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Pros and Cons Of Small Business Financing From a Bank
When you want to secure financing for your business, one or more banks may be at the top of your lender consideration list. As part of your due diligence in comparing the lending options available to you from banks and other sources, it's good to keep in mind the pros and cons of securing a business loan with a bank.
Pro: Banks can provide benefits beyond competitive loan rates
When you work with a bank for a business loan, you and your business can reap some significant benefits in addition to the cost of your loan:
- A lower cost to borrow may be found at banks compared with alternative lenders, especially if you have good credit and/or a broader relationship (multiple accounts) with that bank
- Ongoing support from a bank relationship manager who understands the big picture and important details of your business
- Confidence you're borrowing from a trusted financial institution you can count on now and in the future
Pro: Banks offer a variety of lending products for your small business
Many banks offer a range of loan and credit products that can grow with you as your business develops. Look for the following business lending options at any bank you're considering:
- Business credit card: Best for short-term use on expenses like business travel, small costs or meals that can be paid back within a few months, ideal for smaller needs around $1,000
- Small business line of credit: Best for short-term or seasonal needs like inventory or production materials and can be typically paid back within a few months, great for larger needs around $10,000
- Term loan: Best for needs around $50,000 for things like new equipment or vehicles and can be paid back within a few years
- Commercial mortgage: Best for financing a new property purchase or refinancing an existing business mortgage for needs around $250,000
- Equipment finance: Financing for both purchases and leasing for certain types of highly specialized commercial equipment
- Healthcare lending: Special types of practice financing to meet the unique needs of healthcare professionals like doctors, physicians, veterinarians, optometrists and more
Pro: Banks can help you apply for a Small Business Administration (SBA) Loan
Banks are also a major source of SBA guaranteed lending. These are loans that have a partial guarantee of support from the SBA to help grow small businesses. You can apply for SBA guaranteed loans directly from a participating bank. Some SBA loan options include:
- SBA Express Loan (up to $350,000)
- SBA 7a Program (up to $5MM)
An SBA guaranteed loan can help finance projects with less money down and may offer long repayment terms. However, there may be higher rates and fees versus a traditional bank loan, but likely substantially lower than a non-bank alternative lender. Once approved there can be additional paperwork and the time to close make take a little longer than a traditional bank loan.
Con: Bank business loans require time and documentation
Applying for a small business loan or line of credit with a bank can take some time and effort, as well as extensive documentation. You'll need to set aside time to complete detailed applications, gather and provide extensive supporting documents (financials, payroll, tax returns, etc.) and attend a few meetings with your small business lender. All of this is done so banks can continue to offer competitive rates and other support services that can help you and your business over the long term.
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This article is based on information available in February 2021. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.