Business Loans from Commercial Banks for Small Businesses

What You Need To Know About Commercial Bank Lending

African American couple talking to businesswoman Credit: Jose Luis Pelaez Inc
Jose Luis Pelaez Inc/ GettyImages

Debt financing, or taking a small business loan is one important source of money for small businesses. A commercial bank is usually where small businesses turn first for a loan. It can be difficult for a start-up small business to get a commercial bank loan because of perceived risk. Mature small businesses obtain loans regularly through commercial banks, though access has been more difficult during the Great Recession.

What You Need To Know About Commercial Bank Lending:

  • Be careful when you choose a bank for your small business. Compare your local community banks verses large, regional banks. Compare the services each offers and how accessible they are to you.
  • Understand the basics of commercial bank term loans before you apply. The basics include maximum and minimum amounts, covenants, collateral and more.
  • There are five important factors involved in qualifying for a small business loan. Factors include credit history, how much money you will need for start-up assets, your business plan, and your documentation for your loan officer.
  • In order for a small business to get off the ground, or to keep operating, it must have financing. There are typically two sources of financing for small businesses. One is debt financing. Small businesses can apply to banks or other financial institutions, like credit unions, for commercial loans.
  • You have a good idea and a lot of enthusiasm for a new business. What you may not have is the money to start that business. How do you get a business loan for a startup business? The best way is to apply for a bank loan for a new business, or to buy an existing business.
  • Small businesses take out commercial bank loans for a variety of reasons. Loans can come from other sources as well. Credit unions make loans to small businesses. Loans can be made using accounts receivable or inventory as collateral. Borrowing money is expensive for a company and raises its risk.
  • When a small business applies for a business loan, a bank or other lender follows a certain protocol when evaluating the application. One thing the bank uses is the 5 C's of credit analysis to evaluate the application for the loan. Bankers evaluate the small business in the context of the 5 C's in order to allocate their limited funds.
  • When you open a business, one of your first tasks should be to open a business bank account. It is important to keep your personal and business finances separate. It's not enough to just keep separate records. You should actually keep the money physically separate in different bank accounts, one set up as a business account.
  • Small businesses need access to short-term business loans for working capital and other needs that can be resolved within one year.

 

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