How Hard Is It to Get a Business Loan?

At some point in your small business or entrepreneurial journey, you may need financing and start asking a common question: how hard is it to get a business loan? The answer to this depends on whether potential lenders believe you can repay a loan.

 

For the most part, lenders have a difficult time seeing enough potential to provide financing. In fact, around 37 percent of small businesses apply for loans, and banks reject about 80 percent of them. Some small business owners are so disheartened by the process that they don’t even apply. Research suggests that 20 percent of companies refuse to ask banks for a line of credit because they’re too “discouraged.”

 

The top challenges to getting a business loan

 

There are reasons business owners feel so dispirited about their chances of getting a loan. It’s because multiple issues can make it challenging to secure financing. Specifically, seven factors can decrease your chances of getting a business loan.

 

1. Poor credit history 

One of the tools that lenders use to determine your credibility is your credit score. Lenders assess your credit report, and typically, if your credit score is lower than 700, it will be challenging to get a loan. Additionally, if your credit report shows a pattern of you not paying back debts, you may get rejected for financing.

 

2. Insufficient cash flow 

Lenders want to gauge the health of your business to see if you can repay a loan. If you have limited cash flow, meaning you don’t have enough money to pay back a loan, it could be hard to get approved for financing.

 

3. A poor business plan

Another challenge that may prevent you from getting a loan is a poor business plan. Lenders want to see business owners develop and stick to a solid strategy. Otherwise, they won’t be too quick to provide a loan.

 

4. Disorganization

Being organized means that you have your act together, which lenders want to see. So, if you approach a potential lender without the necessary paperwork for your application, it may signal that you’re disorganized and not responsible enough to repay a loan.

 

5. The maturity of your business

Has your company been in business for a few weeks or a couple of months? If so, it’ll be hard to show a track record of maintaining good cash flow and great leadership. And that will give potential lenders less reason to help finance your business.

 

6. Lack of collateral 

Collateral is business or personal property, including equipment and real estate. It’s essential to have it to secure financing, as it will provide a secondary form of payment if you default on your loan. So, if you don’t have collateral or feel uncomfortable using certain things as collateral—like your personal home—you may have trouble getting a loan.

 

7. Limited capital investment 

Have you invested a lot in your business? If so, potential lenders will be impressed. It’ll show you have enough skin in the game. However, if you depend too much on external funding and don’t put enough of your brand’s money back into your business, it could scare off potential lenders.

 

What types of business loans are available?

 

While many challenges can make it hard to get a business loan, there are still ways to receive one, primarily because there are various types of loans to consider. Depending on your needs, you could apply for any of the following:

 

• SBA loans: The U.S. Small Business Administration guarantees these loans, and participating lenders process them. They’re great for small businesses because the interest rates are lower, and the repayment terms are easier to fulfill. The maximum loan amount is $5 million.
• Short-term loans: Short-term loans will provide anywhere between $5,000 – $250,000. They’re usually repaid in less than a year.
• Bad credit loans: These loans are for businesses that don’t have poor credit scores. All you typically need to qualify is good cash flow. But if you get approved, your interest rates will be higher.
• Long-term business loans: These loans are geared towards established companies. Typically, they have lower interest rates. Also, you can usually take several years to repay them.
• Unsecured loans: For these loans, you don’t need collateral. But the interest rate will be higher.
• Secured loans: These loans will require some sort of collateral. However, if approved, you’ll have a lower interest rate.
• Merchant cash advances: This loan is against your company’s future earnings. You’ll pay it back by offering a specific percentage of your credit card sales.
• Equipment financing: Online lenders provide this loan. The financing will help you purchase equipment and tools for your business. And the best part is that this loan doesn’t require a down payment.

All of these are common business loans, so it’s relatively easy to find lenders who will offer them. You just need to determine the best loan for you based on the health of your business and your company’s needs.

 

How to apply for a business loan

 

Once you select the best loan for your company, you can start the application. The overall process will differ depending on the business loan you attempt to get. However, typically, there are a handful of documents you need to gather regardless of the loan you apply for. For example, here’s the information you may need to collect:

 

1. Proof of business ownership
2. Three months of bank statements
3. Accounts receivable reports
4. Up to three months of tax returns or financial statements

After gathering these documents, take time to also look at your credit score and history. Unless you’re applying for a bad credit loan, you’ll need a good credit score to increase your chances of getting approved for a business loan.

 

Additionally, make sure your revenue and sales look good, as cash flow will be an essential factor for lenders. It also won’t hurt to have a solid business plan on hand to showcase how your company will continue to make a profit. That way, potential lenders can see a clear path to repayment.

 

Finally, if you need to provide collateral, make sure you know what you’ll use. It can be vehicles, stocks, property, or any valuable asset. Just keep in mind that lenders will take whatever assets you pledged if you can’t repay your loan.

 

Alternative ways to get financing 

 

Perhaps you get rejected after submitting an application for a business loan. In that case, don’t be discouraged. There are alternative ways to get the financing you need. Other options include the following:

 

• Small business grants
• Business credit cards
• Invoice factoring
• Crowdfunding

While these might be secondary choices, they still provide an opportunity to grow your business, so don’t write them off too quickly. Be open to alternative routes to get the financing you need. Who knows? Using one of these approaches could be the very thing that helps increase your credibility in case you want to apply for another business loan in the future.

 

Financing is available 

 

Trying to get a business loan can be a nerve-wracking experience, but targeting the right loan and having all the necessary documents for the application can make it easier for lenders to approve your request. However, don’t quit if a lender denies your application. Financing is available through various routes. So, if it’s too hard to get a business loan, don’t be afraid to seek other financing options.