ADVERTISER DISCLOSURE

How Hard Is It To Get a Business Loan?

Getting a business loan can be necessary to allow you to get your business to the next level. Many people ask the question, ‘How hard is it to get a business loan?’, and the simple answer is, it depends. This article will take you through the pitfalls that may prevent you from getting a business loan, how you can increase your chances of getting a business loan, and the types of business loans that are easiest to qualify for.

Top 5 Reasons Why It Is Hard to Get a Business Loan

  1. Typically, you need a personal credit score of around 600.
  2. You need to meet the minimum requirement of your business’ age (typically 2 years).
  3. You need to have a strong annual or monthly revenue to meet the minimum requirements of lenders.
  4. It is riskier for banks or other lenders to loan to very small businesses as they are more likely to struggle with repayments.
  5. Some require collateral or a down payment that small businesses simply don’t have.

How To Make It Easier To Get a Business Loan – Increasing The Odds of a Successful Loan Application

Although it can be hard to get a business loan, there are several ways that you can increase your odds of a successful business loan application:

  • Have sufficient collateral – some banks will be hesitant to lend to those that do not have proper collateral as they will not be able to take anything in return if you cannot make your repayments for any reason
  • Create a solid business plan – this needs to include details about your company, including staff, the products or service it provides, your target market, and your financial information, including cash flow
  • Collect information that will provide financial evidence that your business is a good candidate – e.g., loan and credit history, bank accounts, tax returns, and balance sheets
  • Collate a summary of your personal financial situation – including your asset information, financial solutions such as mortgages, and credit card debt.
  • Research and compare loans before you apply (click here to get started)

What Are Some of the Mistakes That Keep You From Getting a Business Loan?

The main mistake is simply jumping in too quickly when you’re not prepared since this is often done out of desperation. Here are the other mistakes you should be aware of:

Having a Poor Personal Credit History

Typically, lenders use credit reports to determine your eligibility for a loan. If you have a low credit score, i.e., under 600, this shows that you may not be good at paying back money you have borrowed on time, and you are more likely to be rejected when applying for a loan.

This is why it is so important that you work to reduce any withstanding debt you may have in order to build up your personal credit score before you begin to look into getting a business loan, if at all possible.

Working with Limited Cash Flow

Along with your credit score, this will be what lenders will look at to try to ascertain whether you have a successful business. There is no point in applying for a business loan if you don’t have enough cash flow in order to make repayments, as it is unlikely you will even be considered.

Make sure that your cash flow is at its optimum level before you apply for a business loan. You can calculate what loan amount you will be able to afford by dividing your net income by your annual debt, which will give you a debt service coverage ratio. If your monthly loan repayments are equal to your cash flow, you will have a ratio of 1. However, you want to have a ratio of at least 1.35, as this will show lenders that you have safeguarded your finances.

Having a Below-Par Business Plan

It is not enough to have a basic business plan; many potential lenders want to see a detailed plan that has taken time to put together. In addition to the components we mentioned above, you need to be able to clearly explain to lenders what you will use the loan for, broken down into various amounts if needs be, and exactly how you plan to repay the loan. Even if the lender you intend to apply to does not require a business plan, it’s a good thing to have around just in case.

Applying for Too Many Loans at Once

Some people will apply for more than one loan at a time as they think this will give them more options, however, although this makes sense in theory, credit bureaus will flag this up and can reduce your credit score.

Being Unorganized

You need to make sure that you have all the required paperwork ready, as stated by the specific loan and lender. Along with your business plan, this could include financial information and legal documents. If you do not have all the required paperwork, it could be interpreted as excluding information on purpose, which is a huge no-no. You also need to ensure that you fill out the application correctly and honestly and that you keep business and personal finances separate, otherwise it is very likely your application will be rejected.

Failing to Get Expert Advice

It can help your case if you show that you have actively received financial and business advice from knowledgeable people. This is often in the form of accountants, but there are other sources such as the Service Corps of Retired Executives, or SCORE, which is full of ex-businessmen/women who can be a valuable mentor in your relevant industry. At the very least, you should compare business loans before applying.

Failing to Look at Your Options

You might feel so excited when you get accepted by a lender that you just choose the first one that does. However, it is not a good idea to go with a lender before looking at other options. It is crucial to look at all your loan options and then the various lenders to choose the right loan and lender for you and your business. This includes looking at the requirements of each lender, their loan terms, and their interest rates. Click here to start comparing.

Having an Apathetic Attitude

Lenders like to see that you are enthusiastic about your business so that they will believe that your business will be a success. A successful business means better cash flow and, therefore, a better ability to pay off a loan.

Easiest Types of Business Loans To Get

There are various business financing options out there you should explore, but here are those considered the “easiest” to get.

Merchant Cash Advance

This is the easiest funding option to get, but it isn’t really a loan, it’s an advance.

With a Merchant Cash Advance, a lender will advance the credit card revenues that your business will make in the future. You then repay this advanced daily based on a percentage of your credit card sales, as set out by the lender.

It should be noted that, although the easiest type of funding to get, this is more than likely to be the most expensive option for financing due to the particularly high-interest rates.

To qualify, you simply need:

  • 5+ months in business
  • A personal credit score of at least 400
  • Annual revenue of $75,000 or above

Merchant Cash Advance Options

Invoice Financing

This is another financing option that is easy to qualify for. Invoice Financing is where a lender will advance the amount of an outstanding invoice, for anywhere up to 90%. You then pay this advance back to the lender once the invoice has been paid, with interest added for each week the invoice was outstanding.

To qualify, you need:

  • 6+ months in business
  • Annual revenue of $50,000 or above

Compare Invoice Financing Options

Business Line of Credit

A Business Line of Credit is another financing option with minimal requirements. Similar to a business credit card, except you get cash in hand, you can spend portions of your business line of credit and pay it back to be used again and again. Interest will only be charged on money you actually use, as opposed to the full amount of the line of credit.

To qualify, you need:

  • 6+ months in business
  • Annual revenue of $50,000 or above

Compare Business Line of Credit Options

Short-Term Loans

The last financing option that is relatively easy to qualify for is a Short-Term Loan. Much like a traditional loan, you get a lump sum of money to pay off depending on the repayment terms, always with added interest. Short-Term Loans allow you to borrow small amounts, but the interest will be higher and repayment terms shorter than longer term loans. Unlike traditional loans you will generally have to make repayments weekly or daily.

To qualify, you need:

  • 1 year+ in business
  • A personal credit score of at least 550
  • Annual revenue of $50,000 or above

Short Term Business Loan Options

Is The Business Loan Application Process Difficult?

This is also dependent on the type of business loan you choose to go with, and how good your eligibility is. Some business loans will require a lot of time and effort, while others can be approved in 5 minutes with the money deposited within hours. Do your research and compare financing options before you apply.

Most will require you to have your driver’s license, a voided business check, bank statements, credit score, and tax returns. Some finance options, such as Invoice Financing, will need you to provide minimal documents during the application process, and others, such as a Business Line of Credit, will need you to provide many more documents during the application process.

This is why it is so important to take time to consider all your options carefully to determine which will be the best for you and your business.

Compare Business Loans

DISCLAIMER
See the online credit card applications for details about the terms and conditions of an offer. Reasonable efforts are made to maintain accurate information. However, all credit card information is presented without warranty. When you click on the “Apply Now” button, you can review the credit card terms and conditions on the issuer’s web site.

ADVERTISER DISCLOSURE
The offers that appear on this site are from third party advertisers from which PrimeRates receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). PrimeRates strives to provide a wide array of offers, but our offers do not represent all financial services companies or products.