If you’re thinking about applying for a business loan from a bank, it might be wise to think again.
Going to a bank is a natural first instinct after identifying the need for capital to grow your business. According to Finder, almost half (48%) of all business owners seeking capital applied at a large bank.
Banks have been around forever, and they’re practically synonymous with business loans. But in recent years, business owners have turned to the new alternative loan market for faster financing, and higher approval rates.
But while the idea of a business bank loan is enticing, there’s more involved than you might initially think. Before taking the dive into applying for a business loan from a bank, it’s best to understand what you’re up against, and the alternatives available.
Many business owners consider SBA loans to be the best option available. And it’s not exactly a mystery why— the rates are fantastic, and the terms are fit for the long term.
That being said, it’s important to remember exactly what you’re getting yourself into when you’re applying for a business loan from a bank.
After you submit your application, banks can take forever to fully process it. At a minimum, the process could take between 60 and 90 days.
When you’re thinking about your business’s future, this is far from the ideal timetable. You need capital, quickly, and in 60-90 days, your opportunity to strike may pass.
Not to mention, the hours you’ll need to invest in helping your business reach the next level.
To qualify after applying for a business loan from a bank, you’ll need to meet their strict criteria. While the exact requirements can vary from institution to institution, banks are known for having incredibly strict standards.
These requirements generally include a stellar credit score, high revenue, and a long time in business, but we’ll touch on that later.
Even if you’ve prepared yourself as best as possible, the chance that your bank loan application will be rejected is always there.
In terms of your business’s capital, facing a bank loan rejection can be a defeating blow.
But to truly understand the extent of the loss, you have to consider the amount of time you spend applying.
With other alternatives out there, you can better spend your time and money qualifying for the right opportunity.
If you’re applying for a business loan from a bank, you’ll either qualify, or you won’t— there’s no middle ground.
Think about it. If your credit score is exceptional and you have a history of making on-time payments, but your annual revenue is low, you may not qualify.
On the other hand, if your business is generating sky-high annual revenue, but your credit score isn’t quite there, then you won’t qualify, either.
Which begs the question: why?
If your business can prove through either qualification that you’re capable of and trustworthy enough to make payments, then it makes sense that you’d qualify.
But with so many levels of qualification, checks, and balances in place, it’s unfortunately just not possible.
Fortunately, alternative lenders are more willing to look past one requirement, and help you qualify based on other promising qualities.
Banks will scrutinize every aspect of your business when you apply for a business loan.
And while word of mouth might get you in the door, it won’t get your paperwork approved.
Before giving the final seal of approval, banks may require you to submit:
These are just the basics— if your business is in a unique situation, then the bank may ask for even more paperwork.
This can be one of the most time-consuming aspects of applying for a business loan from a bank. It can be frustrating, especially when you find yourself filling out the same details in all of the paperwork.
You won’t find the same restrictions with alternative lenders— two months of bank statements is often all you’ll need!
We’ve already touched on banks’ long approval process. But what about the time that you’ll personally invest in navigating through this process as you go?
This is one of the things that business owners don’t always consider when applying for a business loan from a bank.
Think about it: the more that the loan process requires on your end, the more time you’ll invest. While it may seem worthwhile, growth periods are when your business needs your attention the most.
Exploring other options could prove to be a better use of your time.
Do you have collateral— either commercial property, personal property, or another asset— to put up for your loan? If not, then banks may not even take a second look at your business loan application.
But if you’re like most business owners, you probably don’t have tons of collateral lying around. In fact, many business owners rent property, rather than paying for the full cost of the building. In a pinch, you may be able to put your personal property up as collateral— but it’s best to keep your personal finances separate.
Banks are especially demanding with collateral when you don’t meet the higher end of their credit requirements. WIthout amazing credit or sales, they need some assurance that the loan will be paid off.
Alternative lenders, on the other hand, tend to be more understanding of the difficult position business owners are in. Even without collateral, you can qualify for the best amounts, rates and terms available!
When approving a bank business loan, bankers are asking one question: will the business owner be able to repay the capital in full?
Personal guarantees are one way that banks ensure all business loans are fully paid off by the end of the term, no matter what.
Personal guarantees are in place in the event that your business cannot repay the loan. Whether your business defaults on the loan, or can’t repay it for a different reason, this guarantee protects the lender. Essentially, you’ll be required to repay the balance out of pocket.
Be sure to have a thorough conversation with your loan officer before finalizing the details— they may have important information that can put you ahead.
Your credit score is a major factor when it comes to qualifying for a business loan from a bank. You can get the conversation started by saying that you have a great credit score. But for the loan to be fully approved, your bank will need some proof.
To verify that your credit history matches your description of it, banks will trigger a hard credit inquiry.
Unlike a soft credit pull, which merely checks your actual score, a hard credit inquiry provides details about your credit history.
This can reveal details like:
Even if you don’t have anything to hide, this hard credit inquiry can have an impact on your chances to qualify.
For a short period of time, a hard credit inquiry can lower your credit score. This is temporary, but if you’re eager to get financing for your business, then bank credit checks can pose quite an obstacle.
If you’re ultimately rejected by the bank that checked your credit, then you’ll be at a disadvantage in applying for your next loan.
Unlike banks, alternative lenders don’t perform hard credit inquiries until everything is in place, and you’re nearly approved!
What are you planning to do with your capital once the funds are deposited in your account?
Before signing off, banks will want to know your intentions for growth. An anecdote about a new customer base or opportunity can be helpful, but it probably won’t be enough for the final seal of approval.
Banks generally require that you bring a business growth plan to demonstrate how you intend to grow your business. In order to keep up with new expenses and pay back your loans, there must be an increase in revenue. Your business growth plan would detail how you plan to get there.
Unfortunately, this can be time consuming. You’ll need to provide information like:
And possibly, more.
Your cash flow is the amount of money that your business earns on a monthly basis, as compared to the amount of money that your business spends.
The higher your sales are, the more money that flows into your business. Consistency is important, too— with more routine sales, you’re bringing money into your business on a regular basis.
By examining your business’s cash flow, loan officers will learn important insights about the true financial state of your business. Beyond your credit score, a cash flow statement can also speak to how wisely you’re managing your working capital.
If you’re applying for a loan from a bank with less-than-stellar cash flow, then banks may not be absolutely trusting in your judgement.
All businesses have a different path. Regardless of the industry, the entrepreneurs’ previous experiences, and any other factors, it’s impossible to find business owners with the exact same story.
The same goes for financing. Some business owners require capital from the get-go. Others may not begin the search until later on. This can vary based on a number of things, especially personal savings and private loans.
But at some point or another, all businesses need financing to take things to the next level. Even at the six month mark, once business is moving along and you’re landing new clients, banks may still be skeptical.
At a minimum, most banks will require that you be in business for at least a year.
Not all lenders look at your business through this lens, however. As long as you’ve been in business for six months, lenders are willing to help you qualify based instead on performance-related criteria, like annual sales. Overall, this is a more important metric.
The loan process doesn’t have to be painstaking, time-consuming and disappointing.
At National, we understand the challenges that your business is attempting to overcome, both in seeking financing, and in managing and growing your business.
You can apply in less than 60 seconds, and learn about the options you qualify for the very same day!
Get started by filling out the form today!
National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!
Megan Capobianco is the Marketing Manager at National Business Capital & Services. Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.