There are many factors that go into getting a business loan, which can make it difficult for the applicant seeking funding if they do not meet the right requirements. Some of the factors that are considered include credit history, time in business, annual business revenue, purpose and type of loan, and the lender of choice.
There are several different types of business loans for different types of financing but some of the most difficult ones to obtain are SBA loans and conventional bank loans. The easiest financing is to get merchant cash advancing.
How Difficult Is It to Get a Business Loan?
It all depends on the requirements of the lender since everyone will have different requirements. There are some roadblocks that you should be aware of, so they do not keep you from getting approved for a business loan.
Your credit report and credit history are looked at by lenders to determine how credible someone is. If your credit report shows that you have not made timely payments or paying back past debts, you can be rejected for a loan approval.
If you have a score of less than 700, you also might have difficulty in being approved for a loan. There are many ways you can fix your credit so be sure to do this before you begin applying for a business loan. The better your business score is, the better chance you will be approved for a good loan option.
Most loans require a down payment and the amount of the payment required will be determined on the borrower’s financial history.
Age of Business
The age of your business is another factor that determines how hard it is going to be to get a business loan. If your business is young, it is riskier for lenders to give you a loan. The age of a business is an indicator that your business will stay in business and will be able to pay back debts.
Make sure you will fulfill a lender’s minimum business age before you spend the time to apply.
Limited Cash Flow
One of the first things lenders look at when gauging how healthy a business is, is cash flow. If a business has insufficient cash flow, then this tells lenders that you will not be able to afford the loan.
It is recommended that every business calculates their cash flow at least every quarter. By taking this step, you are able to optimize your cash flow before you start approaching lenders. You can also always sit down with a financial planner to help you get an understanding of the current position of your business.
Having a business plan is important not only to help you grow your business, but also can improve your chances of getting approved for a business loan. Lenders will want to see that you have a solid business plan that explains in detail of how you plan to use the money that you want to borrow and how you are going to repay it.
If you show up to a lender and present them with no business plan, you will have less of a chance of getting approved.
When seeking funding for your business, you may be tempted to apply for multiple loans at one time. However, when you do this it can cause your loan application to raise a red flag for business credit bureaus. Be sure to avoid applying to too many loans at once to improve your chances of getting approved for a loan.
Before approaching potential lenders, business owners should strive to be as organized as possible. Your books and financial statements should be organized so when you are asked for a specific document you will have it all ready.
Some of the important documentation that will be needed is personal and business bank statements, income tax returns, loan history, balance sheet, business licenses, and business registrations.
There are many types of loans available and getting approved for one also depends on the loan you are trying to get. Some of the common financing options are:
- Merchant cash advances: this financing option is easy to qualify for since it has less stringent requirements than a traditional business loan. This option is great for those businesses who have been in business for a short time and process credit card receipts.
- Invoice financing: this financing options is secure for the lender, which makes it easier to qualify for as well. However, it can be expense.
- Short-term loans: if you need financing quickly, short-term loans are a great option. Online lenders have a less stringent requirement because there is low risk for the lender.
- Equipment financing: it is a great way to leverage borrowed capital to purchase equipment your business needs. The equipment is used as collateral for the loan which reduces risk for the lender.
The Bottom Line
The level of difficulty for getting a business loan depends on what you are applying for and the factors different lenders consider. If you do not qualify for what you applied for, take the time to improve your credit histories to increase your chances of approval for the next time.