For many businesses, both large and small, financing is crucial to the launch, growth, and survival of their small businesses during difficult times. Is it hard to get a business loan? This is a query that a lot of small business owners have, especially in the modern business climate that is changing quickly.
Many factors are taken into consideration before approving a company loan. Applications for company loans that are approved frequently include strong credit, a significant income history, and a minimum of a few years of operational experience. If your organization doesn’t meet all of those conditions, though, don’t panic. There are financing options that you might find appropriate.
Business Loan Approval Factors
Your chances of getting a business loan authorized will depend on several factors, including the type of financing you choose and your credit and financial position. The following factors are usually taken into account by commercial lenders when reviewing your application.
Revenue
Is this business financially able to make regular payments? This is one of the issues that a lender must address. Commercial lenders typically want to know that you can not only stay in business, but also that the business has the cash flow to cover its obligations, which could include daily, weekly, or monthly payments.
In light of this, you should expect to be asked to submit bank statements or other documentation proving your income to validate your monthly revenue. As an alternative, you might need to link your bank account so that the lender can examine and confirm them personally.
A lender may consider your typical monthly income over the previous three to six months. Copies of your company’s financial statements and/or tax returns may also be needed by others. (This is particularly valid for bank loans.) Once more, small business creditors want to be sure you can pay back debt.
Time in business
Lenders are not concerned with your age, but they are with the age of your company. Based on your past actions, lenders attempt to anticipate your future behavior; the more extensive your history, the better. A well-established company is always in a better position than a startup. While this isn’t always the case for all loans, the majority of conventional financial institutions, such as banks and credit unions, prefer to see a few years of operation.
Certain online and other financial institutions have less stringent time-in-business requirements; even if your company has only been operating for six months, they may still be able to deal with you. Yet, getting financing for a firm that is only ideas can be extremely challenging. Though fewer in number, new firms do emerge without income or track record. We’ll talk about those shortly.
Your company will be viewed as less risky and you might be given better conditions for repayment if you have been in operation for several years. In contrast, lenders who provide loans to first-time business owners could demand a down payment, impose higher interest rates, or need a personal guarantee to offset the risk that your venture won’t succeed.
Loan amount
The majority of lenders base their loan amount calculations on your cash flow and revenue. The typical deal size should be anywhere from fifty percent to one hundred percent of your monthly income on average. Larger loans are made by certain lenders, but they frequently need collateral and/or are only extended to the best-qualified applicants.
A business lender will take into account your requested amount in addition to the other variables we’ve covered. For example, if your company has just been operating for a few years, you can be granted far less than if it has been operating for at least five and has solid financials.
However, asking for more than what you are eligible for doesn’t always mean you’ll be turned down outright. The lender may, however, make you provide them with a more acceptable sum.
Credit history
The majority of business loans place a high value on creditworthiness, so you should be prepared for the application process to involve a review of your personal and/or corporate credit records.
A good business credit history and high personal credit scores might increase your chances of being granted a business loan with advantageous terms. Some may even decide not to examine your application based only on your score. This may hold whether your company is a recent startup with little credit history or if it has been operating for a while.
The stronger your credit score, the more likely it is that your loan application will be approved because lenders use it to predict your future behavior.
How to Build a Relationship with Potential Business Lenders
Opening an account that is simpler to be approved for, such as a company checking account or credit card, is the greatest method to build a strong rapport with a business lender. If you can first demonstrate that you are a trustworthy consumer with a smaller product, you might be a better candidate for a business line credit or another loan.
You might also think about taking out a microloan or a personal loan. Even if they aren’t usually strictly intended for business usage, you can utilize them to establish your company and show the lender that you’re a trustworthy borrower.
A relationship-building plan enhances the loan request and places you in a stronger position than when submitting without any past relationships since lenders look at all of your accounts.
Tips for Negotiating Better Business Loan Terms
It might surprise you to learn that your lender doesn’t always decide the terms of your loan. Negotiations may be possible on the following:
- The interest rate you have: You might be able to borrow money for less money if you can get a lower annual percentage rate.
- Terms of your prepayment: You might be able to bargain for a lower price or no fee at all if the lender normally imposes a fee for early loan payments.
- Your conditions for repayment: This covers the costs and the length of time you have to pay back your loan; a lender might be open to adjusting them to your advantage.
- Your assurance: If your company doesn’t fulfill its payments, you might be able to work out a personal guarantee without putting your assets at risk.
There are a few things you can do in advance to improve your chances of obtaining the finest terms. Make sure you’re applying to the appropriate lender for your business by doing your homework beforehand and using Nav.
To prove that your company is stable, ensure you have a strong business plan and a successful business model. Another smart move is to familiarize yourself with basic loan jargon, particularly if you’re applying in person, to help you create the most impression possible.
Approval Odds by Loan Type
The type of loan you’re attempting to receive will also affect your chances of getting approved for a business loan. These are a few popular business loan choices along with the likelihood that they will be accepted.
Merchant Cash Advances
If your company has high revenues, obtaining a merchant cash advance might be simple in terms of credit. In most cases, funding is granted in a matter of hours to companies that satisfy the qualifying standards.
Since a cash advance for merchants isn’t a loan but rather an advance over your future sales, you must regularly deposit money into the company’s account or have a steady stream of credit card receipts. While there are several minimum revenue criteria, a monthly minimum of $5,0000 is required. You should anticipate a greater payment than with a regular small business loan because the requirements for obtaining a merchant cash advance are less strict than with one.
Invoice Financing
In essence, invoice financing is a payment advance against an organization’s outstanding invoices. For instance, invoice financing may enable you to receive up to 90% of the amount of an invoice that you anticipate being paid for in the next two months.
Rather than waiting for payments from your clients, you might be able to finance your accounts receivable to obtain working capital right now if your receivables comprise significant invoices. If your clients usually pay their invoices on schedule, this can be a smart short-term approach to get cash.
Compared to more conventional business loans, invoice finance is simpler to qualify for since it offers a lender a reasonably safe option. However, bear in mind that invoice financing might be costly. You may also like to look into the distinctions between invoice factoring and invoice financing.
Short-Term Loans
A short-term loan might be more sensible than a longer-term loan, depending on the reason for the loan. With short-term loans, you can obtain financing fast. Furthermore, compared to traditional lenders, many online lenders who provide short-term borrowing have laxer qualifying requirements. This is mostly due to the short time horizon for the lender to receive its money back, which lowers the loan’s overall risk.
Online lenders frequently seek out creditworthy consumers with a respectable track record, even if their credit requirements may be less stringent than those of a traditional bank. Because of this, a lot of lenders that provide short-term business loans demand that you have a consistent revenue stream and have been in operation for at least six months to a year.
Equipment Financing
Financing for equipment is a great way to use borrowed funds to buy necessary equipment, freeing up cash flow for other uses. When financing machinery, the equipment usually acts as loan collateral, lowering the lender’s risk. You may potentially be eligible for an extended repayment period, contingent on the loan amount.
Lenders typically view equipment financing as reasonably safe, so you can typically anticipate more lenient qualifying standards. However, to be eligible, you might have to show that you have a track record of significant revenue growth as well as reasonably solid personal or corporate credit histories.
Traditional Term Loans
Term loans provide a set loan amount along with a set loan payback duration. Applying for them from typical commercial lenders such as banks can be challenging if you haven’t been in business for a long time. To qualify for advantageous conditions, you usually need to have been in business for a year or two, or even longer, have a solid business credit record, a decent personal credit score, and a history of consistent revenue growth.
SBA Loans
For enterprises that meet the requirements, loans insured by the U.S. Small Business Administration might be an excellent choice. These loans also provide some of the best terms and interest rates available. Generally speaking, you must have been in business for a period of two to three years, have solid or exceptional credit, and have consistent revenue that proves your company can pay off the debt to be eligible for an SBA loan. (While certain SBA loans are accessible to start-up companies, many lenders choose to work with well-established companies.)
In general, business credit cards are easier to get than loans. If you don’t qualify for a loan, you can use them for flexible financing, and you can establish your company’s credit history with them.
The Impact of Industry on Business Loan Approval Rates
Your industry can have a big influence on your loan eligibility. Every American firm is categorized using NAICS numbers, so it’s critical to know what your code is. Your NAICS code categorization has a significant influence on your loan qualifications because each industry is evaluated according to risk.
The following are some sectors that have found the most success in obtaining business financing:
- Software development for dentistry
- Motels and hotels
- Doctors offering business consulting
- Promoting companies
- Booze
However, there are certain companies to which the SBA will not extend credit. Businesses that deal with financing activities, rare coin dealers, real estate investments, pyramid sales companies, gambling establishments, and nonprofit organizations are among the disqualified enterprises.
What Happens to Your Credit Score When You Apply for a Business Loan?
Your credit score may be impacted by a business loan application, depending on how the loan is structured. If you apply for a secured loan, such as a personal guarantee, your credit may be impacted if you default on the loan. If there is no personal guarantee, applying for an unsecured loan won’t impact your credit score; however, these loans are more difficult to locate and qualify for. To maintain your credit history, it’s critical that you consistently make your full and on-time payments.
As previously said, depending on the lender, you might need to meet a certain credit score threshold to be eligible for a business loan. Obtaining company finance is more challenging when one has poor credit. Your business credit score may be taken into account.
Why Small Businesses Struggle Getting SBA Loans?
Due to the high delinquent behavior and rate of default on SBA loans, lenders are hesitant to offer SBA loans to small businesses, considering that the Small Business Administration, a United States government agency, guarantees up to 75% of the loan amount. This leaves the lender responsible for the remaining amount.
6 Reasons SBA Loans are Denied
The SBA approval procedure is difficult and fraught with challenges for applicants. There are numerous reasons why an SBA loan application may be denied, despite its reputation for having strict qualifying standards and collateral requirements. Nonetheless, the following six factors are frequently cited by small business owners who are turned down for an SBA loan because they do not match the credit requirements. It’s interesting to note that numerous SBA loan facts answer these frequent questions. The “credit not available otherwise” qualification criteria, which calls for proving that money cannot be obtained from your resources, frequently serve as a roadblock.
- Time in BusinessÂ
The duration of the business is a significant factor in the lending decision. Business history is an important consideration. Because one in two new businesses fail in their first year and fewer than 20% survive by the fifth, SBA-approved lenders view startups as extremely hazardous. Your chances of getting approved are better the longer you have been in the company and the more years, not months, you can demonstrate financial success with steady cash flow. Before considering approval, lenders will want to see a minimum of two years’ worth of financial records.
What is the solution to a time in business denial?
SBA loans are not the only way to obtain business finance; there are other options as well, even though it is difficult to address time denial in the short term. Alternative lenders provide merchant cash advances and short-term loans to startups, with offers accessible as soon as a six-month sales history is demonstrated.
- Cash Flow
The capability of an organization’s finances to pay back a loan is assessed by the SBA-approved lender based on its profit and loss statement and balance sheet, of course, but ultimately, the ability to return monthly payments is determined by the stability of the cash flow from month to month and by annual revenue.
What is the solution to a cash flow denial?
The easiest way to deal with cash flow problems is to look for alternative company financing solutions that will help you increase cash flow over time. That way, after six months to a year, you can reapply and, if you can show some stability in your cash flow, you can get reconsideration. If the minimal monthly revenue requirement is satisfied and further requirements are met, online and other financial institutions provide short-term company loans and payday loans that will take variable cash flow into account.
- Financial Documentation
Many documents are needed for the SBA loan application procedure to meet their requirements for business loan approval. To get approved for the loans, applicants must submit numerous years’ worth of personal and business tax returns, a balance sheet, a year-to-date profit and loss report, aging reports for accounts due and receivable, and a host of other financial papers.
What is the solution to a denial related to your financial documents?
Fixing this issue will take time, business performance, and advice from an accountant or financial advisor to provide a solid foundation for future review. It will indeed take some time to gain the SBA’s favor and obtain an SBA loan. While this is going on, alternative lenders offer a range of company resources, including small business finance, to companies whose financial statements are insufficient to qualify for a conventional term loan such as an SBA loan.
- Business Owner Personal Credit
The SBA places a great deal of weight on the creditworthiness of the business owner’s private credit history and score. To increase your chances of approval, it’s crucial to have a strong personal credit score and an exceptional credit history. The normal minimum credit score is at least 680.
What is the solution to a denial related to personal credit?
If your credit isn’t great, work on establishing it and clearing up any bad debt. You should look for alternatives to a conventional small business loan because, as you are aware, credit restoration can take months or even years. Poor credit is taken into account by several business finance options, including merchant cash advances.
- Business Credit
Business credit is demonstrated by past business debt with a clean payment record. There is a history of the company repaying debt, not a “business credit score” per se. It might be challenging for SBA lenders to assess a borrower’s potential to repay successfully in the absence of previous history.
What is the solution to a denial related to business credit?
Getting credit from vendors and maybe getting several business credit cards are important ways to build business credit. If you want to be considered for an SBA loan and have awful business credit, now is the time to get it mended and rectified. There are alternative sources of business funding that are more understanding of some delinquency or absence of business credit.
- Collateral
Having real estate, machinery, and other company possessions as collateral can help you get SBA financing. Personal belongings can also be utilized as a down payment or as collateral. SBA lenders will not be pleased to see no collateral.
What is the solution to a denial related to collateral?
You might wish to explore offering the SBA lender your collateral if you have any to put up for consideration. You should look into small business funding possibilities from sources other than traditional lenders if you lack collateral or are unwilling to give personal guarantees. These sources include merchant cash advances, short-term business loans, and other revenue-based financing choices.
Is it hard to get an SBA Loan?
Yes, it can be difficult if you don’t have a strong business strategy and proof of your sector experience. When they are ready, a lot of small business entrepreneurs can quickly raise the capital they need to grow their companies. This usually entails a solid credit history, necessary paperwork, a well-written business plan, and an accomplished business loan starter, proving your dependability and subject matter knowledge.
Get a free quotation from AdvancePoint Capital right now if you’re ready to see if you qualify for an SBA loan or if you want to think about refinancing your debt as an alternative to an SBA loan. What then is stopping you? It’s time to support your company’s expansion into the planned maturity.
What Happens If You’re Rejected?
It takes place. Occasionally, your loan application may be denied or you may receive an offer with adverse conditions. In those cases, you can take the following actions to secure the capital your company requires:
- Apply to a different lending institution: Certain lenders focus on working with start-ups, credit-problematic business owners, or companies with minimal cash flow. It might just be an issue of locating the ideal lender for you to be authorized.
- Spend some time strengthening your application: To reapply very shortly if you are unsuccessful in getting a business loan, you could wish to take some time to increase your revenue or raise your credit score.
- Think about different types of financial products: There are other options than business loans for raising funds for your enterprise. Consider alternatives like working capital loans or merchant cash advances if you’re experiencing problems obtaining a standard loan.
Business Loan Alternatives
Personal loan: If you were to obtain one, you may use money for your company. However, there are hazards involved when applying for a personal loan for company-related needs, and since it doesn’t boost your company’s credit and leaves you personally liable, it might not be the greatest choice.
Business line of credit: This type of financing is still for businesses even though it differs from a standard term loan. With a business line of credit, your company can take out loans and pay them back over time.
Business credit card: If your organization needs to make frequent, sporadic expenditures, like stationery or subscription services, a business credit card can be the best option.
The Bottom Line
There isn’t a universal response to the topic of how difficult it is to obtain a company loan. This is because it can change depending on the kind of loan you’re asking for and the variables that various lenders take into account. It’s crucial to investigate company financing possibilities as you weigh your options.
It’s not necessary to become an authority on small business financing to find the ideal business loan nowadays; all you need to do is research the possibilities that best suit your company’s requirements.
To increase your chances of getting approved for a loan the following time you need funding, think about working on enhancing both your business and personal credit in addition to your revenue streams.
FAQs
How much money is required to be eligible for a business loan?
While small business credit cards frequently depend on income from various sources, including personal income, business loans are frequently based on business earnings. Although every lender is different, minimum revenue requirements usually begin at an average monthly income of $5,000 or more. You can have a harder time getting accepted if your company’s sales have been dropping lately.
If your firm or personal income isn’t very strong, think about crowdsourcing or vendor terms.
For a company loan, what credit score is required?
Having excellent credit makes getting authorized simpler. There might still be ways for you to help your business receive finance even if you have negative credit.
Minimum credit scores of 680–720 are frequently required by banks and credit unions. Some alternative financing solutions, however, might not require a high credit score because they are more focused on the revenue of the firm. Certain lenders have somewhat lenient credit standards, such micro lenders.
Consider crowdsourcing, micro-loans, loans for machinery or leasing, vendor terms, or merchant cash advances if your credit score isn’t that excellent.
Can somebody with a regular job get a business loan?
Yes, even with a mediocre business, you can still obtain a small business loan. However, keep consideration that you might not be eligible for a significant amount of money or you might have to pay an increased interest rate on the funding that you get if your company doesn’t meet the requirements.