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Owners of businesses require capital, particularly when launching or growing a business. Although there are numerous options for financing small businesses, loans continue to be the most common. However, how difficult is it to obtain a business loan?
According to the Biz2Credit Small Business Lending Index, small business loans had a 13.5 percent approval rate from big banks as of April 2023. Small banks and alternative lenders approved more small business loans, with approval rates of 18.7 percent and 28.7 percent, respectively.
Factors that impact business loan approval
Lenders will take into account the features of your business and whether it satisfies their requirements for a business loan before granting a loan. Lenders give your cash flow, credit history, and length of business the most consideration. They will use this data to calculate your interest rate and decide whether to approve or deny your loan.
Don’t give up if your company doesn’t fulfill every one of these requirements. Even if you don’t meet certain requirements but meet or surpass others, you might still be eligible for a loan.
Lenders prefer to work with businesses in stable, profitable industries rather than lend money to those in riskier industries.
For instance, during the pandemic, some traditional lenders have hesitated to fund small businesses within the travel, hospitality and transportation sectors. These companies were often affected by lockdowns and travel restrictions.
If you want a government-guaranteed loan from the United S. Small Business Administration, your company must fit specific industry requirements. The majority of industries can receive funding from the SBA; the exceptions are the gaming, multi-level marketing, and religious sectors.
Lenders want proof that you can run a business profitably over an extended period of time. The longer you’ve been in business, the better your chances are of getting approved. Possessing a history of profitable company management indicates to a lender that you will handle your loan sensibly and make timely repayments.
When approving a loan, traditional banks usually require a minimum of two years of business history. However, if your company has been operating for at least six months, you may be able to obtain funding from other lenders. If you’re just starting out, take a look at the top startup business loans.
Credit score and history
Your credit history is essential to establishing your eligibility for any loan, regardless of the kind you’re applying for. A higher credit score will increase the likelihood that a business loan will be approved. When deciding whether to approve a loan, lenders may consider both your personal and business credit scores because they want to know exactly how you have handled debt in the past.
Depending on the kind of lender, a business loan may require a minimum credit score. Credit unions and banks might demand a score of 700 or above. If your company is otherwise financially sound, some online and alternative lenders will accept credit scores in the mid-500s.
Your company’s cash flow is another essential factor. Proof that you generate enough income to support your business and pay back the loan is required by lenders.
Loan recipients frequently have to meet minimum income requirements set by the lenders; some have as low as $10,000 in annual revenue requirements. However, conventional lenders will have higher standards for cash flow; many will demand an annual income of at least $100,000.
The amount of a small business loan varies based on several factors, including the type of loan, the lender, and the cash flow of the company.
Consider both your expected and current cash flow when determining how much money to ask for. Being realistic about how much you can afford to borrow is important, particularly if your business has seasonality or your income fluctuates from season to season.
The amount of the loan you apply for may differ from what you actually get. Lenders will take into account each of the aforementioned factors when evaluating your loan application to establish your maximum borrowing amount.
Certain lenders demand collateral, such as inventory or equipment, which they may seize in the event that you default on the loan. For instance, you must pledge business assets as security for any SBA 7(a) loan that exceeds $350,000.
If the value of your business collateral is less than the total loan amount, you will have to provide personal assets to make up the difference.
While not necessary, having a business plan is advised for all lenders. A business plan will provide lenders with the information they need to accurately evaluate your company’s financial viability and loan repayment capacity. It will also highlight the potential revenue streams for your company.
A lender may only require documentation of your company’s revenue and cash flow if it is already established and can guarantee loan repayment.
The amount you can afford for a business loan may be impacted by other debts and financial commitments. Determine your debt-service coverage ratio—a comparison of your company’s debt and cash flow—before submitting a loan application. It’s important to be aware of how potential lenders may perceive your company and its financial standing because they will use this figure to determine whether you can afford a new loan or debt. It’s also beneficial to have a business debt schedule for all of your outstanding debts.
Difficulty of getting a loan by type
Your chances of receiving a loan also depend on the kind of business loan you’re applying for in addition to the previously mentioned factors.
Here are some common requirements and advantages of the most common loan types, though specifics vary based on the lender.
| Loan type | Purpose | Requirements | Benefits |
|---|---|---|---|
| SBA loan | Growth and expansion of business |
|
|
| Term loan | Cover operating expenses and business purchases |
|
|
| Business line of credit | Cover short-term business expenses |
|
|
| Equipment financing | Purchase business expenses |
|
|
| Merchant cash advance | Cover short-term business expenses |
|
|
| Invoice factoring or financing |
|
|
Alternatives to business loans
It can be difficult to obtain a traditional small business loan; depending on your circumstances, alternative lending sources or business loans for people with bad credit might be a better fit for raising money for your venture. Consider some of these alternatives to traditional business loans.
Similar to a personal credit card but only available for business use, a business credit card typically has a higher credit limit than a personal credit card. Given that they can avoid paying interest if they pay the balance in full each month, business credit cards are sometimes preferred by business owners over business loans because they are more affordable when used responsibly. Furthermore, business credit cards may come with bonuses and benefits such as travel rewards, an introductory APR, or a sign-up bonus.
Many entrepreneurs find grants attractive because they don’t require repayment of the funds. However, this can make it competitive, and the application procedures are drawn out.
Business grants are generally provided by nonprofits, businesses, federal and state government agencies, and private enterprises.
Another option to raise money for business needs or startup costs is through crowdfunding. Generally, there is no need to worry about an application, credit check, or interest depending on the kind of crowdfunding you select. But crowdfunding platforms do charge fees, including payment processing fees.
Peer-to-peer (P2P) lending is akin to debt crowdfunding in that it enables businesses to obtain loans in the form of funds from one or more investors. If investors agree to fund your peer-to-peer loan, you will be required to repay the money with interest at set monthly payments. Both an application and a credit check are necessary, and the majority of websites enable users to get prequalified in order to determine their potential eligibility before completing an application.
If you’re prepared to expand your business, obtaining a small business loan might be a wise move. Although there are many different kinds of loans available, the majority will demand solid personal and business credit scores, consistent cash flow, and ideally a few years of business experience.
Merchant cash advances, invoice factoring, and invoice financing are some other options to get cash fast if your company is still developing credit or if your revenue is being generated. Additionally, you may research bad credit business loans, which are intended for entrepreneurs with a personal FICO score of 630 or lower.
- Depending on the lender, a business loan may require a minimum credit score, although it is possible to obtain a loan with a score in the mid-500s.
- Securing a small business loan isn’t easy for every business. A business is evaluated based on a variety of factors, but in comparison to a new venture with low annual revenue or a bad credit score, one with a high annual revenue and a good credit score may find it easier to get approved.
- Depending on the lender, requirements can change, but many consider things like annual revenue, debts and other obligations, years in business, industry, personal financial history, business credit score, and business plan.
FAQ
Is it hard to get your first business loan?
For entrepreneurs, obtaining a small business loan is typically a difficult task. Finding the right financing, completing the application process, and fulfilling the requirements make it challenging for many business owners to obtain the funding they require to expand.
How hard is it to get a $10,000 business loan?
A $10,000 business loan is available from most lenders. Big banks, however, might not be the greatest choice because they usually fund larger amounts and might not even provide loans of this magnitude. Even some online lenders have funding minimums above $10,000.
What credit score do you need to get a business loan?
Term loan: Lenders offering SBA loans require credit scores between 620 and 680. Banks and credit unions typically require a score of 670 or above. However, online lenders may only require a score of 500.
How hard is it to get a 50000 business loan?
To be eligible for a variety of loan options, you typically need to be an established business with a strong cash flow if you’re looking for a business loan between $20,000 and $50,000. Even online lenders frequently require you to show that you are eligible to repay the loan by presenting evidence of your company’s success and a strong business plan.
Read More :
https://www.nerdwallet.com/article/small-business/how-to-apply-small-business-loan
https://www.bankrate.com/loans/small-business/how-hard-is-it-to-get-a-business-loan/