How to Get a Bank Business Loan: Eligibility, Documents, and Application Process

Key Takeaways:

• Various types of lenders provide capital to businesses, including traditional banks.

• Getting a bank business loan requires borrowers to meet specific eligibility requirements around credit score, time in business, and annual revenue.

• Borrowers should research various banks, financing products, and alternative lenders to find the best option.

If your business needs capital to improve cash flow or scale, you can get financing from different types of lenders. One option that many business owners consider is a bank business loan, which is commercial funding from a traditional bank.

While banks can provide funds, there are specific bank business loan requirements to be aware of. In this guide, we cover more about eligibility, documentation required, how to submit an application, and alternatives to consider.

Bank Business Loan Requirements

Bank business loan requirements can vary by institution. Each one has a different underwriting process.

However, banks tend to have stricter eligibility requirements for borrowers. If you already have a business or commercial banking relationship, you may qualify for more favorable terms.

While requirements may vary, below are some common factors that banks evaluate when determining whether you qualify for a loan.

1. Credit Score

Your credit score is a measure of financial health and consumer behavior. It illustrates how likely you are to repay your debt and how responsible you are in managing multiple types of debt. If you have a business credit score, that may be considered as well.

Lenders often also review your individual credit score. Banks typically have specific minimum credit score requirements. Your credit score can impact both your approval and the interest rates you qualify for.

Your FICO score is based on five factors:

1. Payment history (35%)
2. Amounts owed (30%)
3. Length of credit history (15%)
4. New credit (10%)
5. Credit mix (10%)

You can typically check your current credit score with your bank or credit card issuer. Review the lender’s credit score minimum to see if you qualify.

2. Time in Business

Banks also review your time in business when you apply for a bank business loan. In general, banks may typically  want applicants to have a minimum of two years in business. For example, Bank of America requires two years in business for its Business Advantage Term Loan.

Startups with limited history may not qualify for a traditional business loan from a bank. In that case, online lenders may have more flexible requirements.

The shorter the timeframe, the riskier it can be in the eyes of the bank. Having many years of business under your belt can show that you have a proven track record and provide important data for the bank.

3. Annual Revenue

Annual revenue is another metric that banks review when  a business owner applies for a loan. Lending money always comes with a level of risk. Checking annual revenue ensures that you’re earning enough to repay your debt.

4. Existing Debt

Checking your annual revenue only shows lenders that you might be able to afford the monthly payments on a loan. But lenders also review your existing debt as part of your financial health.

If your debt-to-income ratio is above certain levels, or your debt service coverage ratio falls below lender minimums, the bank may consider you overextended and a higher risk.

5. Cash Reserves

While consumers need an emergency fund for the unexpected, businesses need cash reserves for the surprises that lie ahead. Having a buffer of cash that you can access easily shows lenders that you’re financially healthy and have funds to repay the loan, even if circumstances change.

So, if you enter a slow period or equipment breaks down, you have enough funds to get through it.

Documents Required for Business Loan Applications

When you apply for a bank business loan, you must provide supporting documentation. The paperwork gives lenders insights into your business finances and cash flow history. Some common documents required for business loan applications include:

1. Financial Statements

Banks may require you to provide:

• Profit and loss statement
• Balance sheet
• Cash flow statement

Lenders are looking for patterns and consistency. Having strong cash flow and revenue can help your application.

2. Tax Returns

You may also need to provide two to three years of personal and business tax returns when you apply for a bank business loan. This gives banks a longer timeframe to review and assess the financial health and strength of your business and make sure numbers match up.

3. Business Plan

Banks may ask you for your business plan. That helps them understand what you do, what you need, and why you need it. Include the executive summary, financial projections, loan purpose, revenue model, and position in the market.

4. Bank Statements

You will likely need to provide bank statements to show your transaction history, deposits, and spending patterns. Though it can depend on the lender, you may need to provide up to one year’s worth of bank statements.

5. Business Documentation

As part of the application process, you may need to provide business documentation showing the legitimacy of your company. That may include:

• Articles of incorporation
• Employer Identification Number (EIN)
• Operating agreements
• Business licenses and permits

6. Collateral Documentation

Some business loans from a bank may be secured or unsecured. An unsecured line of credit or loan doesn’t require collateral. Secured loans are backed by collateral, or a type of asset that lenders can seize if payment obligations aren’t met.

If you’re applying for secured financing, you may need to provide collateral documentation. Some common types of collateral include:

• Equipment
• Vehicles
• Inventory
• Commercial property

Secured financing lowers the risk for lenders and may help you qualify for better terms and rates. Just be aware of the risks when pledging collateral.

How to Apply for a Bank Business Loan

To apply for a business loan from a bank, take the following steps to get started.

1. Step 1: Determine Financing Amount

Borrowing can help fill cash flow gaps and support a period of growth. But there’s always a risk when borrowing. It’s important to determine the amount of financing you need and avoid overborrowing.

2. Step 2: Review Different Types of Bank Business Financing

Banks may offer different financing options, including:

• Business term loans: Borrowers receive a lump sum of capital, typically with fixed terms and rates.

• Business lines of credit: A revolving line of credit that allows borrowers to tap from a preapproved credit limit and only pay interest on what’s borrowed.

• Business credit cards: Provide borrowers with access to revolving credit, paid by a specific due date, and generally have higher interest rates.

• Equipment financing: Provides funds to purchase either new or used equipment, which acts as collateral for the loan or lease.

• Commercial real estate loans: Business owners can use commercial real estate loans to purchase or refinance commercial or income-generating property.

Based on your financing amount, loan purpose, and needs, you can choose the option that best aligns with your goals.

3. Step 3: Compare Multiple Lenders

After identifying the type of financing, compare various bank lenders. They may have different loan amounts, offerings, interest rates, and repayment terms. To get the most competitive rates, check out three to five banking lenders. Review potential extra costs like origination fees, annual fees, or prepayment penalties.

You can also check reviews on sites like Trustpilot and the Better Business Bureau (BBB). If you have an existing business banking relationship, you may qualify for better terms.

4. Step 4: Prepare Paperwork

Prepare your paperwork for your application and gather your supporting documentation. Collect recent bank statements, tax returns, business formation documents, and financial statements.

5. Step 5: Submit Bank Business Loan Application

Go to the bank’s website or into a local branch and fill out the business loan application. Provide required paperwork and necessary signatures. Ensure all information matches and that you don’t leave anything blank to help avoid delays.

6. Step 6: Get Approved and Receive Funding

If you’re approved by the bank, you’ll receive the funds, typically in a business checking account. Once you have the funds, you can use them for working capital or expansion. Start repayment based on the schedule in your loan agreement.

Bank Business Loans vs. Alternative Financing Options

Small business loans from a bank or alternative lenders have different benefits and disadvantages. Bank business loans may come with competitive interest rates, and certain relationship benefits if you have an existing account.

However, banks are known for having tight lending standards and require borrowers to meet stringent criteria. Additionally, approval and funding may take a bit longer, depending on the bank.

Online and alternative lenders typically provide faster funding options and a streamlined application experience. Depending on the product and lender, rates could be higher. For borrowers who might not qualify for traditional financing, online lenders generally have more flexible requirements.

Final Thoughts

Business owners seeking financing have a range of options from banks and credit unions to online and alternative lenders. If you pursue a bank business loan, understand the advantages and disadvantages.

To strengthen your application, build both personal and business credit by making on-time payments and managing outstanding balances. Boost your cash reserves and get your paperwork organized. Understand how much you need and what the funds will be used for, so you can responsibly invest in your business.