How Hard Is It to Get a Business Loan?

When it comes to seeking a business loan, it is easier said than done. If you are considering taking out a business loan, it is important that you understand what your chances are to ensure that you make the most of your time. Financing is necessary for both small and large enterprises. It helps keep your company running when cash flow becomes tight.

As we live in a rapidly changing time, you need to know how hard is it to get a business loan and if there is an alternative funding option available. Companies that have a bad credit score have more to worry about. There are various factors that influence the approval of your business loan. Strong business revenue is essential for business loan application approval. In addition to this, you also must have a good credit score and be in the industry for quite some time. To help you make an informed decision, here is everything that you need to know.

Factors That Influence Business Loan Approval

If you are considering getting approved for taking out a business loan, there are certain factors that commercial lenders will check when reviewing your loan application as mentioned below.

Revenue

The first question that the lender would ask is whether your business even has the financial means to make payments periodically. Generally, commercial lenders will look into whether your business would remain solvent or not. They would check your cash flow to determine if it is strong enough for making the required payments. You would need to provide evidence of income through bank statements. In fact, the lender might even ask you to link to your bank account for analyzing and verifying your financial standing.

Generally, lenders would check your average monthly income for the last six months. You might also be required to submit your tax returns along with financial statements. The reason behind this is that the lender would want to make sure that you would be able to service the debt or not.

Time in Business

If you require small business funding, the lender would consider the age of your business. They would want to learn more about its past to analyze your track record. For instance, the majority of financial institutions such as credit unions or banks prefer accepting loan applications from businesses that have been around for a few years.

Fortunately, there are some alternative lenders that have lower time-related requirements. In fact, you might even be able to get a loan if your business has been around for only six months. However, you must realize that seeking a loan while your startup is at an idea stage can be rather difficult. Without any track record or revenue, it can be tough to get a loan. But, it does not mean that there are no options available.

Businesses that have been around for several years are considered less of a risk and have a higher chance of getting accepted while also benefitting from better repayment terms. As for new entrepreneurs, a down payment and even a personal guarantee might be required to reduce the risk. In addition to this, you would be charged a much higher interest, especially if you have a low or bad credit score.

Loan Amount

The loan amount will be calculated by the lender based on your cash flow and revenue. You will be allocated anywhere from 50% to 100% of the monthly revenue. But, you should be able to find a lender that can offer a larger loan.

However, you might be required to provide collateral. You should consider other factors as a business lender. If you have a short business track record, you would be able to take out a loan for a less amount in comparison to a business that has been around for more than five years. It is still possible that the lender might provide a more reasonable amount after reviewing your application and discussing your plans.

Credit History

To get a loan, your credit history would be taken into account by the lender. Most business loans require a credit check. This is why you would have to provide your credit report when submitting your business loan application.

Only when you have a solid credit history and personal credit score can you expect to get approved for the loan. In fact, your credit score might be the single most important factor that determines whether your application gets accepted or not. As lenders have to judge your ability to pay back, your credit score allows them to look at your credit history. It allows them to make better decisions.

Approval Odds Based on Loan Type

The type of business loan you require influences its approval rate. Here are your options.

Traditional Term Loans

A term loan provides a fixed amount of money that you need to repay based on a fixed period. If your business is relatively new, this type of loan can be difficult to obtain, especially if you apply for one at a traditional commercial lender such as a bank. In order to make sure that you benefit from favorable terms, your business should be around for at least two years or more. You would also require a strong record of revenue generation, a positive business credit history, and a good personal credit score.

SBA Loans

Another funding option available is an SBA loan. It is offered by the US Small Business Administration and can prove to be a great option if you manage to qualify. This loan is also the best option when you compare the loan terms and interest rate. In order to get an SBA loan, your business must be operated for a minimum of two to three years. You would also need stable revenue and a good credit score to prove that you would be able to service the debt.

Short-Term Loans

A short-term loan might be a better option if you do not require a longer-term loan. The reason why it is a great option is that it allows you to obtain financing rather quickly. Many online lenders today provide short-term financing options. Their requirements are not as strict as traditional lenders. Thus, you should have an easy time taking out a short-term loan. Even if you have a bad credit score, you should be able to get a short-term loan. A reasonable track record should suffice. Your business just needs to be around for six months to get accepted.

Alternative Funding (Alternative Financing)

Merchant Cash Advance MCA

A merchant cash advance is not as difficult to qualify for even if you have a bad credit score as long as your business generates strong sales. In fact, this alternative financing method is quick and allows you to seek funding within a matter of hours as long as you meet the eligibility requirements.

Now, you need to understand a merchant cash advance is not the same thing as a loan. It is simply an advance that you can take out that is backed by future sales. This is why a consistent credit card receipt is needed. Otherwise, you can make do with regular deposits. Although the minimum revenue requirements tend to vary, you would need to be generating a minimum of $5,000 a month. As the merchant cash advance qualifying criteria would be less stringent in comparison to a conventional small business loan, the cost would be much higher.

Invoice Financing

Another alternative financing option that is available is invoice financing. It represents the advance you would take out for unpaid invoices. For instance, if you think that the invoice would be paid within the next month, you can get funding for about 90% of its value. In case your accounts receivable covers large invoices, you can rely on receivables for financing your working capital. It is a great short-term option for accessing cash.

Since invoice financing is considered secure, it is rather easy to qualify for in comparison to a traditional business loan. You must bear in mind that invoice financing tends to be quite expensive. Hence, you must be willing to spend more on interest.

Equipment Financing

If your business needs to purchase equipment, you can opt for equipment financing. It offers a great way to leverage the capital that you have borrowed for purchasing equipment. It would help ensure that your cash flow does not take a hit. When financing new equipment, you would need to provide some collateral to reduce the risk and benefit from a lower rate. You can even benefit from a longer repayment period depending on how much money you need to borrow.

Since equipment financing is considered a much safer option for lenders, you should be able to benefit from flexible requirements. As long as you have a history that demonstrates strong revenue and good credit history, you should be able to qualify.

How Much Income Do You Require For Taking Out A Business Loan?

Business revenue is considered when determining the business loan amount that you can borrow. The amount of income you generate will influence the small business loan amount. Keep in mind that every lender tends to be different. However, you must know that there is a minimum requirement for income which is $5,000. If you generate more monthly revenue, you will have an even easier time getting accepted. However, it would be much harder to get accepted if your income started to decline. In such a situation, your best option would be either vendor terms or crowdfunding.

What Credit Score Do You Require For Taking Out A Business Loan?

Generally, an excellent credit score will make your life a whole lot easier. If you do not have strong credit, it does not mean that you should give up. There are still options available that you can avail for seeking funding. A credit union or bank would require you to have a credit score of at least 680 to 720. But, you can make do with a low or bad credit score if you opt for alternative financing. It would be more concerned with your business income. You should be able to take advantage of a micro-lender as they are known for their flexible requirements.

If your credit score is very low, you should opt for a merchant cash advance, vendor term, leasing, microloan, or even crowdfunding.

Can Anyone Get A Business Loan?

Even if you run an average business, you should be able to take out a small business loan. However, your business would need to meet the requirements set by the lender to be successful, especially if you need to take out a large loan amount. You would also need to be prepared to pay a higher annual interest rate.

Conclusion

After you have gone over the post, you will have an idea about how hard it is to get a business loan. The fact is that there is no one-size-fits-all answer to this question. It all comes down to the factors considered by the lender and the type of loan you plan on applying for. You must research the different business loan options in order to make up your mind. It is not necessary for you to be an expert in financing to get a business loan. However, you must know the different options that are available to get the funding required.

In case your business loan application gets rejected, there is no need to worry as you can work on improving your business revenue and business credit score. Then, you can apply for the loan once again in the future if you think that your chances of qualifying have increased.

As South Florida Funding Group, we provide a number of alternative financing options. Forget about having to go through a lengthy process when you choose us. We will guide you every step of the way so that you do not have anything to worry about. Let us take care of everything.