Many businesses, both large and small, rely on borrowed capital to fuel business growth and fund other day-to-day business initiatives. Especially in today’s business climate many small business owners are asking, “Is it hard to get a business loan?”
There isn’t really a short answer, because there are several factors that go into a business loan approval. In general, though, the longer you’ve been in business, the better established your personal and business credit histories are, and the better shape your financials are in, the higher your chances of getting approved.
Business loan approval factors
If you’re looking to get approved for a business loan, your chances of qualifying can vary depending on the type of lender you choose and your financial and credit situation. Here are some common factors commercial lenders look at when reviewing your application.
Having a solid business credit history and a track record of meeting your financial obligations can help boost your chances of getting approved for a business loan with favorable terms. Most business lenders also take a look at your personal credit score to get an idea of how you manage your money. 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.
If your personal credit history isn’t in good shape, it can be a sign that you’re not responsible with credit, and they will likely be hesitant to approve your small business loan application. If your credit is excellent, however, it shows lenders that you take your financial obligations seriously and are more likely to make each and every periodic payment.
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.
Time in business
Although your age doesn’t matter to lenders, the age of your business does. Remember, they are trying to estimate what you will do based upon what you have done in the past—the the longer your track record, the better. For example, most tradition lenders like banks or credit unions prefer to see a few years in business, but that’s not the case for all lenders.
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 had to get a loan for an idea-stage startup though. With no revenue and no track record, there just aren’t a lot of options.
But think about it: lenders that require you to be in business for a while typically view you as less of a risk, so they can afford to offer a lower interest rate. On the flip side, lenders that are willing to provide loans to new small business owner may charge higher interest rates to compensate for the risk that you might fail.
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 loan payments.
With that in mind, you will likely be required to provide proof of your annual revenue and bank statements to verify your monthly cash flow. Remember, they want to confirm that you have the ability to service debt.
Most lenders consider your requested loan amount based on your revenue and cash flow. It’s usually in the form of a percentage. You should expect the average deal size to be somewhere between 50% and 100% of your monthly revenue. Although there are some lenders that will do more, they are the exception rather than the rule and larger loan amounts 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.
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 and what your chances are to get approved.
Merchant cash advances
From a credit standpoint, merchant cash advances are relatively easy to qualify for financing option if you process a lot of credit card receipts in your business. You also typically don’t need to have been in business for a long time.
A merchant cash advance is not really a loan, but rather an advance on your future credit card sales, which means that you need to have pretty consistent credit card receipts for the lender to expect to be able to collect. The actual credit card volume requirement can vary by lender but expect to have a tough time if you’re a startup with very low volume.
Because the merchant cash advance qualifying criteria is less stringent than a traditional small business loan, you should expect the rates and fees 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 can usually get up to 90% of its value through invoice financing, which is paid back when you get paid.
If your Accounts Receivable includes larger invoices, you may be able to finance your Receivables to access working capital today, rather than wait for the payment terms you’ve offered your 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 like the local bank. 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 an online lenders may have credit criteria that is less strict than a traditional bank, they are 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 favorable terms. But to qualify, you need to show a history of strong revenues and have a relatively good personal credit score as well as a good business credit history.
Traditional Term loans
Term loans can be difficult to get if you haven’t been in business for very long, especially if you’re trying to apply with a traditional commercial lender like a bank. 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 are a great option for those businesses that can qualify, and they’re also some of the best in terms of interest rates and other terms. To qualify for an SBA loan, you’ll 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 were many business owners who were denied a Paycheck Protection Program loan in early 2020 because they didn’t meet the SBA’s creditworthiness criteria. Like many SBA loans, the PPP loan requirements included what they considered a “reasonable” credit requirement.
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 several business loans. If you’re thinking about applying with a lender but aren’t sure about their requirements, considering calling them. They might not give you all of their criteria, but they may be able to give you an idea of your approval odds.
Finding the right business loan today doesn’t require that you become a expert in small business financing, but it does require that you learn about the options that will best meet your business need.
If you don’t qualify for the type of loan you want, consider working on improving your personal and business credit histories, as well as your business, to boost your chances of qualifying the next time you need financing.
At Nav, we can help you find the right small business loans or business credit cards to meet your business financing needs. And, if you need help improving your personal or business credit scores, we can do that too.