Conventional Business Loans

Collateral, Guarantees and Covenants

Conventional loans are usually secured. The bank files a lien on the assets being financed and often on other business assets as well, using a UCC filing for equipment, inventory and receivables or a mortgage for real estate. Most banks also ask owners with significant stakes to sign a personal guarantee.

Many loan agreements include covenants, which are promises the business makes for as long as the loan is outstanding. Common examples include keeping a minimum DSCR, staying under a maximum debt level, delivering annual financial statements and keeping deposit accounts at the bank. Breaking a covenant can allow the lender to raise the rate or call the loan, even if every payment has been made on time.

Conventional vs. SBA-Guaranteed Loans

SBA programs exist partly to fill the gap left by conventional lending. To qualify for an SBA 7(a) loan, a business must show it cannot obtain the desired credit on reasonable terms from non-government sources. The SBA guaranty, up to 85% on 7(a) loans of $150,000 or less and up to 75% on larger ones, reduces the lender's risk and makes approval possible in cases a bank would otherwise turn down.

• Down payment. SBA loans can allow a smaller equity contribution, which helps on real estate and business purchases.

• Term. SBA 7(a) loans for real estate can run up to 25 years, often longer than a conventional commercial mortgage.

• Speed and paperwork. Conventional loans often close faster with fewer forms, especially for repeat bank customers.

• Fees. SBA loans can carry an upfront guaranty fee, which the SBA sets each year by loan size. Conventional loans have no guaranty fee but can have their own closing costs.

Preparing a Strong Bank Application

1. Gather two to three years of business and personal tax returns and current interim financial statements.

2. Prepare a debt schedule listing every loan, lease and line of credit with balances and payments.

3. Write a short explanation of the loan's purpose and how it will be repaid.

4. List the collateral available, with estimated values and any existing liens.

5. Review your personal and business credit reports and resolve errors before applying.

6. Talk to the bank where you already hold deposits, since an existing relationship often helps.

Frequently Asked Questions

How long does a conventional business loan take?
Timelines vary, but several weeks is common. Loans involving real estate usually take longer because of appraisals, title work and environmental reviews.

Can a startup get a conventional business loan?
It is difficult. Banks usually want a few years of operating history and financial statements. Newer businesses often look at SBA programs, equipment financing or non-bank lenders first.

Is a credit union loan conventional?
Yes, as long as there is no government guarantee. Credit unions follow their own commercial lending policies and may have limits on business lending.

Find the Financing That Fits

If your business has steady cash flow, good credit and collateral, bank financing is often the lowest-cost option. If one piece is missing, SBA-guaranteed or non-bank financing may bridge the gap. Comparing offers across these options will show which path works best for your business.

A conventional business loan is commercial credit from a bank or credit union that carries no government guarantee, so the lender takes on the full risk of the loan. Because of that, conventional lenders tend to be selective. They look for established businesses with solid cash flow, good credit and collateral, and in return they usually offer some of the lowest rates and most flexible structures available to small and mid-sized companies.

This page explains what banks offer, how they decide, and how a conventional loan compares with SBA-guaranteed financing.

What Makes a Loan "Conventional"

In commercial lending, "conventional" simply means the loan is made on the lender's own terms and balance sheet, without a guaranty from the U.S. Small Business Administration or another government program. The bank sets its own credit standards, collateral rules, pricing and covenants within the limits of banking regulation.

That independence cuts both ways. A bank can move quickly and structure a deal around an existing relationship, but it can also decline a deal that falls outside its comfort zone, even if the business is healthy.

Products Banks Offer

• Term loans. Lump sums for equipment, expansion or acquisitions, repaid on a fixed schedule.

• Commercial real estate loans. Financing to buy, build or refinance owner-occupied or investment property, often with a longer amortization and a balloon at maturity.

• Equipment loans. Secured by the machinery or vehicles being purchased.

• Lines of credit. Revolving credit for working capital, often secured by receivables and inventory and renewed each year.

• Letters of credit. A bank promise of payment used in trade and contract work.

How Banks Underwrite: The Five C's

Most commercial lenders organize their review around five factors.

1. Character. The owners' credit history, industry experience and track record with past lenders.

2. Capacity. Whether the business generates enough cash flow to cover the new payment along with existing debt.

3. Capital. How much of the owners' own money is invested in the business or the project.

4. Collateral. Assets the bank can rely on if the loan is not repaid, such as real estate, equipment or receivables.

5. Conditions. The purpose of the loan, the state of the industry and the wider economy.

Capacity usually carries the most weight. A business with strong collateral but weak cash flow will struggle to get approved, because banks expect to be repaid from operations, not from selling assets.

Debt Service Coverage in Practice

Banks measure capacity with the debt service coverage ratio, or DSCR: cash available for debt payments divided by total annual debt payments.

In a hypothetical example, a company has $150,000 a year in cash flow available for debt service and $100,000 in annual loan payments, including the new loan. Its DSCR is $150,000 divided by $100,000, or 1.5. A ratio of 1.0 would mean every dollar of available cash goes to debt, with nothing left over. Each bank sets its own minimum, and most want a meaningful cushion above 1.0.

If the ratio comes in too low, options include borrowing less, choosing a longer term to lower the annual payment, or paying down other debt first.