Pros And Cons Of A Business Bank Loan – Bankrate.com

Got big plans for your business? A business bank loan could be a convenient and viable solution if your company is established.

Business bank loans are generally available to business owners who can demonstrate that their company is in good financial health. It also helps if you have a solid credit rating. Most banks will review your credit profile and require a personal guarantee to secure funding. Banks offer common loan types, such as term loans and lines of credit, for larger amounts than online lenders typically do.

Although business bank loans generally offer attractive terms, getting one is by no means guaranteed. Big banks approved only 14.5 percent of small business loan applications in December. Sometimes, you may discover that an alternative is far more suitable for your company.

Bank business loan benefits

These loan products have their fair share of advantages that make them worth considering. Here are some business loan benefits to be aware of.  

1. Generous loan amounts

Business bank loans are typically larger than loans from online lenders. Banks are more inclined to offer larger loans since borrowers generally have strong credit scores. Plus, they can demonstrate that they’ve previously responsibly managed debt obligations.

2. Attractive interest rates

Borrowing costs also tend to be lower with business bank loans than you’ll find with alternative lenders. On average, small businesses pay 6 percent to 7 percent for loans from traditional banks, compared to the cap of 30 percent or higher with online lenders. And the average borrower pays 13.5 percent in interest for SBA loans.

3. Longer terms 

You could get an extended term with a business bank loan and pay monthly installments until the balance is paid in full. Some banks offer terms of five to seven years. 

An extended loan term allows you to get a more affordable monthly payment that doesn’t cause cash flow problems in your business. Just remember that you’ll pay more in interest over the loan term.

Online lenders often offer terms capped at two years; they sometimes require weekly or daily payments.

4. Flexible use

In most instances, you’re free to see the loan proceeds for any business-related expenditure. Some lenders ask how you intend to use the funds when you apply to determine the likelihood of defaulting on the loan. 

Even if your spending deviates slightly from what you indicated in the loan application, the lender typically won’t object if you make timely loan payments. 

5. Borrower incentives 

It’s not uncommon for some banks to offer perks to both new and existing customers. These include reduced APRs and autopay discounts. Plus, you’ll start building business credit if the lender reports payment activity to the credit bureaus. 

Bank business loan cons

Unfortunately, there are drawbacks to consider when deciding if you should apply for a business loan with a bank. 

1. Stringent eligibility guidelines 

Most traditional banks require a good or excellent personal credit score, substantial business revenue and a certain amount of time in business. Some may also require a good business credit score.

 If you cannot meet these requirements, you likely won’t be approved for funding. Online lenders are slightly more lenient, but you’ll pay a premium in the form of a higher interest rate to access capital. 

2. Documentation requirements 

You’ll likely need a mountain of paperwork when applying for a bank business loan. Most banks require copies of your personal and business details, financial documents, license information and more. You may also be asked to provide a list of current debts, accounts receivable and accounts payable.

3. Not ideal for startups 

Another downside of bank business loans is the time in business requirement. Unless your business has been open for two or more years and operating profitably, the likelihood of qualifying for a loan is low. 

However, some online lenders will approve you for a loan with just six months in business. Others don’t have a minimum time in business requirements if you meet the eligibility criteria. These might be better options for startups.

4. Lengthy waiting periods for loan approvals 

Some banks allow you to apply online; others only accept business loan applications at a physical location. Either way, waiting several days or even weeks to receive a lending decision isn’t uncommon. But if you apply with an online or alternative lender, you’ll likely hear back within 24 hours or less. 

5. Slow funding times

Banks also tend to have far slower funding times than online lenders. Even once your application is formally approved, it could be several days before your loan proceeds are disbursed. Some online lenders fund loans as soon as the same day or the next business day. 

Bank business loan alternatives

If you’d prefer to look beyond bank loans to secure the funds you need for your business, consider these alternatives

  • Business credit cards are easy to obtain if you have good or excellent credit. Plus, some credit card issuers offer interest-free introductory periods and rewards programs. However, you could get a higher interest rate than you would with a business bank loan and pay an annual fee. 
  • SBA loans are offered through private lenders and partially backed by the U.S. Small Business Administration. They come with lower interest rates and fees to make borrowing more affordable for small business owners. The significant downside is the waiting period for a lending decision, and it often takes several weeks to receive the loan proceeds. 
  • Online loans are offered by alternative lenders. You could be eligible if you’re a business owner who doesn’t meet the guidelines set forth by traditional banks. Expect quick approvals and fast funding times, but you’ll be likely get less favorable term. Anticipate paying more interest to access these loan products. 

The bottom line

Business bank loans offer attractive interest rates and terms. But before applying for funding, consider the benefits and drawbacks to determine if they suit your business. An alternative, like a business credit card, SBA loan or online loan, could be a better fit.