Business loans can be indispensable when you're looking to grow your business. They can provide working capital to hire staff, invest in marketing, buy inventory, and more.
Yet many small businesses don't get the business loans they need. In fact, in 2021, only 31% of the small businesses that applied for financing got all the funds they asked for.
So are business loans hard to get? The answer's not that simple.
1. What factors affect business loan approval?
Lenders look at several factors to decide how likely it is that an applicant will be able to pay back the loan. Those criteria can vary from one lender or another, but generally, you can expect these factors to be important:
- Credit score: Many lenders look at both your personal and business credit scores to determine your financial stability.
- Time in operation: Some lenders want you to be in business for at least two years, while others may waive this requirement.
- Business plan: Some want to see your goals for the business, as well as your audience and marketing plan.
- Financial statements: Many lenders want to see financial statements like your profit and loss to understand your financial big picture.
- Collateral: Some lenders ask for collateral that would cover your debts in case you’re unable to pay off the loan.
2. What types of business loans are available?
The first thing to understand is that different types of business loans exist—each with its own requirements. Some may be easier than others to qualify for, depending on your situation.
Traditional bank or credit union loans
Traditional banks typically want your business to have been in operation for at least two years. They may want you to have a certain credit score as well. You'll likely need to provide financial statements, tax returns, and a business plan.
Credit unions are another potential source for business loans. Some credit unions offer competitive rates. You might have to be a member to apply for a loan. Other requirements vary. Some may only require you to be in business for one year and have a positive cash flow rather than a specific amount of annual revenues.
SBA loans
To qualify for a loan backed by the Small Business Association (SBA) your company must qualify as a small business and be in the U.S. You must also be ineligible for other types of business loans. While the SBA doesn't list specific credit score requirements, many lenders look for scores of at least 640 or 680.
SBA loans provide long-term financing with some of the lowest rates available.
Online lenders
When other business loans are hard to get, online lenders could offer alternatives that may be easier to qualify for. Requirements differ among lenders, but some online lenders help businesses with poor credit, new startups, and those that can't get other types of financing.
To narrow down the hunt, search for the type of loan you’re looking for. For example: “online business loans for average credit.” Sift through the results to see which offer the loan amounts you’re looking for, and whose qualifications you can meet.
Microloans
Microloans are designed to help small business owners who are often shut out from financing (marginalized or low-income borrowers), or members of certain groups (disabled or minority or veterans). The amounts available are lower than with other loans, and repayment periods may be shorter.
The SBA offers a microloan up to $50,000. There are other organizations that offer microloans, such as Accion Opportunity Fund, which is open to businesses that generate $50,000 or more in annual revenue.
If you want access to a smaller amount of cash quickly, you could be approved for a microloan and receive funding in days, not weeks.
Merchant cash advances
A merchant cash advance is an advance on future credit and debit card sales. The service provider takes a flat fee, which can be high, so be aware. To repay the advance, the MCA provider typically takes a portion of your daily card sales to pay it back. There’s no option to pay the balance off early and save, like with a business loan.
With such potentially exorbitant fees, you’ll want to do your homework first to see if you qualify for more affordable options.
3. How can you boost your approval chances?
If you're concerned your financial history could make a business loan hard to get, here are a few ways you might improve your odds of getting approved.
Improve your credit scores
Because your personal credit score factors heavily into your application for many types of business loans, work on improving it. You can do so by lowering your debt-to-credit ratio. Pay down or pay off outstanding debts, and you may see your credit score rise slightly. Paying your debts on time each month is critical. Last, avoid applying for multiple loans and credit cards at the same time. Each application could lower your score by a few points. Each lender’s inquiry will show up on your credit report, and some lenders cap the number of inquiries they consider acceptable.
Prepare a solid business plan
You'll need a strong business plan, especially if you intend to apply for a traditional or SBA loan. If you don't have one, create one now. Your plan should show the direction of your company, your target audience, and how you’ll market your business to customers.
Maintain accurate financial records
Even if you're not ready to apply for a loan, keeping accurate financial records can help you prepare. Use accounting software to keep track of your business expenses and income. Become an expert at creating financial documents like profit-and-loss statements and sales projection reports.
4. What are common reasons loans get denied?
Knowing common reasons for being turned down for a loan can help you better prepare your application.
- Poor credit history
- No business plan
- Insufficient cash flow
- Lack of collateral
- Operating in a high-risk industry
5. What should you consider before applying for a business loan?
For the best chance of approval for a business loan, start by knowing exactly how you want to use the loan. Calculate how much you need, and don't borrow more. Create a budget for using the funds, and have a plan for how you'll pay it back. Pay attention to repayment terms and interest. Are there other fees, such as late payment or a prepayment penalty?
Taking out a loan should help move your business forward. Have a plan to use the funds to invest in the business, whether that's marketing, staff, new product development, or technology.
Check out the lender’s reputation online to see what kind of customer support is available after a loan is funded.
Last, find out if you can shop around without hard inquiries into your personal credit history. Each time you apply for credit, your score could drop by a few points. This may be a non-issue if you’re applying as a business, but confirm it anyway. It’s best to avoid submitting a formal application until after your loan shopping is done.
6. Is it hard to get a business loan?
These four factors could make it fairly easy to get approved for a business loan:
- You’re running a legitimate business.
- You know why you need the money.
- You know how you’ll use the funds.
- You have a solid plan for future success.
Getting approved for a business loan gets easier the more effort and planning you put into it. Start before you need the financing and allow time for the approval process, considering the type of financing you plan to apply for. The best thing to do is talk to a business loan lender about your situation to learn what options make sense to research.
