The first stop in applying for a business loan should be the bank that already handles your finances. With your current bank, you have the advantage of familiarity: You’ve established a relationship and have shown that you’re a reputable business. Banks also usually have slightly better rates for commercial loans than other types of lenders.
The trade-off is that banks are pickier about who they lend to. They may require more collateral, lower debt-to-equity ratios, or more proven success than other types of business lending. Often they’ll decline commercial loans to companies that have been in business fewer than five years.
There are many other types of business lending. The main distinguishing feature is whether they offer secured or unsecured loans. Secured loans are those that are backed up directly by collateral: real estate, securities, or the equipment the loan is being used to purchase. Unsecured loans are more typically offered by banks, while independent financial organizations are more likely to offer secured loans.
These independent companies are more likely to take business lending risks on startups and smaller businesses than banks. Often they specialize in particular industries, types of loans, or business sizes.
If you’re turned down by your bank or just think you’re likely to be, look into business loan brokers. As the name implies, brokers don’t lend money directly; instead, they’ll assess your situation and decide which lenders are most likely to accept your application.
Brokers are often a good source for commercial loans for startups or other higher-risk businesses. Because the brokers bring in a lot of business, they can sometimes get approvals that you wouldn’t be able to get on your own. In addition, they’ll also usually provide advice on your paperwork and give you other help in getting the loan.
However, you can expect to pay a higher rate for a broker’s services, both because they need to mark up the loan from the provider and because they’re taking greater risks.