How hard is it to get a business loan
How hard it is to get a business loan depends on how lenders judge your business’s ability to repay the loan. While the overall economic environment and industry you operate in are important, there are six main factors about your business that you can control to influence your likelihood of approval.
Business loan approval factors
Lenders consider the factors below when determining whether to approve an application and in determining what interest rate they’ll offer.
1. Cash flow
Minimum revenue requirements vary dramatically by lender and the amount you want to borrow – for small business loans, you can see revenue requirements of anywhere from $36,000 per year to $2 million per year.
It’s important to demonstrate that you have — or will soon have — the revenue to make payments on your small business loan. The prospective lender will ask for your banking and accounting statements so they can do a business cash flow analysis that will show whether you have enough money coming in and if you’re actually making a profit. Doing one as an owner can help you to understand your business finances so you won’t get in over your head on a loan.
2. Time in business
Some lenders, like Taycor Financial, will lend to startups, while others, like Funding Circle, have a minimum time in business requirement of at least 24 months.
Being in business for months or years means that you have a track record that you can show to a lender. Simply remaining in business can mean that you have a history of consistent sales and good management to exhibit. The more time your business has under its belt, the more likely it is that it’ll remain in business long enough to repay the loan.
3. Credit score
Underwriting requirements differ significantly from lender to lender, but if you want an SBA 7(a) loan in particular, you’re looking at a FICO Small Business Score Service (SBSS) score requirement of at least 155.
If you’re just starting your business, you can use your personal credit score to secure business financing. There is risk with this option: While it allows you to access funding while your business is building up its own credit history, you’ll be personally liable for any debts when you use your own Social Security number to secure capital.
Once your business has built up a positive credit history of its own, you might decide to start using your business credit score to secure further funding. If your business is an LLC or corporation, this will provide more protection for your personal assets, as the business is a separate entity from you.
4. Collateral
Collateral is an asset of value that you own, like a vehicle or a building, that a lender can repossess if you default on a loan. The higher the value of the assets, the higher your borrowing power. This makes the loan less risky for the lender and less expensive for your company. Examples of collateralized business loans include equipment loans and heavy equipment financing.
Typically, business owners turn to asset-based lending when they need working capital and are having trouble qualifying for an unsecured business loan.
5. Business plan
Writing a business plan can be vital, as it outlines your company’s purpose and details how it will be successful. A solid business plan shows lenders that you have a plan to repay your debts — and hopefully profit a little on top of your repayments. Taking the time to write a full, traditional business plan can help your business look more legitimate to potential lenders.
Entrepreneurship organizations and the Small Business Administration (SBA) provide resources to help.
6. Loan amount
How much you want to borrow is considered in addition to all of the above factors. For example, if your company has little revenue, has only been in business a year and doesn’t have the best credit score, you may gain approval for only a small amount. You can use this small business loan calculator to run some numbers.
Loan amounts vary by lender, but can start as low as $500 and range into the millions.
How to increase your chances of approval
On top of improving your revenue and credit scores, there are additional steps you can take to increase your odds of approval when applying for a business loan. Here are some steps to consider before you officially apply:
- Get preapproved. Getting preapproved can help you find out how much funding you may qualify for, helping you comparison shop and negotiate before you sign on any dotted lines. There may be a hard pull on your credit during the preapproval process, unlike getting prequalified, which generally uses a soft pull. The hard pull makes the preapproval more accurate than a prequalification.
- Prepare your documents beforehand. Whether you’re applying for preapproval or a full business loan, the process goes a lot faster if you gather your supporting paperwork before you sit down to apply.
- Compare lenders to find the best offer. However you shop for your loan, you want to get quotes from different lenders. At the very least, be sure to compare the best small business loan lenders.
What happens if you’re rejected
It happens. Sometimes you’ll apply for a loan and get rejected — or get an offer with unfavorable terms. In those instances, here are some things you can do to get the funding your business needs:
- Apply with another lender. Some lenders specialize in serving new businesses, business owners with poor credit or businesses with low cash flow. Getting approved may just be a matter of finding the right lender for you.
- Take some time to become a stronger applicant. If you can’t secure a business loan, you may want to take some time to grow your revenue or improve your credit score so you can reapply in the near future.
- Consider alternative financial products. Business loans aren’t the only way to secure capital for your business. If you’re having trouble getting a traditional loan, you may look to products like merchant cash advances or working capital loans.
How hard it is to get different types of loans
Generally speaking, the more favorable the loan terms, the lower the odds of approval. Some business lending products are relatively easy to secure, like invoice factoring. If you want a cheaper way to borrow, though, you’d be better off looking at business term loans or lines of credit, which tend to be less expensive.
| Funding type | What is it | How hard is it to get approved? | Interest rate | Qualification factors |
|---|---|---|---|---|
| Term loan | Traditional loan that you repay in fixed installments every month. | More difficult | Generally low |
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| SBA loan | Lending backed by the SBA. Most products are term loans, though there are multiple different funding options. | More difficult | Generally low |
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| Line of credit | Lender issues you a line of credit to draw upon as needed. Repayment is only required when you borrow against it. | More difficult | Generally low |
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| Invoice factoring | Sell your outstanding customer invoices at a discount for an immediate cash injection. | Less difficult | Generally high |
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| Merchant cash advance | Cash advance on your projected credit and debit card sales. Repaid as a percentage of your daily sales until advance is fully repaid. | Less difficult | Generally high |
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Business loan alternatives
- Personal loan: You could get a personal loan and use it for your business. There are risks to using a personal loan for business purposes, however and it may not be the best option as it leaves you personally liable and doesn’t help build your business’s credit.
- Business line of credit: This is not a traditional term loan, but it is still a form of business financing. A business line of credit allows your business to withdraw funds and repay them on a revolving basis.
- Business credit card: A business credit card can be best if your company needs to make regular, on-demand purchases, such as office supplies or subscription-based services.
Frequently asked questions
The level of difficulty a small business faces when applying for a loan depends on several factors, including its cash flow, time in business, credit score, business plan and desired loan amount. The better a small business is able to prove its ability to repay the loan, the easier it will be to get the loan.
According to the SBA, the current requirement for an SBA 7(a) loan is a FICO SBSS score of at least 155 for your business. If you’re borrowing with your personal Social Security number, minimum credit score requirements can vary by lender.
You need enough income to at least cover your business bills and your future loan payments, with some left over as profit or as savings in case of a rainy day.