The main types of business loans from banks are term loans, lines of credit, real estate loans, equipment loans, and construction loans. Each type of loan is built for a different job. Therefore, there are two parts to the actual question. What will the money buy, and how will your business earn it back?
The first part is generally easy to answer. In the second part, sometimes things don’t go according to plan. If the loan’s structure isn’t appropriate for its purpose, even a seemingly manageable payment might put a strain on cash flow. To help small business owners in Southwest Ohio understand their loan options, our commercial bankers have put together this handy guide. You’ll learn what banks are looking for when they approve financing and how to find the business loan that best fits your goals.
Key Takeaways
- Bank financing arrives as a lump sum repaid on a schedule or as revolving credit you borrow from.
- Term, equipment, and real estate loans are the type of business loan built for one-time purchases.
- Pick a loan term that fits how long the asset you buy will keep earning for you.
- Banks check credit history, credit scores, cash flow, collateral, and financial documents before they approve a loan.
What Are the Four Types of Business Loans?
The four types are secured loans, unsecured loans, installment loans, and revolving loans. The FDIC sorts loans into two main categories, installment and revolving, and notes that either one can be secured or unsecured.
- Secured loan: You put up collateral to secure the loan, often the property or equipment you’re buying.
- Unsecured loan: Only your credit and cash flow back the loan. That’s riskier for the lender, so the rate may run higher.
- Installment (term) loan: One lump sum, then payments until the loan term is over.
- Revolving loan: Works like a credit card. Pay it down, then borrow again up to your limit.
Real bank products combine one trait from each pair. Financing for machinery is usually a secured business loan repaid in installments. A business line of credit is revolving, and it may or may not be secured.
Common Types of Business Loans from Banks and What They Cover
Business loans offered by banks come in a handful of shapes, each built for a different need.
Business Term Loans
A business term loan gives you a lump sum upfront. You repay the loan amount plus interest in scheduled payments, usually monthly, over the life of the loan. The rate can be fixed or variable. They suit known, one-time costs like an expansion. The catch? Once the money is out, borrowing more means a new application.
Business Lines of Credit
With our business line of credit, funds become available again as you repay, and you pay interest only on what you borrow. Many owners use it in place of working capital loans to cover seasonal swings, purchase inventory, and unexpected repairs.
Commercial Real Estate Loans
Commercial real estate loans pay for buying or refinancing business property. We lend on office buildings, retail spaces, multifamily housing, mixed-use properties, and owner-occupied buildings. The property typically acts as collateral for the loan.
Equipment Loans
An equipment loan finances machinery, vehicles, or technology, and the equipment itself secures the debt. We finance new and used equipment, and we can refinance equipment you already own.
Construction Loans
A construction loan funds new builds, expansions, and renovations. Money goes out as the project moves forward rather than all at once. Our business construction & Development loans typically carry interest-only payments during the build. Construction-to-permanent options can then roll the balance into long-term financing.
How to Choose the Right Loan for Your Business
Which loan is best for business needs like yours? The one whose repayment matches how the purchase pays you back. A commercial banker gets there with a few plain questions. What does the money buy? How long will it take to earn it back? When does cash come in?
A building or machine earns value over many years, so it makes sense to choose an installment loan with a matching loan term. Nobody wants to keep paying for a delivery van after it’s off the road. Payroll and inventory are different. They turn over within months, and revolving credit handles them better. Timing matters too. A landscaper with quiet winters needs flexible access to cash, while steady monthly revenue suits scheduled payments.
Your answers generally lead to one of the five loans listed below. You’ll want to make sure its repayment style suits your revenue flow.
| Your need | Loan that usually fits | How repayment works |
|---|---|---|
| One-time purchase or expansion | Business term loan | Usually monthly payments over a set term |
| Uneven costs or slow seasons | Business line of credit | Borrow, repay, borrow again. |
| Buying or refinancing a building | Commercial real estate loan | Scheduled payments backed by the property |
| New machinery or vehicles | Equipment loan | Scheduled payments backed by the equipment |
| Building or expanding a property | Construction loan | Often interest-only during the build |
Trouble usually starts with a mismatch. Put a building on a line of credit, and you could carry a large balance with no plan to pay it off. When you compare business loans, consider not just the monthly payment but also whether your business can repay the loan and what protects the bank if it cannot. A banker can compare each financing option with you.
What Do Banks Look At Before They Approve a Loan?
There are two things that banks are interested in knowing. Can your business repay the loan, and what protects the bank if it cannot? Most reviews focus on five areas.
- Credit history: Your business credit scores and, for many small businesses, your personal credit score.
- Cash flow and revenue: Tax returns and financial statements will tell if business revenue is enough for the new payments.
- Years in business: An operating history helps, but a startup is looked at more closely based on its plan.
- Collateral: Assets like property and equipment can be used to secure the loan.
- Business plan: Bankers want to know how the loan will be used and paid back.
Bring recent tax returns, financial statements, and a short written plan to your first meeting. For a line of credit, 1st National Bank may also ask for a business bank account. To understand the full process, check out what a business loan is and how it works.
How 1st National Bank Handles Business Lending
1st National Bank is a community bank and a member of the FDIC. We lend to small businesses in Butler, Clermont, Hamilton, Highland, Montgomery, and Warren Counties.
We handle underwriting in-house and make loan decisions locally. From day one, each borrower works one-on-one with a dedicated commercial banker.
Frequently Asked Questions
What is the difference between a term loan and a line of credit?
A term loan is a lump sum of money that you borrow and pay back over a specific period of time. A line of credit is a revolving line of credit up to an approved limit. You borrow what you need, pay it back, and borrow again, paying interest only on what you’re actually using depending on your loan terms.
Can a startup get a business loan from a bank?
Yes, but a startup will be subject to a more demanding review, as they won’t have an operating history. Banks will look more at the owner’s personal credit, the business plan, and any available collateral. A solid business plan that shows how the startup will repay the loan will help strengthen the application.
Do you need collateral for a business loan?
Not always, but it’s common. Collateral is an asset the bank can claim if the loan isn’t repaid, such as property or equipment. If you have no collateral, the lenders may consider you a higher risk and charge you more interest. Lenders also often require a personal guaranty, making the owner personally liable if the business defaults.
Does your personal credit score affect a business loan?
Yes, often, especially for a young business with a short credit history. When you apply for a credit line, 1st National Bank may look at your business credit score and possibly your personal score. Checking both reports early will give you time to fix errors.
How much can a small business borrow from a bank?
It depends on the loan type and your finances. For small businesses, banks examine revenue, cash flow, current debt, collateral, and the use of financing to determine how much of a loan to approve. A commercial banker can review your numbers and tell you what size small business loan you can afford to repay.
Talk With a Commercial Lender About Your Next Step
The wrong loan can leave you short on cash or paying for credit you never use. So match the loan to what you are buying.
Call (513) 932-3221 or fill out the commercial lender form below or on the business lending page. A 1st National Bank commercial banker will reach out to talk through your plans.
This article is provided for general informational purposes only and is not intended to constitute financial, legal, or tax advice, or an offer or commitment to lend. Loan products, terms, rates, eligibility requirements, collateral requirements, and availability may vary and are subject to credit approval and applicable underwriting standards. Additional terms and conditions may apply. Contact a 1st National Bank Commercial Lender for information regarding your specific financing needs.