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How Hard Is It To Get A Business Loan?

11/25/2022 07:03:58 +0000
Businesses are expensive to get off the ground, and even then, expansion can take some serious investment, which is why business loans are such an essential lending format.
 
However, considering how many businesses fail, lenders aren't willing to part ways with their money easily, which can make securing a business loan quite difficult.
 
How difficult, you ask? Well, applicant standards differ from lender to lender, but you will be expected to meet a few general criteria before you're considered eligible for such a loan.
Approval Variables Of Business Loans
While it can be tricky getting a business loan, if you consider and work on the following factors, you'll be able to plead your case well.
Business Revenue
Most importantly of all, you need to prove that your business has money-making potential, after all, the lender needs to feel comfortable that you'll be able to pay them back in accordance with the repayment terms of the prospective loan contract.
 
You'll need to show that your company has what it takes to succeed by providing evidence of revenue over various periods of time (usually weeks and months).
 
You'll do this with bank statements, painting a picture of your general cash flow, but some lenders may require you to provide your bank details as well.
 
Most lenders want to see financial details for the last 3 to 6 months, but if you're approaching a bank for your loan, you'll likely have to provide copies of your business tax returns as well as your financial statements.
Duration

Lenders don't just want to know that your business is financially viable, they want to be able to actually predict what the future may hold for you and your entrepreneurial endeavor, and the longer your business has been up and running, the more data they have to do so.

If your business is something of a baby, i.e. around the 6-month mark, it can be a lot harder to secure a business loan, especially if you're hoping to get one from a bank.

There are some lenders out there who will work with you once you hit that 6-month threshold, but the terms may not be quite as favorable, as the lender has to insure against potential losses.

Businesses with a proven track record are considered far less risky, so if you can hold off on applying for a while, the chances of striking a deal when you finally do go up exponentially.

Loan type also has a time-in-business factor, but we'll discuss that in more detail a bit later.

Credit History
Much like any other loan, when applying for a business loan, a lender will look into your creditworthiness both personally and professionally.
 
Lofty credit scores make a fantastic impression, illustrating that you're a responsible and financially savvy individual with a good head for business.
 
Oftentimes, your personal credit history is the first thing a lender will check, and if it doesn't meet certain expectations, they'll disregard your entire application, regardless of revenue and time spent in business.
 
That said, while a pristine credit history will help you to close the deal, it's not an absolute essential. As long as your credit score is relatively respectable, you'll still find willing lenders, but perhaps not for the terms you're hoping for.
 
You see, as mentioned earlier, lenders are trying to predict the future using your past behavior as a reference, so a less-than-stellar credit score tells them that you might be irresponsible with the business loan.
 
To hedge against loss, a lender will weight the deal heavily in their favor.
Loan Amount
Of course, the requested sum of money will also factor into a lender's decision-making process. The more money you need, the less likely you are to receive a loan, but don't give up if you're hoping to land a big borrow!
 
Should the factors discussed above be in check, a lender will be willing to cut a more substantial deal.
 
Generally speaking, the average sum of a business loan equates to 50–100% of your typical monthly revenue; however, if your application is pristine and you're willing to put down some collateral, many lenders are willing to go way higher with their offer.
 
Remember, larger loans stand to be far more profitable for lenders, so they want to sell them, but they need to be reassured that you're capable of repayment.

 

Loan Type & Approval Rates

Business loan is a general term comprising many specific loan formats, and each one has differing criteria.

Are Merchant Cash Advances Hard To Get?
A lender of a merchant cash advance will forgive a mediocre credit history if your business has a strong recent sales history as this format isn't technically a loan but an advance against sales in the near future.
 
You will, however, need a minimum monthly revenue of $5000, possibly higher depending on the lender. What's more, you'll need to provide either evidence of consistent deposits in your business account or regular credit card receipts.
 
If this lending format seems like a good move for you, be warned... merchant cash advances may be easier to secure, but they can be pretty expensive where interest is concerned.
Are Short-Term Loans Hard To Get?

Quick and lenient, short-term business loans are similar to MCAs, but lenders will be paying more attention to credit histories and business revenue.

Even though the short repayment term poses less of a risk to lenders, they still want to check you're on the up and up.

Is Invoice Financing Hard To Secure?

Invoice financing involves borrowing up to 90% of a yet unpaid invoice so you don't have to wait for your customers to pay up to use the profit your business has earned.

As a low-risk investment, a lender is far more likely to approve the loan, but they can be expensive, so you'll need your customers to pay their invoices promptly.

Is Equipment Financing Hard To Secure?
When you take out equipment financing, the equipment you purchase acts as collateral, meaning it's a low-risk endeavor for lenders, increasing the chances they'll sign on the dotted line.
Are Traditional Business Loans Hard To Secure?

Lenders of traditional business loans are hoping to see businesses with respectable track records and credit scores, which can make such a loan difficult to secure, but, the beauty of more stringent eligibility criteria is a lower interest rate and larger loan amounts.

Are SBA Loans Hard To Get?

While the SBA offers some of the best terms on the market, they don't make these deals with just anyone. They demand high credit scores, at least 2–3 years in business, and a strong revenue stream.

 

Final Thoughts

Business loans can be incredibly helpful for entrepreneurs and very profitable for lenders, but with a ton of pitfalls for both parties to worry about, it's not always a piece of cake to get a piece of the pie, so to speak.

But, if you can prove that you're a responsible individual and that your business has a lot of promise, there's no reason you won't be able to get the loan you need to take your enterprise to the next level.

About the Host
Sophie Howard is the founder of Aspiring Entrepreneurs, a community designed to help people develop the skills and confidence to build a business and a life that serves them. Sophie began online in 2013 with an Amazon firm, which she sold for more than $1 million in 2015.

Sophie has lectured on stages all around the world, encouraging and teaching other ambitious entrepreneurs. She has established instructional programs educating thousands of students how to sell online, in addition to releasing over 1000 products.

Sophie has also written a book titled "Aspiring Entrepreneurs: A Guide to Finding Your Best Path to Financial Freedom."
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