Pros and Cons of Bank Loans for Small Businesses

If you are exploring financing for your business, you are most likely considering a bank loan or alternative financing option. This guide will show you the pros and cons of small business bank loans, factors and features you should consider in a small business loan, how to get a small business loan from a bank, and alternative financing options for small businesses.

The Cons of Bank Loans for Small Businesses

There are tons of small business loan options out there, including traditional bank loans, business lines of credit, invoice factoring, accounts receivable funding, capital loans, and much more.

The reality for small business owners is that bank approval rates are low for small and online businesses. Banks are risk-averse, so they have rigorous processes in place to ensure that they only lend to businesses with the longest track records of healthy financials. Not only that, but they have also complicated and manual application systems that take a lot of time.

Here are some of the cons:

  • Long application process. To apply for a bank loan, you need to provide lots of paperwork and visit a loan officer. It can take several weeks and up to months to get a decision.
  • Low approval rates for small businesses
  • Collateral requirements. Banks require businesses to secure their loans with collateral such as real estate or equipment. These requirements can be overwhelming for a small business owner.
  • Tough minimum qualifications. Bank loans are designed for large, established businesses with years of operating history, physical brick-and-mortar locations and excellent credit for both the business and its owner.

The Pros of Bank Loans for Small Businesses

There are several advantages as well to small business bank loans.

  • High dollar amounts. Bank loans can go up to one million dollars whereas alternatives often are much lower.
  • Low interest rates. Banks offer interest rates between 4-13% which is lower than most credit cards, venture funding, and other alternative financing options. The interest payments are tax-deductible too.
  • Long payment terms. Payment terms tend to be years long which can give you lots of flexibility.
  • Unrestricted funds. Unlike venture capital and angel investments, bank loans are unrestricted, this means that you can use the funds for whatever you need.

How to get a small business loan from a bank

Each bank will have its own set of requirements and you will need strong business and personal credit as well as some of the following paperwork.

  • Business plan with financial projections
  • Financial statements
  • Personal and business bank statements
  • Personal and business tax returns
  • Business licenses and articles of incorporation

Alternative Financing Options for Small Businesses

As a small business owner, your financing needs are likely urgent. In other words, you cannot wait weeks or months to see if you are approved for a bank loan. Instead, you need a lender that can get you the funds you need when you need them. That way, you can invest in growth and maximize your ROI.

The following are some alternative financing options and loan considerations for your small business:

The Bottom Line

Many people go with bank loans to fund their business but consider the alternative options as well. Do your research and consult with a professional so that you find the best one that fits your business needs.