How Hard Is It To Get a Business Loan?
Whether you’re launching a new business or expanding operations, when you need an infusion of cash, a business loan can be critical to success. However, many small business owners wonder how hard it is to get a business loan, if they’ll qualify and where they should turn for funding. While there is no one-size-fits-all answer, if you have solid personal and business financials, there are many options for funding. If you or your business have financial challenges, such as poor credit, it can be difficult to find a lender willing to extend a loan, let alone one with manageable interest rates and terms.
If your financial house is in good order, there are several options for small business loans, including traditional bank loans or one of the federal government’s Small Business Administration loan programs. With SBA loans, the federal agency does not lend money directly to business owners, but rather guarantees a portion of the loan to its approved lenders, allowing them to extend credit to applicants and safeguard against defaulted loans. For a list of government-backed loan programs and eligibility requirements, visit GovLoans.gov.
When applying for most business loans, small business advisors and government agencies (including the Minority Business Development Agency, a federal agency that promotes growth in the United States’ minority-owned businesses) recommend that applicants collect the following documents in advance:
- Three years of personal and business federal tax returns (or as much as you have for your business)
- Bank statements for business and personal accounts
- Personal credit history
- Business credit history
- Proof of insurance
- Lease agreement
- Business financial statements or income statements
- Business plan, including forecasting and expansion plans
- Key man insurance, which is a policy for the business owner
For an SBA loan, in addition to these items, the agency also asks applicants to submit a brief history of the business and its management, along with a list of collateral.
How hard is it to get a business loan with bad credit?
If you have a low credit score or a history of credit problems, it can be difficult, though not impossible, to get a business loan, said Paola Garcia, a small business advisor at Excelsior Growth Fund, a New York-based nonprofit lender. She noted that credit is important because it demonstrates your historical financial habits and your payment history to lenders.
It is important to remember that lenders will look at both personal and business credit when making loan decisions, Garcia said. That’s because a small business is directly tied to its founder, and your personal credit both guarantees a loan and serves as an indication of your financial health. In fact, 42 percent of small business owners rely on their personal credit score to secure a loan, while another 45 percent use personal and business scores, according to a Federal Reserve Small Business Credit Survey report on small businesses.
Before you apply for any loan program, review your credit report and identify ways you can tidy up your credit, including paying outstanding bills or consolidating debt into one lower-interest payment, such as a single credit card. A loan officer or credit counselor can help review your case and make suggestions, as can a small business advisor at a community organization, such as SCORE or the Small Business Development Council, which has chapters nationwide.
“If your credit is a weakness, that is something you want to work on as soon as possible and before going to a lender and being declined,” Garcia said.
Once you’ve settled some outstanding debts or adopted a regular repayment plan, your credit score should improve, boosting your chances for to procure loan. That activity will also demonstrate to a lender that you are responsive and responsible.
In situations where an applicant has credit problems, a lender may ask for more collateral or personal guarantees in order to approve a loan, said Levar Haffoney, principal of New York-based Fayohne Advisors, a business and financial planning advisory for small businesses and individuals.
To improve your business credit score, advisors recommend following many of the same steps as tidying up your personal credit:
- If you have outstanding debts, pay them off as quickly as possible or arrange payment plans.
- If you have other loans, make sure you’re paying them off on time.
- Be sure to pay your rent and utilities on time.
- When you’re on solid financial footing, opening a business credit card – and making on-time payments in the full amount – is another way to build up your credit history.
Before you apply for another loan, Haffoney suggests spending six to 12 months working on your personal and business credit. Then, check your credit report and reapply with that or another lender.
Small business owners can also take a local approach and apply for a loan with their local bank or credit union. In some cases, working in the same community as your bank can boost your chances of obtaining a business loan. “They may be more willing and able to work with small businesses,” Haffoney said. “Plus, they may have less restrictive lending requirements than larger banks.”
He advises business owners to build these relationships by establishing a business checking and savings account, building up a steady history of banking activity and getting to know the local bank executives.
When a small business owner has exhausted these traditional borrowing source options and still can’t get a loan approval, there are still other options. Alternative online lenders may approve a loan, but these can come with high interest rates. Another option is crowdsourcing platforms, such as GoFundMe, to access or raise funds. This can work well for an entrepreneur with a new product or someone looking for a small infusion of capital.
The Federal Reserve Small Business Credit Survey report noted that 76 percent of business owners used personal funds to fill gaps in their business financing. Small business owners may turn to personal or business credit cards to get cash advances or make business-related purchases. However, loan advisers caution against this behavior because of sky-high interest rates and possible damage to your credit report.
How hard is it to get a business loan with the SBA?
The SBA works with a wide variety of lenders and organizations to administer loan programs, so if you have solid financials and meet program criteria, you may qualify for an SBA loan. With SBA loans, applicants work directly with lenders to obtain the financing, and decisions are made at the local level.
Among the SBA’s loan offerings, the 7(a) program is its main and most popular program, and is designed to help entrepreneurs who have had difficulty securing traditional bank loans. With low down payment requirements and flexible terms, applicants can qualify for up to $5 million in loans to use for startup or expansion, real estate or equipment, or to refinance existing debt. To qualify, a business must operate in the U.S., and the owner needs to have equity invested and have also used their own resources before applying for a loan.
For entrepreneurs that need a small infusion of cash, the SBA’s Microloan program is another popular option, offering a maximum of $50,000 in funds.
With each loan program, the SBA outlines specific eligibility requirements, so it is important to research your needs and the available programs.
To encourage more lending and spur small business growth, the SBA also works with Community Development Financial Institutions, which are either nonprofit or for-profit community-based lenders. These certified organizations, which could be banks, credit unions, venture capital funds or nonprofits, provide funding to low-income business owners and underrepresented communities that may have difficulty qualifying for traditional loans.
This can be another way to secure a loan, including if you’ve had difficulty with a business loan through a traditional lender, such as a local bank or credit union.
Another SBA-approved program is the Small Business Investment Company, which helps small businesses connect with equity investors. Rather than borrowing money from an institution, a business exchanges a piece of ownership for credit. Using their own funds or money borrowed from the SBA, qualified SBIC firms make an equity investment in small businesses, or provide long-term loans.
How to improve your chances of getting approved
To increase your chances of being approved for a business loan, consider the following steps to improve your financial position and put your best foot forward with a lender.
Work on your credit: Take a detailed look at your credit report and make a plan to pay off or consolidate any outstanding debt. Craft a budget and a payment schedule, and stick to it. Since personal credit is important, pay your usual personal bills and loans on time.
Get organized: If you don’t have well-organized books and financial statements, make that a top priority. Along with helpful online software, business owners can work with a bookkeeper or CPA. Visit a local nonprofit for business coaching or entrepreneur classes.
Gather your documents: Along with bank statements, tax returns and financial statements, loan advisors may ask for your business plan, forecasting or marketing plans. Make sure you have detailed, organized documents that show your experience, your company’s results to date and future plans.
Start banking: If you haven’t already, open a business checking and savings account at a local bank or credit union. Make regular deposits into checking and, when you can, transfer money to savings to build up your reserves, said Joshua Escalante Troesh, a small business advisor and founder of Purposeful Strategic Partner. This could improve your position when it comes to apply for a loan with that bank. At the very least, you’ll have an established relationship with a lender and may be able to get their suggestions and guidance.
Open a business credit card: Tread carefully, but this can help boost your credit and grow your business. If you’re able, open a business credit card, but be sure to make timely payments and don’t overspend, which could actually hurt your chances to secure a loan.
Build relationships: By building strong relationships in your community, an entrepreneur may be able to better access credit and funding. Talk to loan officers at your local lender, as well as an approved CDFI lender. Small business advisors and local business courses can also help guide a borrower and build your professional network.
The bottom line
The Fed reports that 44 percent of small business owners said access to credit is the No. 1 obstacle to growth. Yet, 39 percent of entrepreneurs said they did not apply for a loan because they worried bad credit would prevent them from being approved.
Despite the challenges, small business owners should not give up on a loan. Contact your local banking institutions or find a CDFI in your area. Loan officers can review your application and give you suggestions to improve your position. If you need assistance building your application, nonprofits and local colleges can be good resources for templates, coaching and support. With solid credit and a well-organized application, you may be able to find the funding you need. In fact, in 2015, the Fed reported that 53 percent of all small businesses were approved for all the loans they applied for.