and derogatory items (such as collections or judgments) have been satisfied, and have relevant documents ready as backup.
Prepare your loan package: Before you apply, ask your bank representative for a checklist of all the documents needed for the loan application. Review the forms carefully before submitting and if you’re unsure about anything in the application, ask for help from the lender or a trusted advisor.
Communicate: Keep an open and honest dialogue with your lender. Respond promptly to requests for additional documents or information, and remember, an application’s processing time largely depends on your cooperation.
Don’t get discouraged: It’s not uncommon for traditional banks to turn down small business applicants – even existing clients. If your application is declined, keep the relationship positive and find out what you can do to get approved in the future. Your representative may recommend that you meet with a local Small Business Administration (SBA) representative or a Community Development Financial Institution (CDFI) like Pursuit for additional help securing a loan.
Know what you need and where to go for help:
The financial health of your small business relies on many factors, including access to financing. It’s important to know which resources and funds are available to you and how your small business measures up to a lender’s eligibility requirements. While the lending process can be complicated, you don’t have to go it alone.