The 5 Best Banks For Small Business Loans In 2020
When people think of getting a loan for their small business, the first place they’re likely to think of is a bank and with good reason. Banks have deep pockets, offer the convenience of in-house checking and savings accounts, and usually have better rates than the alternative lending market.
Because you’re likely to encounter stricter credit requirements as well as geographic constraints, the best bank for your small business loan needs is often the one you’ve already built a relationship with. They know you as a customer and, wouldn’t you know it, already have access to your bank statements and records. It is possible, however, that you may be able to use the economy of scale offered by big national banks to get an even better deal, provided you can meet their stringent qualifications.
Unfortunately, if your credit is below 600 or your business hasn’t been around very long, you’ll likely have a hard time qualifying for a bank loan. Learn more about alternatives to bank loans — such as online lenders and nonprofit business lenders — below.
Read more below to learn why we chose these options.
Types Of Business Financing Offered By Banks
As traditional lending institutions, banks usually offer a full spectrum of financial prospects to their customers. None of these are inherently “better” than any other, but they each come with their own sets of qualifications and terms that may make one product the superior choice for a specific business.
When you think of a loan, the first thing that pops into your mind will probably be a term loan. Term loans provide the borrower with a lump sum of money. You’ll then pay the amount you borrowed, called a principal, back over a timeframe called a term, plus interest. The term length will vary from loan to loan, but as a general rule, the longer the term, the more money you’ll eventually pay for the privilege of borrowing. Banks usually deal in long and medium-term loans with terms longer than one year. Banks are less likely to deal with short-term loans, which work a bit differently.
Most banks offer both secured and unsecured loans. Secured loans are backed by collateral, typically an asset or a cash deposit. As a result, they usually have lower rates and higher borrowing limits than comparable unsecured loans.
Lines Of Credit
Where term loans grant you a lump sum, lines of credit instead give you the ability to borrow money up to your credit limit for a specified amount of time. Most lines of credit are revolving, meaning that you can reuse credit after you have paid it off. Think of it as being a bit like a credit card but with better interest rates (some even come with a card that you can use at the point of sale).
Whereas term loans are used for working capital, expansions, and equipment, lines of credit are more often used for miscellaneous expenses or to smooth out a company’s cash flow. They can also provide a bit of security for unexpected expenses.
Like term loans, lines of credit may be secured or unsecured.
Equipment loans are a type of secured term loan that is specifically for buying equipment for your company. They follow, more or less, the same rules as term loans, but the asset that you’re purchasing is used as security for the loan.
Many banks offer SBA loans. These come in a variety of different forms, the most common being the SBA 7(a) loan and the SBA 504 loan. The SBA doesn’t originate loans, but it does provide a guarantee on loans offered through other institutions (such as banks), allowing businesses that wouldn’t otherwise qualify for financing to access capital at competitive rates and terms. Just be prepared for a longer application process.
Take A Look At The Best Banks For Small Business Loans In 2020
When looking at the “best” banks for small business loans, we’re considering a combination of excellent rates and accessibility. As I touched on above, you may very well be able to get a better deal from your local community bank or credit union. However, because the banks below are institutions that cover large portions of the country, there’s a high probability that at least one of them will be operating in your market or in your nearest major city.
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1. Wells Fargo
Wells Fargo Business Loans
Wells Fargo has developed a reputation for being a big bank that’s willing to work with small businesses. Like Chase, Wells Fargo has made some headlines for the wrong reasons in recent years, but most of those aren’t related to this area of lending.
Wells Fargo offers secured and unsecured loans to small businesses as well as lines of credit. It also offers a short-term loan product called FastFlex. The borrowing limit is lower ($35,000), and the rates begin at 13.99%. With a term of only a year, you’ll be making weekly instead of monthly payments, which will be deducted directly from your Wells Fargo business account. The more traditional Unsecured Business Loan has terms of one to five years, with a maximum borrowing amount of $100,000.
Wells Fargo also has a more modern application process than many of its competitors and reveals more information about its products online. Depending on the product and whether or not you’re a Wells Fargo customer, you may even be able to apply online.
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2. Chase Bank
Chase Bank Business Loans
As you might guess, America’s biggest bank comes with some advantages for small business customers. With nearly bottomless pockets and an enormous economy of scale, Chase can offer some of the best — if not the best — rates on business term loans and lines of credit. It also has extensive equipment financing resources and the ability to offer SBA loans.
Despite its position as an industry leader, Chase is surprisingly traditional when it comes to the lending process; you’re going to have to go to a branch and meet with a Chase representative in person.
Chase is concentrated around major metropolitan areas throughout the country (particularly the coasts, Illinois, and Texas). There are chunks of the country where the company has little to no presence.
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3. U.S. Bank
U.S. Bank Business Loans
For many small businesses in areas that aren’t well-served by the Big Four, U.S. Bank will be the largest player around. That’s not necessarily a bad thing, as U.S. Bank offers most of the advantages of those companies without some of the baggage. East Coasters, with a few exceptions in the Southeast, will be out of luck, though. U.S. Bank primarily operates west of the Mississippi.
While U.S. Bank offers business term loans and SBA loans, its line of credit offerings is what draws the eye. It offers three variations on the credit line, including an expedited version called Cash Flow Manager Line of Credit. If that isn’t enough, businesses with real estate equity can leverage it in the form of a Business Equity Line of Credit. U.S. Bank will offer you a secured line of credit for up to 75% of your property’s value. Payments are interest-only. Just be aware that this arrangement is for a maximum of five years. Larger businesses can also apply for a secured line of credit in the form of a Business Line of Credit. This arrangement can be secured with a greater variety of assets than the Business Equity Line of Credit.
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4. Bank Of America
Bank Of America Business Loans
Bank of America is one of the more conservative lending institutions on this list. However, it does offer a versatile array of products at excellent rates and, as the second-largest bank in the country, is accessible to most population centers in the US.
Despite stringent lending standards, the bank has modernized its application processes more than some of the other banks on this list. If you already have a Bank of America ID (from an existing account), you can use it to apply for unsecured loans and lines of credit on the Bank of America site. You’ll need to submit basic information about yourself and your business as well as your number of employees, profit, sales, and any outstanding obligations. You’ll also need to provide personal information about each additional business owner, guarantor, and controlling manager. Depending on the product, you may need to have a business checking account with Bank of America if auto-debiting is required.
If you’re not a current customer, you’ll need to apply by phone or at your local branch.
Bank of America offers business lines of credit, business term loans, and SBA loans to small businesses.
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5. TD Bank
TD Bank Business Loans
TD Bank operates almost exclusively on the East Coast and can be a good option for those looking to avoid the Big Four.
Businesses seeking less than $100,000 in funding will appreciate the fact that TD Bank doesn’t charge origination fees on small loans or lines of credit.
Small businesses can get a term loan, line of credit, or SBA loan through TD Bank. Unlike some of the other big banks, there isn’t a ton of product differentiation. You can borrow up to $1 million with a small business loan and get a line of credit up to $500K
While fairly traditional in nature, TD Bank does allow you to begin your application from home by downloading forms available on its site. Depending on the type of financing you’re seeking, you may need to attach additional information or forms.
You can also submit your information in a contact form if you’d like a representative to help walk you through the process.
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How To Qualify For A Small Business Bank Loan
So you like what you see and want to work with a bank? Well, there’s a reason the alternative lending market exists, and it’s because getting a bank loan can be surprisingly challenging these days. If you want to maximize your chances of being approved, here are some things you can do.
Watch & Repair Your Credit
Traditional lenders care about traditional markers of trustworthiness, and that, unfortunately, means you’re going to want to have good credit. If your credit isn’t in the high 600s or better, most banks will be hesitant to take a risk on you.
Have A Business Account With The Bank
If you don’t look like a fantastic borrower on paper, you can still build a relationship with your prospective bank by being a customer. Not only can this give you room to negotiate, but it will also make it easier to apply when you’re ready to. Additionally, some banks will only lend to customers who have accounts with them, regardless of how good your credit is.
Watch Your Cash Flow
It should be obvious, but banks don’t want to lend to customers who are financially unable to pay back their loans. Formulae vary from bank to bank — for example, Wells Fargo likes to see $1.50 in revenue for every $1 you borrow — but you’ll want to make sure you have some margin for error for making your payments. Learn how to calculate your debt service coverage ratio (DSCR), so you can assess whether you’re a good candidate for a bank loan.
Have A Good Track Record As A Business Owner
Most banks will want to see that you’ve been able to keep a business afloat for a while. That means having been in business for two to three years, minimum. If you need help before that, you may want to look at alternative business lenders.
Have Documentation Ready
If you’re applying to the bank where you also have business accounts, you’ll save some labor here. However, you’ll still need to be ready to produce a host of documents (doubly so if you’re applying for an SBA loan). These are things such as tax returns, proof of business registration, personal identification, financial statements, collateral (if applicable), information on any other loans you might have, and your business plan.
Alternatives To Small Business Bank Loans: Online Lenders & Nonprofits
Have banks rejected you? Did you read the above section and are now worried you probably won’t qualify for a small business bank loan? Do you need money faster than most banks can deliver it? Are you just starting and need a cash infusion?
You’re not alone. In fact, there’s a large market for people like you.
How Online Lenders & Nonprofits Are Different From Banks
Since the Great Recession tightened lending standards a decade ago, an alternative online market has grown that’s focused on getting money to businesses with poorer qualifications. Banks themselves, or investors with an appetite for risk, usually finance these companies. They also tend to have much easier and quicker applications, making them appealing to businesses that need money immediately.
Of course, this comes with a trade-off. While the seedier alternative lenders tend to fail over time, you still want to enter the alternative market with caution. Even honest and transparent lenders will (probably) have higher rates than a bank would offer you. Your credit score will be less of a factor here, but still, the better your credit score is, the better the rates you can expect.
The other option is to look at programs offered by nonprofits. Of particular interest will be the loans provided by Community Development Financial Institutions (CDFIs). These may be banks, credit unions, loan funds, or even venture capitalists certified by the CDFI Fund. CDFIs are often open to new businesses — even most online lenders shy away from businesses that haven’t been around for at least six months — and usually have good interest rates, though not as good as those of banks. Just be prepared for a lengthy application process as you try to match your needs with those of existing programs.
Where To Find Online Lenders & Nonprofits
Online lenders are incredibly easy to find. In fact, it’s almost impossible not to stumble across them online. Finding the ones you want to work with, however, will probably take a little bit of research. Merchant Maverick can give you a head start with that; check out our best small business loans.
Nonprofits are a different ballgame. Most operate on a local rather than national level, so you may have to do some research to find the ones in your area. The easiest way to do this is to use the CDFI locator on the Opportunity Finance Network or CDFI Fund websites.
You have as many potential bank loan options as you have banks operating in your area. That said, they can be tough nuts to crack, especially for businesses with less-than-perfect credit, or those that haven’t been in business very long. Businesses that can meet their qualifications and can wait out the slower application processes, on the other hand, should make banks their first stop for funding.
In Summary: Best Banks For Small Business Loans
- Wells Fargo Business Loans
- Chase Bank Business Loans
- U.S. Bank Business Loans
- Bank Of America Business Loans
- TD Bank Business Loans