July 22nd, 2022 | By: The Startups Team | Tags: Funding
What are the best banks for business loans? When we think of startup funding, we usually think of venture capital — but that’s not the only option out there. Small business loans are a more traditional way of getting financing that are also open to startups. In addition to not requiring founders to give up any equity, they may even be easier for some startups to get than venture capital, which can be a long and arduous process.
Small business loans are a great option for startups that already have some momentum and — even better — some income coming in. That’s because while venture capitalists are all about taking big risks for the potential of big rewards, traditional banking institutions are more careful with their funds.
So, if you think a small business loan is a good option for your startup funding, here are the best banks for business accounts and loans, as well as the types of loans available and the steps you need to take if you’re going to apply for a small business loan.
While it may seem like a no-brainer to go right to a big bank, many small businesses and startups find more success with smaller or local institutions who tend to be the best small business loan providers. The best banks for small business loans listed below are mostly national banks because this is an international publication, but don’t neglect your local lending institutions when you’re looking for the best bank for your small business loan.
It’s worth it to consider local financial institutions, like credit unions — which often not only award business loans to smaller companies and startups, but may actually do so at a lower rate than a larger institution. Most credit unions require people to be a member in order to get a loan, you should do their research before applying.
Recently, a new wave of online financial institutions that help people apply for business loans has also cropped it. It’s worth doing some research to see if this avenue is a good fit for your startup as well. Oftentimes the times to apply and the times between applying and receiving the loan are shorter with these online financial institutions than with traditional banks.
The Small Business Administration also offers long term, low-interest loans that are partially guaranteed by the government. They can be a great option for startups looking to apply for a business loan. SBA loans are available through local or national lending institutions in your area.
And, of course, national banks are always an option, too. It really depends on your startup, the size of your loan, and your own personal financial history.
Wells Fargo is all about small business loans. They’ve actually set themselves a goal of $100 billion loaned over five years to businesses with less than $20 million in revenue. They also offer other great support services to entrepreneurs and should be one of your first stops when you’re looking for a business loan.
They offer unsecured business loans and unsecured business lines of credit. “Unsecured” means you don’t have to put up collateral for them.
Bank of America is a great bank for small business loans for two reasons. One, they have branches throughout the country. Two, they’re committed to serving small businesses, with $30 billion already loaned to small businesses. Like Wells Fargo, they offer unsecured term loans and unsecured credit lines.
Their loans range from $10,000 to $100,000 and have a fixed rate starting at 5.50%.
While Chase hasn’t quite met the loan amounts of the two first best banks for small business on this list, they’re getting there. They’ve already loaned $19.1 billion to small businesses and have made a commitment to increase that lending by 20 percent over three years. They’re also known for their business credit cards, if that’s the route you’re looking to take.
If it’s variety in loan types you’re looking for, Capital One should be at the top of your best bank for business loans list. They offer lines of credit, commercial real estate loans, equipment and vehicle financing, business installment loans, and SBA loans, including the SBA 7(a) and 504 program.
US Bank is an excellent option for small business loans — if you have one in your area. While they’re a major player, they’re currently only available in 25 states, primarily in the West and Midwest. However, if they do exist in your state, you’ll find a range of options, including term loans, lines of credit, equipment finance, to commercial real estate loans.
TD Bank is another regional one that’s a great option, if you have one in your area. They’re primarily East Coast and they offer all three types of SBA loans. You do have to apply in person, however — they don’t have an online application option yet. They’re a good bank for business loans if you’re looking for a relatively small amount of capital, with an average loan size of $53,717.
While the first few banks on this list are more traditional national banks, Live Oak Banking Company doesn’t have any consumer loan products and doesn’t have any physical locations. Instead, they focus solely on small business loans. They’re especially great for SBA loans and have made the entire process of applying for an SBA loan streamlined and electronic.
Huntington Bank is based in Columbus, Ohio, but available in Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania, West Virginia and Wisconsin.. They offer SBA-backed loans, term loans, business lines of credit, and real estate loans to small businesses.
Small business startup loan is an umbrella term under which a few different types of financing fall. However, there are two general categories under which all small business loans fall: term loans and business lines of credit.
Term loans are what you’re probably thinking of when you hear “small business loan.” They’re a certain amount of capital that a bank loans over a specified period of time and interest rate. They can be used for most business purposes.
Business lines of credit are like credit cards, but specifically for business. You only pay interest on what you’ve spent and not paid back.
Here’s a general breakdown of the main types of small business startup loans you might run across as you figure out the best option for financing your startup. Each section gives a clear outline, with some links to more in-depth information if you’re interested in learning more.
A SBA — or small business loan — is a loan that is backed by the Small Business Administration (SBA). Founded in 1953, the SBA is a federal government program that provides support to small business owners in the form of mentorship, workshops, counseling, and small business loans.
While the loans are backed by the SBA, they don’t come directly from the SBA. You’ll have to find a local lender who provides SBA loans in order to access to the funding. That local lender could be a national bank or a local institution, depending on where you live.
There are three main types of SBA small business loans: the 7(a) Loan Program, the 504 Loan Program, and the 7(m) Microloan Program.
Each type of SBA small business loan has slightly different requirements, but generally you have to qualify as a small business according to the SBA size requirements, be a for-profit business, operate within the United States, have good personal and business credit, and not have other financing options (like your own wealth).
SBA loans have an upper limit of $5 million. Therefore, they’re a better option for small businesses and startups who need smaller amounts of capital, versus those who might need many millions of dollars.
Time To Funds
The process for applying for a SBA loan can take up to six weeks, with some taking only a couple weeks. If you qualify for a SBA loan, you can expect your funds as soon as one week after qualifying.
As of May 2018, maximum interest rates on SBA loans range from 7% to 9.50%.
1. The loan is backed by the federal government. That means banks are more likely to loan to riskier companies — like startups — than they might otherwise.
2. The equity requirement is relatively low compared to other loans.
3. SBA loans have a floating interest rate that’s tied to the Prime Rate. The maximum interest rate for these loans is Prime Rate plus 2.25 percent for loans maturing in 10 years or less, and Prime Rate plus 2.75 percent for loans maturing in 25 years.
4. People and companies who don’t have access to other forms of capital might find it easier to qualify for a microloan than for a larger or more traditional loan type.
1. SBA small business loans are relatively small. They have an upper limit of $5 million.
2. These loans may require more paperwork than a traditional loan.
3. Startups or founders with poor credit are unlike to qualify.
How To Apply
If you’re interested in applying for a SBA loan, you can check out the SBA website to find a financial institution in your area that provides SBA loans.
While not a traditional “loan,” business credit cards are a great option for very early stage startups who need help getting going. Choose one with a 0% introductory APR, because that means that as long as you’re able to pay off the balance each month (or at least by the end of the first year, which is when most credit cards interest rates kick in), you’re basically getting a free loan.
However, beware of high interest rates — and don’t overestimate how quickly you’ll be able to pay back a credit card. Once that introductory period is over, any balance you’re carrying will likely come with a hefty interest rate.
Credit cards usually have very few requirements for qualification. Banks are in the business of profiting off of small businesses. (While, yes, helping them grow.) However, people with bad personal credit will find it difficult to qualify for a business credit card, as most banks are going to look at your personal credit to determine whether or not they’re willing to give you a credit card for your new business or startup.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
Check your credit rating with one of the big three credit agencies before starting the process of applying for a business loan.
The loan amount — or credit line — that you can get with a credit business card depends totally on the type of card, your personal credit history, your business credit history (if you have any), and your business itself. However, the highest business credit limit right now probably tops out around $50,000.
Unlike other sources of small business funding, credit cards are very quick to apply for. Once you’ve been approved, you can expect to have your card in hand within seven to 10 days.
Interest rates vary from card to card. As mentioned above, it’s a good idea to go for a card that has an initial 0% APR (annual percentage rate). That way you have a year without any interest whatsoever.
As of April 2018, the common APRs offered online for business credit cards was 14%, which is about 2.5 points lower than average for personal cards.
1. They’re easier to get than other loans or lines of credit.
2. They have higher credit limits than personal credit cards.
3. They can help boost your credit rating.
4. It’s easier to keep personal and professional expenses separate.
5. You can build up points that can be used for travel and other perks.
6. It’s easier to keep track of employee spending, if you have employees, and some even offer preset employee spending limits.
7. It helps build credit history for your business.
1. If you have trouble making payments, it may affect your personal credit.
2. High interest rates, late fees, and annual fees can add up and be brutal.
3. Many business cards don’t have purchase protection.
4. Business credit cards often have a higher APR than personal cards.
5. Interest rates can fluctuate.
6. A business credit card may come with foreign transaction feeds.
First, get your credit score so you can determine which business credit cards you even qualify for. You can get it from one of the big three credit agencies. Once you have that, calculate your business’ annual revenue — the credit card agency is going to want to know that information. Decide what kind of rewards program you want, and then go take a look at different business credit cards to see what’s the best fit. Maybe make a spreadsheet of the factors most important to you — like APR, credit score needed, limits, rewards, signup bonuses, etc. — in order to do a side-by-side comparison.
Then, apply via the card’s website. That’s it! If you’re rejected for your first choice move on to the next. There are plenty of options out there. You can find some recommendations here.
Short term loans relatively small amounts of money that have to be paid back within three to 18 months. They’re often used as a stop-gap when a company is having cashflow problems, for emergencies, or to help companies take advantage of a business opportunity.
Short term loans are a good option for startups with good cash flow who have been in business for at least two years. If your startup has good cash flow, it may even override other factors like poor credit. Companies who make between $25,000 and $150,000 yearly, with a credit score of at least 600, and who have been business for at least two years may consider this option.
Short term loans are usually between $2,500 and $250,000.
The loan terms for short term loans are usually between three and 18 months.
The time to funds for short term loans is extremely fast! If you qualify, you can expect access to the funds as quickly as one day.
Interest rates start at 10%.
1. People with less-than-perfect credit may apply.
2. There’s very little paperwork required.
3. Short term loans come with a set payment structure.
4. They can be used for a range of purposes, including FILL IN.
1. Payments have to be made weekly.
2. May have higher annual costs than longer-term loans.
Short term loan applications exist online only. You’ll need your driver’s license, a voided business check, proof of ownership of your company, bank statements, your credit score (business and personal), and your personal tax returns.
Check out this list of options for companies that offer short term loans.
Small business grants are offered by the government and some private interests to promote small business growth. They don’t have to be repaid, which can make them an appealing option for startups and small businesses that qualify.
Most small businesses probably won’t qualify for a small business grant, as they’re tied directly to US government agencies that have specific goals. However, research and development companies often do well, as do some high tech companies.
State level grants are also tied to the direct economic or social needs and many of them are matching grants. That means that you’re expected to match the amount you’re loaned with your funds.
Finally, there are local small business grants that are usually less competitive than federal or state grants, but are often for less money. If your startup is clearly helping your local community, this could be a good avenue for getting some funding.
Small business grants can be as low as a couple thousand dollars and as high as a few hundred thousand. They are generally a lower amount of money than other financing options.
The terms of each grant depends entirely on the grant.
Small business grants take a long time to get. You can expect at least a year from the beginning of the process — and three to six months after applying — to get funding, if you qualify.
There is no interest with a small business grant, because you don’t have to pay anything back!
1. You don’t have to pay anything back.
2. No interest, because it’s not a loan.
1. They’re difficult to qualify for.
2. The provisions for how you use the money are very specific.
3. They’re difficult to find.
4. They can’t be used to start a business.
5. They can’t be used to pay off debt.
6. They can’t be used to cover operational expenses.
Check out the following for updated lists of available small business grants:
Getting money — in the form of loans or investment — from family and friends is another one that doesn’t fall under traditional “small business startup loans.” But it’s a common way for startup founders to get money to either start their companies or get help along the way.
Friends and family are a great source of early investment or loans — but it can be a tricky relationship to navigate. It’s common for people to feel like they can be casual and personal with these types of investments because their relationships with the investors are personal. That’s a mistake.
You should a treat investment or loan from friends and family as a professional addition to your existing personal relationship. It’s a good idea to get a written contract stipulating the terms of the investment or loan and also to make it clear that it’s very, very likely they won’t get their money back if it’s an investment.
Anyone with family and friends who have the money and are willing to lend or give it qualifies!
The biggest advantage of borrowing money from friends and family lies in the fact that you already have an established, trusting relationship with these people. That means they’re easier to get a meeting with, more inclined to say “yes,” and are more likely to be flexible with their expectations and timeline. They are often considered the most easy small business loan to obtain.
The structure of the loan will also likely be simpler than the structure of a loan obtained through more formal means. When you borrow from friends and family, you don’t have to worry about long, complicated applications.
1. Introducing large sums of money into a relationship that was previously entirely personal has the potential to ruin that relationship. That’s a particularly big risk if a startup fails — as most do — and investors lose all of their investment or you’re not able to pay back a loan. It’s important for you to be very clear about the potential for loss with investment money or loans from friends and family. While they might be the most easy small business loans to obtain, they do come with real risk.
2. Friends and family members also may not be able to add value to a company in the same way that more formal, established investors can. Venture capitalists, for example, typically invest in startups in fields that they are familiar with. Having that kind of knowledge on board is a huge advantage for any new company.
First things first: You need to be extremely clear on why you need a small business loan, as well as how much you need. While VCs might be willing to hand over money on a hope and dream, a bank is going to want to see a clear plan and explanation before loaning money. It’s worth it to create a business plan and financial statements that clearly outline what will happen with the money you’re asking for. It also makes it easier to come in with a clear number when you go to apply for the business loan.
When applying for a business loan for the first time, it doesn’t hurt to get some advice from business owners who have gone before. Personal connections are great, if you have them, but there are also organizations that offer advice specifically for small business owners and startup founders looking for help figuring out the business loan process.
One such group is the SCORE Association, which is a nonprofit, volunteer-run association of business mentors, primarily retired executives. You can search for a chapter in your area for in-person advice, or request a mentor via email or video. They also offer workshops (online and in person) and a digital library of small business resources, including templates.
Another great resource is the Small Business Development Association, which has offices throughout the United States, offers free business mentoring. Both organizations are part of the Small Business Administration, which is an independent agency of the federal government created to help small businesses grow and also advocate for their concerns.
Every institution is going to be slightly different about what they require, so be sure to pick up a loan application form early in the process in order to make sure you have everything. Many loan applications will have a checklist that can help you guide you as you prepare to apply for a business loan.
To give you an idea of what you might be able to expect, here are the sample forms offered by the Small Business Association.
More mature companies will be assessed based on their business credit score, but less mature companies (fewer than three years old) and startups with no financial history will be assessed on the founders’ credit scores as well. While there’s not much that you can do to improve a bad credit score immediately, it’s worth getting a copy of credit history to make sure that everything is accurate. If it’s not, you can submit a correction to the credit agency.
Generally, a score above 700 is considered good, with above 750 being considered very good. People with a score below 680 should prepare an explanation for their low credit and those below 650 will most likely be rejected and should reconsider applying for a business loan.
You should never, ever try to apply for a business loan without a business plan already in hand. Even early stage startups need to be able to show financial institutions that they have a roadmap they’ll be following. It’s reassuring to the bank or credit union because it not only gives them an idea of what you’re going to do with their money, but also shows that you’ve thought seriously about the issue.
Make sure your business plan includes:
– Executive Summary
– Company Description
– Problem, Solution & Market Size
– Product (How it Works)
– Revenue Model
– Operating Model
– Competitive Analysis
– Customer Definition
– Customer Acquisition
– Management Team
For more information on business plans and how to make one, check out this article: What is a Business Plan: An Introductory Guide.
After all that preparation, it’s important to make sure you’re prepared for the actual loan application. You’re going to need to prepare a two main things before the meeting itself: a pitch and a packet of information about your startup, including your executive summary.
First, the pitch. All startup founders should have a short, succinct, clear pitch prepared for seeking funding.
If you haven’t created a pitch deck yet, check out this article for more information on how to get there: Investor Deck: How to Present Your Business.
While it’s a good idea to have a pitch deck on hand and your pitch perfected, it’s also important to make sure that your pitches and decks are oriented toward the person or institution you’re pitching to. That means that while a VC might want to hear about 10x return, a traditional financial institution like a bank may be more interested in hearing about how you’re going to get to profit quickly. This is another area where you may want to consider consulting with a mentor or friend who has already done a pitch to the institution (or type of institution) that you’ll be pitching, in order to get a better handle on what your pitch should highlight.
The other important thing to bring when applying for a business loan is a packet of information about your startup. Start with an executive summary, and then make sure it includes any other information that will help encourage the loan officer to take a risk with you. This is a good place to include your business plan — it can make up the majority of this packet. Be sure to also include a repayment plan, an asset and liability financial statement, your current income and your startup’s current profits and losses, and any collateral you’re willing to put up to secure the loan, if that’s something the financial institution is asking for.
If you’re rejected for one loan, don’t take it as a rejection across the board! While your startup may not be a good fit for some financial institutions, that doesn’t mean it’s not a good fit for others. Ask for feedback from the loan officers and then take it moving forward to the next institution.