Many businesses, both large and small, rely on financing to start or grow their small businesses and get them through times of tight cash flow. Especially in today’s rapidly changing business climate, many small business owners are wondering, “Is it hard to get a business loan?”
Several factors come into play when approving a business loan. Generally, business loan applications that are approved show strong business income, good credit, and at least a few years in business. But even if your business doesn’t tick all of these boxes, don’t panic. There are loan options that might work for you.
How hard is it to get a business loan?
The simple answer: Almost any business can easily get a small business loan if they know where to look. This era of online innovation has led to an influx of financial technology institutions that specialize in helping small businesses secure capital when they need it.
Many companies worry because their credit rating is not good or their company is young and in a difficult market. While these considerations will affect the number of lenders willing to look at your business, they shouldn’t stop you from finding financing.
Let’s take a look at how to get a small business loan, from the hardest to the easiest.
5 Factors That Keep You from Getting a Business Loan
#1: Poor or No Credit History
Startups and some small businesses face the problem of having bad or no credit history. The challenge here is that lenders don’t like risk. If you have a history of not paying off your debts, this tells lenders that you are unlikely to repay the money they loaned your business.
If you don’t have a credit history, it’s a risk to lend money to your business because you have no proof you’re going to repay the debt.
Solution: Risk reduction is the solution to bad or no credit. How do you mitigate this risk? Obviously, you need a legal business entity.
You should start building business credit before applying for the loan or give the lender some security so that they own the collateral that will be used to guarantee the loan if you stop paying the loan. The final option is to apply for a business credit card and use it to build your business.
Additionally, you can check out our rating of the best small business loans for bad credit.
#2: No Business Plan
Applying for a business loan requires filing a variety of paperwork and in that mix is a business plan. If you don’t have a business plan, it tells the lenders you don’t plan, and that makes you a risk.
Solution: When starting a business, you should have an idea of what you want to create. A plan will help you create it. Business planning is not difficult, but it does require some critical thinking skills and a little time.
There are many online templates and online business plan generators that make planning your business easier than ever. When planning your business, you should also plan for a business loan.
#3: Not Enough Time in Business
Companies with a solid track record of consistent sales and good management are less risky than startups or companies that are a year or two old. The longer you are in business, the more chances you have of getting a loan.
Solution: The solution to funding your business sooner rather than later is to find alternative ways to grow your business. We recommend reaching out to friends and family for financial support and ways to build business credit.
#4: Limited Collateral
If you’re new to the business, you probably don’t have a lot of collateral, which can be a problem when applying for a business loan. Lenders need to feel confident that they will repay the loan. Collateral is a safeguard for you in case you don’t repay it.
This collateral has value and once you own it, you can sell it and recoup your loss. How do you solve the problem of only having limited collateral to back up your small business loan?
Solution: The key to collateral is understanding the value of the collateral and what lenders prefer in terms of collateral. Once you figure out what someone wants, it’s easier to negotiate with them.
The same goes for negotiating with lenders, so it’s a good idea to understand the ins and outs of collateral before applying for a small business loan. Collateral is more than just tangible assets. Consider intangible assets. Company shares can serve as collateral, for example.
#5: Lack of Required Documentation
When a loan is not approved, it can often be due to not having the right documentation. It hurts to think that your application was rejected because you didn’t submit last year’s tax return, business plan, or income statement.
Solution: A simple solution is to have the right business loan documentation. The best way to accomplish this is to know what documentation is required for approval, and then consolidate that information into a simple loan application package.
When you are ready to apply for a small business loan, review the bank’s requirements and send them the necessary documents.
How much income do you need to get a business loan?
Business loans are often based on business income, although small business credit cards often rely on income from all sources, including personal income.
Every lender is different, but where there is a minimum income requirement, it usually starts at $5000 or more in average monthly income. If your business income has been declining recently, you may have a harder time getting a permit.
If you don’t have strong personal or business income, consider crowdfunding or vendor terms.
What Credit Score Is Needed for A Business Loan?
Excellent creditworthiness makes admission easier. If you have bad credit, there may still be options to help your business get financing.
Banks and credit unions often require minimum credit scores of 680-720. However, some alternative financing options may have low credit requirements; Instead, they are more concerned with business revenue. Some lenders, such as Microlenders have slightly more flexible credit requirements.
If you don’t have good personal credit, consider crowdfunding, microcredit, equipment loans or leasing, supplier deals, or cash advances from dealers.
Can an average person get a business loan?
Yes, it is possible to get a small business loan even if you have an average business. However, remember that if your business does not have strong qualifications, you may not be able to obtain a large amount of credit or you may be charged a higher APR on the financing you have secured.
The bottom line
There is no universal answer to the question of how hard it is to get a business loan. That’s because it can vary depending on the type of loan you’re applying for and the factors that different lenders consider.
When considering different options, it’s important to research small business loan options.
Finding the right business loan today doesn’t require you to become a small business finance expert, but you do need to research the options that best suit your business needs.
If you don’t qualify for the type of loan you want, you should work on improving your personal and business credit score and business earnings to increase your chances of qualifying the next time you need financing.