Pros and cons of a business bank loan

Bank financing can be a lifeline for small businesses, whether to stay afloat during challenging times or capitalize on growth opportunities. Compared to online lenders, bank loans often come with lower interest rates, longer repayment terms and higher borrowing limits. Banks also offer a variety of loan types, though the approval and funding process can take longer than other lending alternatives.

Still, getting approved isn’t guaranteed. According to the 2024 Small Business Credit Survey, just 54 percent of applications were fully approved by small banks, while credit unions approved 47 percent and large banks only 45 percent.

Weighing the pros and cons of small business loans from banks can help you decide whether this type of financing fits your business or if an alternative might be a better match.

What is a bank business loan?

A bank business loan is a type of commercial financing offered through a traditional bank or credit union. Typically, the funds from these loans can be used to cover operating costs, purchase equipment, pay vendors or help grow your business.

Examples of bank business loans include:

• Term loans: Provides a lump sum to be repaid over a specified term with interest.
• Equipment loans: Designed to finance the purchase of business equipment, including machinery and semi trucks, helping spread costs over time and often using the equipment as collateral.
• Microloans: Microloans are small, short-term loans tailored for startups and small businesses, offering smaller sums, typically under $50,000.
• Lines of credit: Flexible access to funds, allowing for multiple withdrawals within a set credit limit, with interest only paid on the outstanding balance.

Online lenders have expanded their offerings to include many of the same loan types as traditional banks, with the added benefit for fast funding, often within 24 to 48 hours. However, that convenience typically comes with trade-offs like higher interest rates and shorter repayment timelines of 24 months or less.

Conventional business loans are different from loans offered by the U.S. Small Business Administration (SBA), which are known as SBA loans. While SBA loans can also be obtained through banks and other lenders, they typically provide longer repayment terms and lower interest rates than conventional loans. These loans are guaranteed up to a percentage by the SBA.

Bank business loan pros and cons

Bank business loan pros

Bank business loans have their fair share of advantages that make them worth considering. Here are some business loan pros to be aware of.

Generous loan amounts with attractive interest rates

Business bank loans are typically larger than loans from online lenders which often stop at $250,000 or $500,000. 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.

Borrowing costs also tend to be lower with business bank loans than you’ll find with alternative lenders. On average, small businesses pay 7 percent to 8 percent for loans from traditional banks, compared to the cap of 30 percent or higher with online lenders. And borrowers pay 10.50 percent to 15.50 percent in interest for SBA loans.

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 and may require weekly or daily payments, which could cause cash flow issues if you have a slow day or week.

Local branches for customer support

Traditional banks and credit unions typically provide the convenience of local branches, where you can get personalized customer service and strengthen your lender relationship. Having access to a dedicated representative can make the process smoother, whether you have questions during the application process or need help managing your loan after approval or understanding why you were denied.

Online lenders don’t offer physical locations, but some will connect you with a dedicated loan specialist to walk you through the process. Others may have a fully online process, only connecting with you through a customer service phone line if you have questions. You’ll need to decide if this perk is important to you and your business.

Borrower incentives

It’s not uncommon for some banks to offer new and existing customers perks. If you already have a business checking account with a bank lender, these perks may include reduced APRs, eligibility for same-day or instant funding and autopay discounts.

Some banks also offer rewards programs if you meet the eligibility requirements, such as spending money on a business line of credit or depositing new money in your bank account.

Additionally, you’ll start building business credit if the lender reports payment activity to the credit bureaus.

Bank business loan cons

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

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. For example, most banks want to see personal credit scores of 670 or higher and at least two years in business. Some may also require a good business credit score.

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

Documentation requirements

You’ll likely need a large amount 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.

By comparison, online lenders might just want to see one or two financial documents like bank statements to prove that you can repay the loan.

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 is operating profitably, the likelihood of qualifying for a loan with a bank 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.

Lengthy waiting periods and funding times

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. If you apply with an online or alternative lender, you’ll likely hear back within 24 to 48 hours.

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 or the next business day.

How to decide when a bank business loan is a good idea for your business

The main determination for getting a bank business loan is whether you qualify for the loan. If you do, a bank business loan offers many benefits, like low interest rates and an established relationship with the lender. Small business loans are a good idea from a bank if:

• You have strong credit and revenue
• You want to establish a relationship with a bank
• You already use that bank for business checking
• You may apply for new loans in the future
• You want to get the best interest rates possible

Bank business loan alternatives

If, after weighing the small business loan pros and cons, you decide a bank loan isn’t the right fit, there are several financing options worth considering.

Business credit cards

Business credit cards are easy to obtain with good or excellent credit — they don’t usually look at your revenue or time in business. Starting interest rates aren’t as low as loans from banks and credit unions, but these cards have plenty of perks.

Some issuers offer interest-free introductory periods, rewards programs, discounts on select purchases and more. You may even be able to avoid paying interest by using the card’s grace period if you pay your entire balance off each month.

SBA loans

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, and may offer longer repayment periods.

The significant downside is the waiting period for a lending decision, which can range from 30 to 90 days, and it often takes several weeks to receive the loan proceeds.

Online loans

Online loans are offered by alternative lenders that primarily use online methods to apply for and approve the loan. 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 likely get a less favorable term. Anticipate paying more interest to access these loan products.

Bad credit business loans

Bad credit business loans are any business loan designed for business owners with poor credit, some even accepting scores as low as 500. These types of loans are known for having lower credit score requirements and less daunting eligibility requirements. Bad credit business loans come in various forms, including term loans, lines of credit, microloans, and invoice factoring.

Venture capital

You can also try looking for individual private investors or venture capital firms. You can present your business and see if anyone is interested in investing. These investors typically will provide you with a lump sum of cash in exchange for equity in your business. They may want some control over how you run your business, but you will likely gain a business partner with experience in turning businesses into a success.

Crowdfunding

There are many different crowdfunding platforms where business owners can post their business ideas or goals and ask individuals to donate to their efforts. Some of the most well-known crowdfunding platforms include Kickstarter and GoFundMe. These platforms allow you to raise money either as a donation or with rewards for the investors, such as free products or equity in your business.

This method allows you to gain funding without stringent eligibility requirements, but they require a lot of legwork to generate buzz around your business and get fully funded.

Bottom line

Bank business loans can be a good option for qualified borrowers, offering low interest rates, longer repayment terms and access to various financing products. However, they often come with strict eligibility requirements, including strong credit history, steady revenue and extensive documentation, which can slow down the application and approval process.

By weighing the small business loan pros and cons and comparing offers from multiple lenders, you can choose the lender type that best meets your funding needs and repayment budget.

Frequently asked questions

• Is it risky to take out a business loan?

• What are the disadvantages of a business bank loan?

• Why are bank loans plans good for a business?