Many businesses, both large and small, rely on financing to launch or grow their small businesses, as well as to carry them through times when cash flow is tight. Especially in today’s quickly changing business climate many small business owners are asking, “Is it hard to get a business loan?”
Several factors go into a business loan approval. In general, business loan applications that get approved show strong business revenues, good credit and at least a couple of years in business. But even if your business doesn’t check all those boxes, don’t panic. There are loan options that may work for you.
Business Loan Approval Factors
If you’re looking to get approved for a business loan, your chances of qualifying will vary depending on the type of financing you choose and your financial and credit situation. Here are some common factors commercial lenders look at when reviewing your application.
One of the questions a lender needs to answer is, “Does this business have the financial means to make periodic payments?” In general, commercial lenders want to know that you’re not only capable of staying in business, but also that your company’s cash flow is strong enough to afford to make required payments, whether those are daily, weekly or monthly payments.
With that in mind, you will likely be required to provide proof of your revenue in the form of bank statements to verify your monthly cash flow. Alternatively, you may be required to link your bank account so the lender can analyze and verify them directly.
Some lenders will look at average monthly revenues for the last 3-6 months. Others may also require copies of your business tax returns and/or financial statements. (That’s especially true for bank loans.) Again, small business lenders want to confirm that you have the ability to service debt.
Time in business
Although your age doesn’t matter to lenders, the age of your business does. Lenders are trying to predict what you will do based on what you have done in the past, and the longer your track record, the better. An established business is always on better ground than a new business. For example, most traditional financial institutions like banks or credit unions prefer to see a few years in business, though that’s not the case for all types of loans.
Some online and alternative lenders have lower time-in-business requirements—some will work with you and your business if you’ve only been in business for six months. It can be very hard to get a loan for an idea-stage startup though. With no revenue and no track record, there are fewer options for new businesses, but they do exist. We’ll discuss those in a moment.
If you have been in business for several years your business will be considered less of a risk and you may be offered better repayment terms. On the flip side, lenders that make loans to new entrepreneurs may require a down payment, charge higher interest rates or require a personal guarantee to compensate for the risk that your business may fail.
Most lenders will calculate your loan amount based on your revenue and cash flow. You should expect the average deal size to be somewhere between 50% and 100% of your average monthly revenue. There are some lenders that make much larger loans but those often involve collateral and/or are offered to only the most creditworthy borrowers.
As a business lender considers the other factors we’ve discussed, they’ll also consider how much you’re asking for. If your business’ track record is relatively short, for instance, you may be approved for much less than you might get if your business has been around for five years and has strong financials.
Asking for more than you qualify for isn’t necessarily grounds for an outright denial, however. Instead, the lender might give you a counteroffer with a more reasonable amount.
Creditworthiness is an important factor for most types of business loans and you should expect your personal and/or business credit reports to be checked during the application process.
Strong personal credit scores and a solid business credit history can help boost your chances of getting approved for a business loan with favorable terms. For some, your personal score will even determine whether or not they are willing to consider your application at all. This can be true regardless of whether your business is brand new and doesn’t have a credit history yet or has been around for several years.
Lenders are trying to judge what you will do in the future based upon what you have done in the past, so the better your credit history, the better the odds of a successful loan application.
How to Build a Relationship with Potential Business Lenders
The best way to establish a solid relationship with a business lender is to open an account that’s easier to qualify for, like business credit cards or a business checking account. If you’re in the market for a business line of credit or another loan, you may be better suited if you prove that you’re a responsible borrower with a smaller product first.
Additionally, you could consider a personal loan or a microloan. Although these aren’t always technically meant for business purposes, you can use them to build your business and prove to the lender that you’re a responsible borrower. Since lenders take all of your accounts into consideration, a relationship-building strategy supports your loan application and puts you in a better position than when applying without any prior relationship.
Tips for Negotiating Better Business Loan Terms
Although it may come as a surprise, loan terms aren’t set in stone by your lender. You may be able to negotiate the following:
- Your interest rate: You may be able to get a lower annual percentage rate and therefore pay less to borrow money.
- Your prepayment terms: If the lender typically charges a fee for early payment on a loan, you may be able to negotiate for a smaller fee or no fee at all.
- Your repayment terms: This includes the fees and time period over which you must repay your loan, and a lender may be willing to work with you to make it work more in your favor.
- Your personal guarantee: You may be able to negotiate whether or not your personal assets are on the line if your business fails to make its payments with a personal guarantee.
To increase your chances of getting the best terms possible, there are several steps you can take ahead of time. First, do your research — use Nav to make sure you’re applying to the right lender for your business.
Also, make sure you have a robust business plan and effective business model so you can demonstrate that your business is on solid footing. Learning some lending terminology so you can make the best impression possible is another good idea, especially if you’re applying in person.
Another great way to improve your negotiating stance is to review your credit reports and work to remove negative items. If there are one or two late payments, you may be able to get it removed by reaching out to the credit bureau directly, especially if there is a reason. And check for errors to correct because even minor mistakes can ding your credit.
You’ll also need to provide organized copies of your year-end and year-to-date financial statements like your bank statements, income statements that show annual revenue, and profit and loss statements.
Approval Odds by Loan Type
Getting a business loan approval also depends on the type of loan you’re trying to get. Here are some common business financing options chances of getting approved.
Merchant cash advances
From a credit standpoint, merchant cash advances are relatively easy to qualify for provided your business has strong sales. Funding often takes place in hours for businesses that meet the eligibility requirements.
A merchant cash advance is not really a loan, but rather an advance against your future sales, which means that you need to have pretty consistent credit card receipts (or regular deposits into your business account). Minimum revenue requirements vary, but the minimum is at least $5000 per month.
Because the merchant cash advance qualifying criteria is less stringent than a traditional small business loan, you should expect the cost to be higher than a traditional loan.
Invoice financing essentially represents an advance on a business’ unpaid invoices. For example, if you have an invoice you’re expecting to get paid for within two months, you may get up to 90% of its value through invoice financing.
If your accounts receivable includes larger invoices, you may be able to finance your receivables to access working capital today, rather than wait for payments from yoru customers. This can be a good short-term way to access cash provided your customers typically pay their invoices on time.
Because invoice financing is relatively secure for the lender, it’s easier to qualify for when compared with more traditional business loans. Keep in mind, though, that invoice financing can be expensive. You might also want to investigate the difference between invoice financing and invoice factoring.
Depending on your loan purpose, a short-term loan could make more sense than a longer-term loan. Short-term loans can help you get financing quickly. And, many online lenders that offer short-term financing have less stringent qualification criteria than traditional lenders. That’s primarily because the time horizon for the lender to get its money back isn’t very long, reducing the overall risk of the loan.
Although online lenders may have credit criteria that are less strict than a traditional bank, they are often looking for creditworthy borrowers with a reasonable track record. As a result, many lenders that offer short-term business loans require that you be in business for at least six months to a year and have a track record of stable revenues.
Equipment financing is an excellent way to leverage borrowed capital to purchase needed equipment that allows you to free up cash flow for other purposes. When financing equipment, the equipment typically serves as collateral for the loan reducing the risk for the lender. Depending on the amount of the loan, you might also qualify for a longer repayment period.
Because equipment financing is relatively safe for lenders, you can usually expect more flexible qualification requirements. But to qualify, you may need to demonstrate a history of strong revenues and have relatively good personal credit scores and/or a good business credit history.
Traditional term loans
Term loans offer a fixed amount of money with a fixed repayment period. They can be difficult to get if you haven’t been in business for very long, especially if you apply at traditional commercial lenders like banks. To get favorable terms, you typically need to be in business for at least a year or two, or sometimes more, have a good personal credit score, a strong business credit history, and a track record of strong revenues.
Loans guaranteed by the U.S. Small Business Administration can be a great option for those businesses that can qualify, and they’re also some of the best in terms of interest rates and other loan terms. To qualify for an SBA loan, you’ll generally need to have been in business for two or three years, have good or excellent credit, and have strong and stable revenue that will demonstrate your business’ ability to service debt. (There are some SBA loans available to new businesses but many lenders prefer to lend to established firms.)
Business credit cards are typically easier to qualify for than loans and can be used for flexible financing if you can’t qualify for a loan and can build your business credit history with responsible use.
The Impact of Industry on Business Loan Approval Rates
Your industry can greatly impact your ability to qualify for loans. All businesses in the United States are classified according to NAICS codes, and it’s important to understand what your NAICS code is. Each industry is assessed based on risk, so your NAICS code classification has a serious impact on your lending credentials.
Some industries that have had the most success in securing business financing are:
- Software development
- Hotels and motels
- Consulting businesses
- Marketing businesses
On the other hand, there are businesses that the SBA will not lend to. These ineligible businesses include real estate investment firms, rare coin dealers, firms that deal with lending activities, businesses that operate on a pyramid sales plan, gambling businesses, and charitable organizations.
What Happens to Your Credit Score When You Apply for a Business Loan?
When you apply for a business loan, the way it affects your credit score depends on how the loan is constructed. If you sign up for a personal guarantee (which is a secured loan), defaulting on the loan payment might affect your personal credit. However, applying for an unsecured loan won’t affect your personal credit score if there’s no personal guarantee, but these loans are harder to find and qualify for. It’s important to always make payments on time and in full to keep building your credit.
As mentioned, you might need a minimum credit score to qualify for a business loan, but it depends on the lender. It’s more difficult to get business financing with bad credit. Your business credit score may also be taken into consideration.
The Bottom Line
When it comes to the question of how hard it is to get a business loan, there’s no one-size-fits-all answer. That’s because it can vary based on the type of loan you’re applying for and the factors different lenders consider.
As you consider different options, it’s important to research business loan options.
Finding the right business loan today doesn’t require that you become an expert in small business financing, but it does require that you learn about the options that will best meet your business needs.
If you don’t qualify for the type of loan you want, consider working on improving your personal and business credit, as well as your business revenues, to boost your chances of qualifying the next time you need financing.
Find the right business loans with Nav.
This article was originally written on April 12, 2019 and updated on May 8, 2023.