Have you built a relationship where your business banks? Do they have a small business relationship manager? If so, the best place to get a loan is from the bank where you regularly do business.
Ideally, you meet with your business banker monthly or quarterly to go over your financial reports. If you treat your banker as a trusted financial advisor, getting a small business loan with the best terms will be much easier.
Use the same criteria to choose where your business banks as you would to choose where to apply for a loan. Find one where you know they are committed to small business lending. Meet the bank’s or credit union’s representative first to determine whether they are someone you feel you can work with long-term.
While changing banks should not affect your business credit score, it could lead to issues getting loans if all your credit history is not considered. So take the time to meet with multiple bankers before deciding. The longer and stronger your relationship with your lender, the more likely you are to be to get your loan approved when you need one.
Where to Get a Small Business Loan
If an SBA loan may be in your future, be sure to ask whether the bank or credit union is an experienced SBA lender. Read on for the pros and cons of each type of lending institution.
Local Community Banks
Community banks are locally owned and operated. Unlike major banks where loan approval rates are typically 24-27%, community banks commonly approve 49-50% of loan applications. They can have lower fees and loan interest rates than large banks.
Chairman and CEO of ConnectOne Bank (CNOB) Frank Sorrentino emphasizes the importance of taking time to build a relationship with your community bank:
“A banking partner who intimately understands your business, your community and the broader landscape can be a beneficial resource, similar to other fundamental advisors such as your lawyer or accountant. For small business owners, community banks are often much better equipped to provide the degree of personalization that larger institutions cannot, which can be a huge asset as your business grows.”
Like any bank, the more services you use and types of accounts you open, the stronger that relationship will be. Using more of their services also improves your chances of being approved for a loan. Unlike big banks, community banks will consider your family history and character in addition to your credit reports.
They often free checking more often, lower fees and pay higher interest rates on deposit accounts. On loans, their interest rates will usually be lower than at big banks.
Credit Unions
Credit unions are non-profit entities owned by people with a common interest. You may be surprised to find that you qualify to become a member of one or more credit unions. The only requirement some have is that you are in their geographic location, military affiliation, or membership in associations or religious, fraternal or alumni organizations.
You are likely to be able to build a closer personal relationship with their branch or loan manager than at a large bank. They often offer extended business hours, lower fees, higher interest on your deposits, and less expensive loans. But at 40.3% loan approvals in October 2018, they don’t approve as high a percentage of loans as a community bank.
Because they can be smaller with a limited number of locations, if you relocate there may not be a branch near you. But many credit unions now use shared branching to offer more locations and free ATM usage. They frequently have more limited services and online capabilities.
Credit unions may offer (but not all do – so you need to ask):
- Term aka installment loans
- Business lines of credit
- SBA loans
- Startup loans
- Business credit cards
- Commercial mortgages
Credit unions are non-profit so they do not have to pay federal or state taxes or turn a profit. This allows them to offer highly competitive rates which could mean a much lower cost loan for your business. They offer smaller loans than most banks and have faster approvals.
Branch of a Large Bank
If your business is not strictly local, or you travel to many locations, you may want to consider dealing with a branch of a large bank. They offer more locations and services and are often leaders in online access to more of their banking services.
While in the past, small business loans were not easy to get from large banks, in 2018, the large banks are bullish on loaning to small businesses. Loan approvals have increased from 24.5% as of July 2017 to 26.3% in July 2018. They continue to rise, hitting 26.8% in October 2018. But this is still far below the approval rates for community banks and credit unions.
Large banks can make much larger loans and are more likely to be SBA preferred lenders than community banks and credit unions. If you have plans to go national or international, you may need their greater reach and influence.
Does the large bank you are considering support your local community? Some large banks do provide grants and invest locally.
Consider All Your Options
Choosing where to do your business banking is extremely important to your business’ survival. Make the time to investigate and compare your options. Go in and meet their personnel and ask to be introduced to the small business relationship manager, loan officer or branch manager who would work with you.
BankLocal search is a shortcut to finding local banks and credit unions and how likely they are to loan money to small businesses. They use publicly available federal data to highlight the actual lending performance and assign a small business lending score.
Wherever you decide to borrow money for your small business, ask for the actual APR in writing. Lenders are not legally required to tell you except under a new law in California. Small business loan APR interest rates can run as high as 50-350%.
Focus on relationship banking so that you have a banker in your corner for strategic advice and financial planning. Get started now on building your business credit file so when you need or want to take out a loan, you will qualify for the best terms possible.
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