Capital and cash flows are the lifeblood of a business, as almost no business can survive or thrive without adequate funding. Businesses of all sizes rely on business loans to meet a variety of needs such as expansion, buying equipment, expanding into new markets, or meeting their working capital needs. In this article, we will explain the process of getting a business loan and share tips on identifying the best bank for a business loan.
Several institutions, such as Large national banks, small and regional banks, and credit unions, can provide your business funding in the form of a business loan. Large and small banks remain the most preferred options for getting a business loan.
Importance of Selecting the Right Bank for Business Loans
Banks differ greatly from one another, and so do their offerings. Some banks may offer lower interest rates on your loans, while others may have lower business loan requirements. Selecting the right bank for business loans is essential as it will ensure that you don’t have to deal with surprises down the road.
Understanding Your Business Loan Requirements
Determining the Loan Amount
The first step in the business loan application process is determining the ideal loan amount you need. You need to carefully assess the needs of your business and arrive at a figure that will be sufficient to meet your funding needs. It’s important not to underestimate or overestimate your funding needs.
Underestimating the amount of loan will lead to problems later while overestimating may force the bank to question your rationale for the higher amount. A higher loan amount may also lead to rejection if the bank deems your finances for repaying to be insufficient for future repayments.
CapCompass can help your business prepare a proforma projection model that allows companies to assess the amount of loan required to meet their business objectives.
How CapCompass Can Help You in Identifying the Loan Purpose
It’s important to identify the exact purpose of the business loan, as pre-customized loans and finance solutions are available based on the needs of a business. If you plan to buy commercial real estate, you may get a commercial real estate loan; to acquire equipment or machinery, you may apply for an equipment loan.
Banks also offer niche solutions such as invoice factoring or invoice financing for businesses needing immediate cash access. These loans are given against the invoices that a company or business has already raised, but the clients have yet to pay for the raised invoices. Identifying the true purpose of a loan will allow you to choose the right type of loan and ensure the success of your business loan application.
Assessing the Repayment Terms and Conditions
It’s also important to consider the repayment terms and conditions at this stage. You need to have a clear picture of the repayment schedule, fees, and other charges associated with the business loan. Some banks might have specific fees associated with the business loan, and you must consider carefully all such terms and conditions as they may affect the repayment schedule later or might also lead to higher-than-expected payments down the road.
Evaluating Collateral Requirements
Many banks ask for collateral for business loans, and a wide variety of things can be used as collateral. You can use your real estate, equipment, inventory, vehicles, certificates of deposits, treasury bonds, stocks, and corporate bonds as collateral. Most banks prefer liquid assets that can be easily converted into cash as collateral, and this gives liquid securities and certificates of deposits an edge over other items listed above.
You can also use future earnings of your business or accounts receivable as collateral for your business loan application. Banks use collateral to lower the risk associated with loans, and there is a higher chance of getting your business loan application approved if you could put up some collateral. It’s also possible to get unsecured business loans that come without the need for any collateral.
Some banks or loan providers may also insist that you put up your personal assets, such as real estate, vehicle, or securities, as collateral for the business loan application.
Researching Different Banks: How CapCompass Can Help
Once you have decided on the loan amount, purpose, etc., you should start researching different banks that give business loans. As mentioned earlier, large national banks such as Bank of America, JPMorgan Chase, Wells Fargo & Co, and Citi all give business loans.
You can also decide to get a loan from small regional banks or credit unions that may offer a more personalized and bespoke solution. Credit Unions are also known for having lower interest rates as compared to large and regional banks because they are structured as non-profits. Credit Unions may also be the best place to get a business loan based on their personalized approach and generally lower interest rates, fees, and charges. Most businesses usually choose from large national and small regional banks for their business funding needs.
CapCompass has longstanding relationships with over 150 banks and lendings, and we routinely coordinate discussions on behalf of our clients.
Factors to Consider When Selecting a Bank
You need to consider several factors when selecting a bank, such as the features that you want the bank to have, ease of accessibility, proximity, and business loan-related services that the bank offers. Most banks nowadays have dedicated mobile apps and online banking features which may appeal to millennials and later generations.
Banks may also have other requirements, such as income, credit scores, etc., that you must consider when selecting the best bank for a business loan. Your business’s credit score will also play a role here, as banks may have minimum credit score requirements. Not many people are aware that businesses and companies also have credit scores that are pretty similar to individual credit scores. Dun & Bradstreet PAYDEX Score and Experian Intelliscore Plus are the two principal business credit scores used in the US. Both range from 1 to 100, and a high business credit score such as 90+ will boost your chances of getting your business loan application approved.
Comparing Bank Options
While comparing different banks, you need to take into account the loan requirements, the maximum amount of loan being offered by a bank, interest rates, and other services that a bank offers, such as a mobile app or online banking experience, etc. You can also include any banks in the list where you have a savings or checking account.
To simplify the comparison process, you can identify the features or services that you value and then compare the banks based on whether they provide features or services valued by you. There is no simple and easy way to identify the best banks for business loans, as each business is different, and what may appeal to you may not appeal to other businesses.
Meeting with Bank Representatives
Once you have zeroed in on your preferred best banks for business loans, the next step consists of reaching out to bank representatives. While in the earlier days, this step usually involved going to a physical bank branch and then meeting in person with bank representatives. With the advent of online and digital banking offerings, it’s now possible to arrange a meeting online and you can even apply online for the business loan itself.
Although, if the bank where you plan to apply has a branch nearby, then it’s almost always better to visit the bank location physically and then have a formal meeting with the bank’s representatives.
Making the Final Decision
Your interactions with bank representatives of different banks will give you a clear idea of the bank’s business loan process, requirements, and loan process. You can now make the final decision and decide which bank you’d select for the business loan. CapCompass provides a detailed analysis of all the items included in a term sheet and advises clients on the most favorable credit solutions based on their unique needs.
Applying for a Business Loan
Gathering Necessary Documentation
Before you apply for a business loan, it’s essential to gather all the necessary documents that most banks ask for to process a loan application. Lenders often ask for business owners’ personal and financial information in addition to information about the business itself.
For small businesses, this means that the owners’ or majority shareholders’ personal information, such as their name, address, phone number, date of birth, and social security number, also needs to be included in the business loan application. It may also be a good idea to keep your past income tax returns and bank statements handy as the bank may request them.
Banks may use these documents to access your most recent credit score, as your personal credit score may also impact your business loan application. If you have a FICO score of 700+, then most banks would look at your business loan application favorably, but scores of less than 680 might lower your chances of getting a business loan or may lead to higher interest rates as a low credit score will force the bank to perceive you as high risk.
Documents that describe a business’s legal and financial status are almost always needed. They may include business formation documents such as articles of incorporation, partnership agreements, state and federal business licenses and permits, franchise agreements, commercial real estate leases, business tax returns, balance sheets, cash flow statements, profit and loss statements, business current account statements, etc.
Most banks will also ask for a detailed business plan to showcase what you plan to do with the funds you want the bank to disburse as a business loan. You need to have all these documents ready and ensure that the bank has access to any document they may need from the above list to process your business loan application.
There is no single formula when it comes to documents that are needed for a business loan, as different banks have different requirements and may thus ask for different types of documents.
Preparing a Solid Loan Application
A strong loan application that ticks all the right boxes will ensure that your business loan application has a higher chance of getting approved. The loan disbursal process is a time-consuming one as the bank may need some time to check all the documents presented by you to support your business loan application.
During this due diligence phase, the bank may ask for further information or request additional documents that they deem to be necessary for approving or rejecting your application. You need to provide the bank with all the requested information and documents, as this will speed up the application approval process.
If you follow all the steps we have discussed above, you should be able to easily create a strong loan application with a high chance of approval. CapCompass assists in preparing and reviewing the loan application, and our vetting ensures that your business loan application has a much higher chance of being approved.
Following Up With the Chosen Bank
While you may expect the bank to approve your business loan application within a few days, this may not happen as the loan disbursal process needs due diligence of documents and approval from the loan department, and the bank executives may also need to take approvals from their bosses.
So, it’s a good idea to have a bit of patience while your loan application is being processed. You may need to follow up with the bank regularly and request to expedite the approval process. There is no fixed time for processing a business loan application, as the approval process can take anywhere from as little as 15 minutes to 90 days or more.
Business loan approval times vary from bank to bank and may also be affected by your state’s banking practices and regulations. Although, if your application meets the bank’s requirements and you have provided all the documents, the application should be approved within a few days or weeks. Banks take longer time only if they have some lingering doubts about the creditworthiness of a business, if the loan amount is too large, or if they need to conduct an in-depth analysis of the financial condition of a business.
Conclusion
Once the loan application has been approved, loan disbursal is relatively fast. Most banks will disburse the loan amount to your business checking account within 3 to 5 business days of approval. The process of selecting the best bank for business loans is quite cumbersome, and we have tried to consider all the crucial elements you need to identify the best banks for business loans in this article.
Recap of the Importance of Selecting the Best Bank for Business Loans
● Identify the exact amount of loan that you need.
● You need to have a clear purpose for the loan, as the bank will undoubtedly ask what you plan to do with the loan amount.
● Keep all the documents pertaining to the financial health of your business ready
● You may also be asked to provide collateral for the business loan.
● Both your credit score and the credit score of your business will influence the bank’s decision
● A higher credit score will dramatically increase your chances of success.
● Identify the correct type of bank, as not every bank or what they offer may suit you.
● Always check the interest rate, repayment schedule, prepayment penalties, and other nuances while selecting a bank
● Ideally, you need to identify things that matter to you most, such as interest rates, repayment schedule, monthly payments, etc., and then rank different banks based on these criteria.
● There are banks and financial institutions that specialize in lending to niche businesses such as franchises, restaurants, etc. If you happen to be in one such industry, then going with a bank with a tailored solution for your business may be beneficial.
● Prepare a robust business loan application that includes a business plan and all the documents required by the bank.
● Be patient; the bank may need some time to process your loan application.
● Also be ready to provide further documents if requested by the bank.
Final Tips and Recommendations for Choosing the Best Bank for Business Loans
● Carefully assess your business and identify the banks that seem an ideal match for your funding needs.
● You also need to conduct thorough research about the lending process of different banks, their minimum credit score requirements, and collateral requirements, and then select a bank where you have the highest chance of approval.
● It pays to have a well-written business plan and well-maintained financial documents. A business plan and other financial documents, such as balance sheets, cash flow statements, and profit & loss statements, can convince the bank to approve your application.
● It’s a good idea to check with the bank where you currently have savings or checking account or a longstanding banking relationship whether they offer business loans or not. If the answer is yes, you can consider approaching them for a business loan, as your existing relationship with the bank may lead to a higher chance of success and faster loan disbursal.
CapCompass has become a go-to partner for entrepreneurs and business owners looking to secure debt capital to fuel business growth. We work closely with our clients to identify and develop a compelling narrative to present to potential lenders. The CapCompass program includes the buildout of a detailed proforma projection model and presentation materials to detail the growth opportunity of our clients. We evaluate our database of over 150 lenders and leverage our banking relationships to facilitate discussions from original expression to funding. Our team has closed over $16 billion in total transactions, and we provide experienced market analysis throughout the due diligence and negotiation process. CapCompass’s team of experienced professionals is dedicated to providing all the necessary expertise to close and fund successful credit facilities.