When looking for funding to grow a business or fund a purchase, the vast majority of borrowers turn to large and small banks to do the job. The 2023 Small Business Credit Survey found that 44 percent of businesses rely on large banks when applying for business loans, while 28 percent use small banks.

Bank lenders tend to offer a variety of types of bank business loans — and at competitive borrowing costs that you won’t find with other lenders. You’ll need to pick the type of business loan that best fits your funding purposes and look into whether you’re eligible for a bank business loan. Bank loans aren’t right for every business, so consider the pros and cons of using a traditional bank over other sources.

Types of bank business loans

Banks offer several different types of small business loans designed for particular funding needs. Consider which type of bank business loan will fit your funding purposes best.

Term loan

Term loans are the most “traditional” type of bank loans, offering a lump sum of cash disbursed in a single payment. Interest rates can be fixed or variable, and repayment terms tend to be on a monthly basis. Though these loans tend to have higher minimum standards for revenue, time in business and credit ratings, they also come with some of the lowest interest rates and highest funding amounts for business loans.

Key features:

• Lump-sum payment
• Lower interest rates
• Higher funding amounts 
• Higher credit and revenue requirements

Business line of credit

A business line of credit offers flexible funding through a revolving credit line. Borrowers can draw as much or as little as they want within the draw limit, and are only charged interest on how much they borrow. This makes a line of credit ideal for more flexible spending needs. 

Lines of credit tend to have smaller limits and higher interest rates than term loans. They don’t always require collateral, and can be a bit more accessible to businesses with lower revenue or credit scores.

Key features:

• “Borrow as you go” model
• Higher interest rates
• Lower funding amounts
• Lower credit and revenue requirements

SBA 7(a) loan

Loans backed by the Small Business Administration (SBA) can be an accessible option for business owners just starting out. They’re only available through private lenders, making banks a good starting point if you’re looking for one.

SBA 7(a) loans can cover a wide variety of expenses, from startup costs, to operating expenses, to equipment and inventory. The SBA sets a maximum interest rate based on the prime rate for its loans, making it an affordable option. The requirements for SBA loans tend to be a bit stricter than term loans, as you need to have exhausted all other lending options before you can qualify. Only U.S. citizens are eligible to apply, and waiting times can extend up to 90 days.

Key features:

• Can be used for a variety of business expenses
• Capped interest rates
• Only offered by SBA-approved lenders
• Longer approval times

SBA 504 loan

SBA 504 loans are used to finance business assets such as equipment, real estate or improvement projects. These loans offer fixed-rate loans with limits of up to $5.5 million, requiring a down payment of at least 10 percent. Like 7(a) loans and other SBA loans, these are offered by approved banks and lenders who back a percentage of the loan alongside the SBA, and have different requirements than traditional loans.

Key features:

• Used exclusively for business assets such as equipment or real estate
• Capped interest rates
• Only offered by SBA-approved lenders
• Longer approval times

Commercial real estate loan

Commercial real estate (CRE) loans are used to purchase or lease property such as office and retail space, manufacturing facilities or land for development. How much you get for the loan depends either on your creditworthiness and annual revenue, or the potential revenue of the property. 

Keep in mind that while these loans are used to purchase real estate, they operate differently than mortgages, as the underwriting will be based on your business plan and annual or potential revenue, and the payoff periods tend to be shorter. There are also a variety of CREs to choose from, including conventional CREs, bridge CREs, hard money loans and USDA CRE loans.

Key features:

• Used exclusively for funding commercial properties such as offices, retail space or factories
• Can be used to purchase land for development
• Funding is based on business revenue or potential revenue of property

Equipment loan

Equipment loans are used to finance business equipment such as office furniture, point-of-sale systems, manufacturing equipment, trucks, farm equipment and more. The equipment purchased is often used as collateral for the loan, making it less risky and somewhat easier to get than an unsecured business loan. Interest rates tend to be on the higher side, however, depending on your credit score and revenue.

Equipment loans can cover a wide variety of purchases, and allow you to keep the equipment after the loan is paid off unlike a lease. Keep in mind that if you default on the loan, the equipment can be seized in order to pay off the balance. 

Key features

• Used exclusively for funding business equipment 
• Built-in collateral options
• Can be easier to obtain than other loans

Why use a bank for business loans?

Banks can offer more personal service, a wider variety of terms and access to certain loan products that alternative lenders sometimes cannot. 

In general, advantages of using a bank can include:

• More individualized service. It can be easier to talk to a loan officer directly when working with a bank, and they can work with your individual circumstances in order to find the right loan for you. 
• Access to larger loan sizes. Since banks can access larger pools of capital, they can offer loan sizes into the millions. 
• SBA loan availability. Many banks are approved SBA lenders and can help you get an SBA loan. 
• Access to a variety of lending products. Banks can offer secured and unsecured business loans, lines of credit, equipment loans, SBA loans and others. 
• More services. Banks can offer not only loans but business checking and savings accounts, credit cards, business education and mentoring and even discounts for members.

Requirements to get a bank small business loan

Banks want to know how risky you are to lend to when you apply for a loan. Lenders may have specific requirements for minimum credit score, revenue, years in business and more. These requirements include:

• Personal credit score. While requirements vary, most loans require at least a score of 670. A higher score can get you a better interest rate. 
• Business credit score. This is more common with established businesses who have taken out business loans previously. Like a personal credit score, you can boost it by making payments on time. 
• Annual revenue. Many lenders will have a minimum requirement of $150,000 to $250,000 per year, depending on your loan size. 
• Time in business. As newer businesses are riskier to lend to, most loans will require at least two years in business. Startup loans will require six months. 
• Collateral or personal guarantee.

Credit score

Though specific requirements vary by lender, banks will likely consider your personal and business credit score. Banks typically review your FICO score to gauge your personal credit history and look for a score of at least 670. Your personal credit history shows the bank how you might manage your business finances based on your personal financial habits.

If you already have established a business credit score, the lender may also look at that score to determine your creditworthiness. Various business credit bureaus, such as Dun & Bradstreet, Equifax and Experian, review a business’s credit score. You can build your business’s credit score by opening trade credit with suppliers that you work with, using a business credit card or business line of credit and making on-time payments.

If you don’t qualify for a bank business loan or want to review other options, there are several alternatives to consider.

• Business credit cards: Business credit cards can often be approved more quickly than a bank business loan and may not ask for financial documents, speeding up the approval process. It usually offer rewards and the potential for a lower or introductory APR. Borrowing is also flexible — the card can be used when needed.
• Online lenders: Online lenders feature quick and easy application and funding timelines, often funding within 24 to 48 hours. They are also typically more willing to work with business owners with bad credit and startups. But these lenders may also charge higher rates than banks, depending on your credit score and the loan type.
• Merchant cash advance: For businesses that generate a significant amount of sales through debit and credit purchases, a merchant cash advance (MCA) may be a good choice. MCAs provide a lump sum of cash, which you repay using a percentage of future card-based sales. That said, they typically have higher fees than other borrowing options.
• Invoice financing and factoring: Invoice financing and factoring are similar types of loans that advance a portion of your business’s unpaid invoices. Invoice financing allows you to get money based on invoices that you use for collateral to get a loan. And as you get paid for those invoices, you repay the debt. Using invoice factoring, you still get an advance of money based on invoices. But a lending company buys the invoices directly from you and collects the invoices from your clients. You get paid any money left over after the factoring company takes out fees.
• Microloans: A microloan, as its name indicates, is a loan for a relatively small amount of money. Typically these loans are for $50,000 or less. These loans are usually geared for businesses in underserved communities. The lender may provide mentoring and education to support the small business getting the loan. Loans may also offer lenient eligibility requirements and competitive interest rates.

Bankrate insight

Some online lenders can help business owners with credit scores as low as 500. There are also online lenders and nonprofits that can help you get an SBA loan if you can’t qualify with a bank.

Bottom line

Before applying for a bank small business loan, consider the types of bank business loans that will offer the best terms, interest rates and loan features to suit your funding needs. A bank may be your best chance at a low-interest business loan if you have good-to-excellent credit. But funding times with a traditional bank may be slower than online lenders, and you may need to meet strict requirements to be eligible, such as having two years in business.

Frequently asked questions about a bank small business loan

• Do banks give loans to small businesses?
  

  Yes, banks offer business loans to small businesses all the time, though you may be more likely to get approved at a small bank. According to the 2023 Small Business Credit Survey, 66 percent of applications for loans, lines of credit or merchant cash advances were at least partially approved at large banks. Seventy-six percent of applications were at least partially approved at small banks.

• Can I use a personal loan from a bank for my business?
  

  You can – to a point. While personal loans often don’t require collateral and have interest rates that won’t get as high as many bad credit business loans, interest on personal loans is not tax-deductible as they’re considered consumer debt. Personal loan limits also tend not to be as high as business limits, and can put your personal assets at risk if you default. Using a business loan, on the other hand, and filing your business as an LLC can protect your personal assets in case of default.

• Which bank is best for a small business loan?
  

  The best bank for a small business loan will depend on your specific funding needs. You might choose to go with the bank where you do your business banking since you already have an established relationship. Or you may talk with several banks to decide which bank will offer you the best loan offer.