The only thing keeping you from starting or expanding a small business is the funding to make it happen. But is it hard to get a business loan? There are many different types of small business loans, and the criteria for getting approved will vary, too. But, finding a lender that offers the funding you need is easier than it sounds.
Business Loan Approval Criteria
Upon applying for a small business loan, one thing you will discover is that it can be a complicated process. This is because lenders have different business loan approval criteria, and each lender weighs those factors differently.
Personal Credit
Most lenders will check your personal credit score when applying for a business loan. Your credit score indicates how dependable you are with paying credit card bills and other debts. On a scale from 300 to 850, good credit ranges from about 670 to 740. Your loan options will be limited with a low credit score. On the other hand, you will have more financing options for your business when you have good credit, and loan terms may be more attractive. Study your credit report to find possible errors and pay your debts on time to improve your personal credit score.
Business Credit
Lenders may consider your business credit score if you have built a track record with an existing business. Credit bureaus collect data on your business from public documents, such as business registration, company information, number of employees, and more. However, it is not essential to have a business credit history unless you are applying for SBA loans or other funding that requires being in business for at least two years.
Time In Business
Depending on the loan, your time in business will be a factor that lenders will consider when you want to get a business loan. Banks and online lenders have certain criteria, and how long you have been in business demonstrates that your business is a good risk for their funding. SBA loans are one example of when time in business will play a big role in whether your business loan is approved.
Revenue
Different lenders will have specific revenue amounts as a requirement for business loans. If you have documented revenue already as an established small business, or you can show valid revenue projections for your new business, you are more likely to get favorable loan terms and interest rates on your business loan. Lenders will look at revenue when determining whether you are best suited to pay back any financing you need.
Loan Amount
The loan amount will be a very important consideration for any small business loan. Lenders will weigh the loan amount against your current debts and business cash flow to determine whether you can make monthly payments.
Collateral
Collateral is one way that lenders use to minimize their risk. They do this by securing the loan with other assets that may be seized if you fail to repay your business loan. Examples of collateral include business equipment, office building, accounts receivable, or other business assets. In addition, some lenders may require the personal assets of the business owner to be used as collateral, such as your home, automobiles, cash, or investments.
Business Plan
Your business plan should describe your plans to grow your business, and lenders will expect to review your business plan for that reason. Your business plan needs to include projected financial statements and past financial statements, if applicable, including cash flow and revenue. Your business plan should also need information about the management team, marketing strategy, competitive analysis, and a description of the products and services you offer customers.
Loan Purpose
It makes sense that lenders will want to know the purpose of your business loan. If you borrow money for a new delivery truck, the lender may request details of the purchase to prove that you purchased the truck for your business.
Approval Difficulty For Types Of Business Loans
You may face approval difficulties for certain types of business loans. The key is to understand what may be expected of you before applying for funding.
Short-Term Loans
A short-term loan is a business financing option you may use if you need money temporarily for your business. In most cases, you will need to repay the loan in six months or one year. New business owners may use short-term loans before they qualify for more traditional funding from banks or online lenders. An advantage of short-term loans is that the application process may be fast, with funding arriving quickly. Some examples of short-term loans are business lines of credit, merchant cash advances and invoice factoring.
Long-Term Loans
Because long-term loans usually involve larger amounts and longer loan terms, it is more difficult to qualify for that type of business loan. Your lender may weigh more criteria and have higher expectations for your personal credit score, length of time in business, and how profitable your business is. Technically, a long-term loan is any financing longer than one year. If you qualify, you can secure funding for your business with a long-term loan, anywhere from three to five or even up to 20 years, depending on how the business loan is structured.
SBA Loans
SBA loans are guaranteed by the U.S. Small Business Administration. While your funding does not come from the government, that guarantee makes it possible for banks, credit unions and other lenders to offer more loans at less risk. Therefore, it is more difficult to qualify for an SBA loan because the criteria are strict.
Merchant Cash Advances
A merchant cash advance is another alternative to traditional business loans. In fact, a merchant cash advance is not classified as a loan but rather an advance against future sales. You are charged all the interest on the amount of the advance when you get the cash. On the other hand, with a business loan, the interest owed is spread out over the life of the loan. It is harder to know exactly how much you are paying in interest with a merchant cash advance, making it less appealing to some small business owners. You might use a merchant cash advance if you operate a micro business with lower revenues.
Invoice Factoring
With invoice factoring, you sell customer invoices to a factoring provider as a way to create more cash flow for your business. Then, your customers pay that third party for the products and services you have provided. Invoice factoring is a method of financing your business that works best if you have a lot of customers generating many invoices regularly. It can be an effective way to improve your cash flow, especially if you have many customers.
Equipment Financing
Equipment financing allows you to get business equipment that you need using a loan or lease. You purchase the equipment with the equipment financing, which you then pay back over time. You may use the equipment purchased as collateral on the loan, which means you won’t have to offer other assets to the lender as collateral. If you choose to lease the equipment rather than buy it, you will return the equipment when the lease is up or renew the lease.
Business Loan Approval FAQs
Here are some frequently asked questions about business loan approvals.
Many lenders will require that you show revenue to get a business loan, but it is only one factor of many that will be considered. Depending on the type of loan you want, you may need annual revenue in excess of $50,000. Lenders may request copies of bank statements, balance sheets, and other documentation to confirm your revenue. If you cannot show that amount of revenue in your financial statements, there are other loans and lenders that would not require it.
Your credit score is an important factor in qualifying for a business loan, but it is not the only thing banks and online lenders consider. There are some variations in the score between the three major credit bureaus, and they weigh factors that affect scores differently. By some estimates, a score above 650 on a scale of 300 to 850 is required for different types of business loans from traditional lenders and credit unions. SBA loans may have even higher credit score requirements. If your personal credit score is low, you may not be eligible for a business loan. Take steps to boost your score, but understand that it can take time to see your score improve.
Yes, you can get a business loan with bad credit. However, you may need to compromise to move forward with a loan. You may need to borrow less or pay a higher interest rate over the life of the loan. Traditional banks and credit unions may reject your application if you have bad personal credit. Online lenders may be more flexible about working with you to find a business loan you qualify for.
It can be challenging to get a loan to start a business, but it doesn’t need to be. The key is to be prepared. If you understand the criteria lenders will use to determine if you are a good risk and take steps to improve your credit and revenue while compiling a thorough business plan, you will be able to find a lender that meets your financing needs.
