Starting a business is a big decision that includes finding the funds and also ensuring you can honor your debt repayment agreement. Business loans help you get off with good momentum as you can fund your ideas. Getting a small business loan could be the thing you need to boost the performance of your business. From marketing to funding upgrades, there are many ways getting a business loan could help you achieve your dreams.
One of the biggest questions among many entrepreneurs is, how difficult is it to get a business loan? There are many things that affect loan approval. Business loans are easier to get if you have been in business longer. An established personal and business credit history shows you can honor debt repayment obligations, so lenders will be willing to give you the amount you want. Also, the conditions of your financials will influence if the lender will consider your application. Good financials means you stand a higher chance of getting approved.
Is it Hard to Get a Business Loan?
When applying for a small business loan, you should consider several factors that will determine if the lender will consider your request. Business loans require a certain degree of qualifications, so you must meet most of the conditions to be approved. These are the common factors that will improve your loan approval odds.
Credit Score
To approve personal loans, a lender wants to see that you have a good credit history. This indicates you can afford to repay the cash without problems. Your credit score shows if you’re responsible and your ability to repay the loan. Many lenders have a minimum personal credit score you must have before you’re approved for a business loan. If your score is 600 and above, you should be eligible to fulfill most of the other minimum requirements.
Time in Business
Because only a few businesses survive after the first year, it shows younger businesses are riskier borrowers. Lenders look to the age of your business to know the likelihood of staying in business and your ability to repay the debt. Like your personal credit score, lenders establish requirements for the age of businesses that can get approved. Generally, if the business is over two years in operation, you can get approved by most lenders.
Annual Revenue
This is an important indicator of whether the business can afford to honor its obligations to repay the debt. Annual revenue shows the business’ potential and the amount of money you make yearly. While different lenders demand revenue with varying periods, sometimes a monthly revenue is sufficient.
Amount You Need
How much money are you looking for? The amount you need will either broaden or narrow your options. For example, if you want $250,000, you could get a traditional bank loan. Be realistic with how much you need, as you should never take more than you can repay comfortably.
Purpose of the Loan
What do you need the money for? You could need the cash for equipment purchase or to cover recurring costs. Based on how you intend to use the money, a lender can evaluate your choices and decide if it’s the right thing to approve your request. If the money goes into something that supports the business to grow, they will be willing to approve your loan request.
Outstanding Debt
Most lenders also want to know if you have other debt you’re repaying. If you already have other forms of debt, it might affect your ability to repay any debt you acquire. Too much debt means you’re a high-risk borrower, so the list of lenders who can approve your request will be narrow.
Business Loan Types
When you get a business loan, you should specify the type of loan you want. This will help you find a lender who offers you a good deal. These are the most popular types of business loans.
Cash Advances
Considering credit, merchant cash advances are easier to qualify for if you have a lot of credit card receipts. Also, you don’t need to have run the business for long. This is not really a loan, but an advance on future credit card sales, so there must be consistent credit card receipts before the lender considers your request.
Invoice Financing
If you’re looking for the best way to get a business loan, you should consider invoice financing. This essentially represents an advance on your business’s unpaid invoices. For example, if you’re expecting to be paid an invoice in two months, you can get up to 90% of its value. You repay the amount to the lender when you receive the money owed to the invoice.
Line of Credit
If you’re considering taking out a business loan, a business line of credit is an ideal option. It functions like an intangible credit card, which your business can spend. You only need to pay the amount you spend plus interest.
Short-Term Loans
You could also opt for short-term loans like payday loans. These are types of loans you borrow and repay in under a year. If you don’t need a big amount, a short-term loan is a suitable choice.
Equipment Financing
This is a good way to finance the purchase of needed equipment for your business. The equipment you’re acquiring serves as the collateral.
SBA Loans
These are loans guaranteed by the Small Business Administration. They’re a good option with great terms. All you need is to have run the business for at least two years, have stable revenue, and have excellent credit.
What Do You Need for a Business Loan
Before applying for a business loan, gather all your documents. Depending on the lender, you should have several of the following:
- Business financial statements
- Business and personal tax returns
- Business legal documents (commercial lease, articles of incorporation, etc.)
- Business and personal bank statements
- Business plan
After determining the type of loan you want, choose the right lender and use their online loan request form to apply. For traditional lending institutions, you might have to visit the institution physically to fill a physical form. Research what they need to prepare your documentation.
The Bottom Line
Now that you know if it’s hard to get a business loan, what’s the next move? Review your priorities and apply the amount you need to support your business. Types of loans that are easy to get will cost more, so know which category of credit you belong to and borrow responsibly.