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Banks & Credit Unions

Banks and credit unions have traditionally been a major source of funding for small businesses. Trends such as mergers and branch closures have constricted this form of capital access to some degree, but the institutions still offer a variety of valuable products. These include:

  • Term loans, which provide a lump sum payment that is repaid with interest on a fixed schedule
  • Business lines of credit, which allow a business to draw on an available pool of funding for short-term needs; these are particularly popular with seasonal businesses that need to cover expenses when income is lower, and are also useful for emergency expenses
  • Commercial mortgages to purchase land or buildings for your business
  • Equipment loans to cover investments in machinery and other equipment

Banks and credit unions also offer other services, such as commercial mortgages, business checking and savings accounts, business credit cards, and services such as the management of payroll, retirement accounts, and health savings accounts. In addition, community banks often provide educational events to assist business owners.

Compare the different rates, terms, maximum loan amounts, repayment conditions, and other details of the financing options provided by different financial institutions. This process will help you find the lender with the most advantageous annual percentage rate, a loan amount that fits your needs, or other terms that can best serve your business needs.

Prepare your supporting documentation before asking a financial institution for a loan. This information should include your balance sheet, financial projections for the future, legal documents, and business tax returns. Provide information on your personal finances as well, including pay stubs, bank records, and the balances and monthly payments on any debts.

A solid business plan can also help convince a bank of your ability to repay a loan. This document should include a detailed financial section with your revenues, expenses, debts, and accounts receivable and payable.

You should also have a firm idea of how large of a loan you’re seeking, and an outline how you plan to spend the money. Your monthly income should ideally remain at least 1.25 times greater than your monthly expenses after the loan payments are figured in.

Be prepared to offer something in return for the loan. Banks typically seek some sort of collateral to help minimize any losses in case of a default on the loan. This may include assets such as a portion of your accounts receivable or some of your inventory. You may also need to put forward a personal guarantee such as your home equity.

Applicants with a good credit score (typically 680 or higher) stand a better chance of getting approved for a loan. Check your credit score with one of the three main credit reporting agencies (Equifax, Experian, or TransUnion) to see if there are any errors or other issues that need to be addressed to improve your score.

Ask the lender what terms you’ll need to abide by during the length of the loan. A bank may require that you maintain a set of key ratios, such as your debt-to-equity figure.

While some banks and credit unions offer financing to startups, most prefer to work with borrowers who have already been in business for at least a couple of years. These applicants have a demonstrated cash flow and are better able to make the case that they can repay a loan, thus minimizing the risk to the lender. You’ll likely need to seek financing from other sources to start a business before going to a bank for funding to grow it.