How Hard is it to Get a Business Loan?

Are you starting a new company or expanding your operations? A business loan can provide you with the enough funding in order to make these goals possible. But just how difficult is it to attain a cash advance for your business? This depends on a variety of factors.

Firstly, it’s important to have a good financial track record. If you and your business have a history of good credit, high annual revenue, and longevity in the industry, then lenders will be more likely to loan you money. If you have a history of financial challenges, then lenders will likely be more hesitant to grant you a loan. In that case, you will likely have to deal with a lender with less accommodating interest rates and terms.

Getting a business loan with bad credit

 

If you have a low credit score or a history of credit problems, it can be tough to get a business loan. That being said, it is not impossible. Before you apply for a loan, look for ways you can improve your credit score, like paying outstanding bills. With smaller businesses, it’s especially important for both the owner and the business to be in good financial standing, because lenders look at the financial history of the individual and the company when considering a business for a loan. Once your financial affairs are cleaned up, lending firms will look upon you and your business as lower lending risks.

If you are wondering how else you can clean up your credit, there are various avenues to do so. They include, but are not limited to:

  • Promptly pay off any and/or all outstanding debts
  • Be sure to pay your rent and utilities on time.
  • If you have any other outstanding loans, ensure that you are paying them in a timely manner
  • Once you are on financially stable ground, opening a business credit card – and making timely payments in full – can help build up your credit history

It will likely take some time to clean up your credit; anywhere from six months to a year. During this time, business owners can apply for a loan with their local credit union or bank. Local banks will likely be friendly and have more manageable lending requirements, especially toward small business owners in the area. In addition to – or instead of – applying for a loan, you can open a business savings and checking account with a local bank to build a history of banking activity. Building a rapport and making payments on time with these institutions will be a great way to improve your credit and put you in a better financial position to approach a larger business lender in the future.

 

Types of business loans and how to apply for them (in order of difficulty)

 

Merchant Cash Advances

First on our list is the most accessible of business loans, the merchant cash advance.

This isn’t technically a loan, it’s an advance. With this option, a lender will advance your business’s future credit and debit card revenues that you will repay in a predetermined daily percentage of your business’s credit and debit card revenues. In a nutshell, a lender will give you an upfront sum of cash in exchange for a percentage of your future sales.

A merchant cash advance (or MCA) is the most accessible of your business funding options. Due to this, a merchant cash advance will also likely be the most expensive of all your options. An MCA’s cost is most often expressed as a decimal which, if multiplied by the amount of your loan, will reveal how expensive your MCA will be.

All that being said, MCA’s are quite easy to qualify for. You will only need:

  • At least five months in business
  • A 400+ personal credit score
  • $75,000 or more in annual revenue

Their costly rates aside, merchant cash advances are one of the best options for lesser-qualified businesses in need of funding.

 

Invoice Financing

Next up on our list is invoice financing. This is another accessible funding option for less-qualified businesses. It works by taking an outstanding invoice that a business is waiting on as a form of collateral. In other words, invoice financing allows for businesses to borrow money against the amounts due from its customers. The business lender can advance your company up to 90 percent of an outstanding invoice’s value. The catch is that the lender will not lend you this cash advance free of charge. For every week that the invoice is outstanding, the lender will charge you interest. This can obviously become more expensive as more days pass since the invoice fulfillment day.

On the plus side, invoice financing is a self-secured form of business funding, so it’s relatively easy to qualify for. Invoice financing comes with these general minimum requirements:

  • $50,000+ in annual revenue
  • Six or more months in business

 

Business Line of Credit

Third on our list is a business line of credit. This is another business funding option that is reasonably attainable for businesses that are less-qualified.

With a business line of credit, you get access to a pool of funds which you can draw from whenever you need capital. Unlike a traditional business loan, you have the flexibility to borrow up to a certain, set amount (typically anywhere from $50,000 to $500,000). Then you repay only the amount you withdrew, with interest. Business lines of credit are conveniently available whenever needed, so you can use it to handle gaps in cash flow, get more working capital, or address almost any other emergency or opportunity.

There are some potential drawbacks to this lending option. You may need to provide updated documents upon each draw, they might require collateral, and there are higher rates for lower credit scores.

That being said, business lines of credit will often be simple to access. They come with minimum requirements that are fairly easy to fulfill:

  • Six or more months in business
  • $50,000+ in annual revenue

 

Short Term Loans

The next most accessible type of business loan on our list is the short-term loan. Short-term loans will function like a condensed version of a traditional term loan. You’ll receive a lump sum of funding that you’ll pay off, plus interest, over time; however, with short-term loans in general, the loan amounts will be smaller, the APR’s will be higher, and the repayment terms will the shorter. Instead of scheduled monthly payments, you’ll likely pay scheduled daily or weekly payments. Some short-term loans even express their rates in factor rate instead of APR’s (which is a tell-tale sign of some pretty expensive funding).

That being said, short-term loans come with less desirable terms because they’re significantly more accessible than their longer-term loans. You’ll only need to fulfill the following minimum requirements for short-term loan:

  • One or more years in business
  • $50,000+ in annual revenue
  • A 550+ personal credit score

 

Equipment Financing

The fifth most accessible type of business funding is equipment financing. Like invoice financing, equipment financing is a form of self-secured form of business funding.

Equipment financing is a form of business loan used for acquiring equipment. If you qualify for equipment financing, you’ll be able to finance up to 100 percent of a piece of an item’s value.

The equipment itself functions as collateral for the loan, and thus makes equipment financing less risky for the lender and more affordable for the borrower; however, because equipment financing offers such ideal terms, its minimum requirements are loftier than the aforementioned loan options. You will first need to make sure that you fulfill the following minimum requirements for equipment financing:

  • A minimum 600 personal credit score
  • 6 or more months in business
  • $100,000+ in annual revenue

 

Term Loans

A term loan is the second-toughest loan on our list to attain.

Term loans offer a straightforward, affordable funding solution for small businesses. A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The set repayment term length will typically be one to five years long. Most business owners use the proceeds of term loans to finance a specific, one-time investment for their small business.

Unfortunately, these ideal terms might be difficult for some small businesses to qualify for. You’ll have to first fulfill the following minimum requirements to even be considered for a term loan:

  • At least one year in business
  • $90,000+ in annual revenue
  • A 600+ personal credit score

 

SBA Loans

SBA loans are the final and least accessible loan option on our list.

SBA loans are the cream of the crop of small business loans. The Small Business Administration partially guarantees SBA loans, and because of this, lenders are willing to lend to small businesses more often and with better terms.

SBA loans come with exceptionally ideal terms, but they will be the hardest type of business loan to qualify for, despite the partial SBA guarantee that makes it less risky for lenders. SBA loans come with the following rigorous requirements that might stop some business owners in their tracks:

  • Two or more years in business
  • $100,000+ in annual revenue
  • A 640+ personal credit score

 

So, how hard is it to get a business loan?

A business loan can be a great tool to help unlock new potential for your business. It is important to keep in mind some loans are going to have more discerning standards. These loans are going to be more affordable, but tougher to attain. On the other hand, the less-discerning loans will have lower qualifications standards, but less-accommodating terms and will likely be more expensive. These will be easier to attain for less-qualified businesses.

Just remember to work on your credit, start banking (responsibly), organize your records, build relationships, and maybe even open a business credit card account. Factors like your business’s age, credit score and revenue will all play big roles when applying to lenders. The most important overall factor for you to consider before you commit to a loan is how stable your finances are. If a business and its owner are on solid financial ground, then the options are expansive.

But don’t worry! There are plenty of ways to attain a business loan. With good credit and a solid application, you may just be able to get the funding you need. After all, in 2015, the Fed reported that more than half of all small businesses were approved on all the loans for which they applied.

At Crestmont Capital, we are able approve 95% of our loan applicants. To learn more, click here to review all our small business lending options.