Is it hard to get a small business loan these days? Aside from the required documentation, the application process can be hassle-free for some lenders.
The small business game is strong in America. After all, it won’t be called the land of opportunity if its citizens cannot pursue their entrepreneurial dreams. And one way that supports many individuals in this endeavor is having access to small business loans. Ironically, though, it is common knowledge that securing this type of small business financing can be difficult. No doubt, it’s a risky business for most lenders, but if done right, it can be financially rewarding for both parties. It is why business lenders must be very convinced that they will recoup their money and then some.
So, how hard is it to get a small business loan? Let’s find out.
The business of lending and borrowing
A business loan is where a lender and a borrower agree to use funds for business-related purposes. The latter repays the former the amount plus interest within a certain period. While there is a process involved, it is easy to misconstrue that this facility is only for cash-strapped small business owners. Many large enterprises would also turn to short-term loans whenever they need capital infusions and other types such as invoice financing and California finance lender loans.
It is important to note that a small business loan does not just sustain the business in the interim by solving insufficient cash flow issues. Having access to such business loans guaranteed the growth of small businesses.
While they are available as an option, it’s not like you can go to online lenders and secure funding for your business in a snap. There’s paperwork, credit-worthiness checks, and other strict vetting measures. Indeed, it does not come easy.
Why is it hard for small business owners to get a loan?
Try asking someone, a wealthy friend perhaps, if they can lend you say, 5,000 dollars, how do you expect they will respond? Do you think they’ll hand you over that amount and take your word for it? They’ll probably ask when you’ll give it back or how you will repay them. That is also how most lenders also think. And here are reasons why applying for a business loan can be quite challenging.
Requires a high credit score
You wonder if there is a lender where you can apply for the easiest business loan. Hence, it is stressful to know that this loan might by hampered because your credit record is below the acceptable standard. A desirable credit score will help in the loan application process. Hence, if you have not been diligent in your previous financial obligations, it will come back to bite you.
Bad credit is why around 20 percent of small business owners are rejected from the get-go. A low credit score is essentially a red flag to most; lenders prefer not to deal with a customer who was not so diligent in their past loans. If you have been in this situation, it would be best to review your credit report before submitting your loan request.
Instead of proceeding directly to lenders, you can dispute any irregularity or inaccuracy by contacting your credit reporting company. As a rule of thumb, you are likely to be turned down if your credit score is lower than 700.
Cash flow should be sufficient
It might seem counter-intuitive at first glance; you need additional funding, yet you have to prove you have enough cash on hand or high income. Since lenders are primarily concerned about being repaid within the approved period, they also want to know if you have a positive cash flow. It indicates that the liquid assets of your business are growing. That said, having poor cash flow will make it difficult to justify how you will be able to defray your monthly payments. When this situation persists, it can cause a business’ untimely demise.
To determine if you can afford your amortization, divide your annual net income by your annual debt, including your projected loan payments. If you come up with a value of at least 1, you can cover your target loan amount. However, lenders will require a value of around 1.35, leaving some room for a buffer and serving as financial protection for the business.
Your business plan must be clear
Winging it certainly won’t help you win the banks over. It is vital for traditional and online lenders to gauge how auspicious your business can be based on your vision and comprehensive planning. In addition, you need to present to your lender how you intend to use the loan amount.
Lenders tend to favor a small business owner who has a detailed allocation of the loan proceeds. This practice reflects diligence and professionalism, which increase their confidence in you. Remember that you’re not getting free money; hence your vision will help guide you to achieve your goals and make good on your monthly payments.
You can’t just submit your loan request carelessly
Sending multiple loan applications in close succession will negatively affect your chances of being approved for a business loan. Each loan request you submit will get a hit in your credit score, pulling it down. This practice should be avoided if you want to increase your business loan approval odds. For traditional and online lenders, it is an indication of desperation. As such, you need to be careful when submitting your loan application by shopping around first.
Once you’ve narrowed down your list of lenders, choose wisely and one that you have better chances at approval based on your assessment. When you get disapproved, work on what caused your result before reapplying or trying a different lender.
Your industry may not be appealing to the lenders
Let’s face it; traditional lenders may favor certain industries; hence they may not be as open to taking a risk with you given the nature of your business if it involves gambling and alcohol, for example. Such industries are deemed high-risk because they are vulnerable to regulations and compliance. Business lenders are wary of retail and food industries whose revenues are not consistent; hence they will encounter challenges getting loan approval. Other high-risk industries include accounting, agriculture, insurance, legal services, travel agencies, and utilities.
You just started your business
Depending on the amount you need, you may apply for other bank loans or personal loans. But, you will find it hard to present your company if it’s still young, without a proven tenure. An established business is preferred over startups which may be disheartening. However, some online lenders may be more accommodating to new businesses or those with fewer than six months in operation.
You don’t have collateral
Although there are unsecured loans, the amount you need may prompt your lender to require collateral that you cannot provide. It may also be required if you’re a new business owner because you don’t have a business credit score yet. By now, you know that you have to establish good business credit to increase the odds of your bank loan being approved. Otherwise, you will have to look for other financing options or settle with a smaller amount that will likely gain approval without any additional security asset or personal guarantee.
Involves a lot of documentation
Applying for bank loans automatically requires documents to support small business loan applications. Some business owners lack organization, making it hard to consider getting traditional loans or Small Business Administration (SBA) loans. Aside from a written business plan, you have to present your financial statements bank statements, among other substantial documents. Securing bank loans won’t be easy if you cannot fulfill such requirements.
Some types of business loans to facilitate business growth
There are two main categories of loans, secured and unsecured. Secured loans will require acceptable collateral, whether real estate, car, stock certificates, or other assets with value. The opposite can be said about unsecured loans; you can get them from banks, online lenders, and credit unions that prefer borrowers with high credit scores.
Meanwhile, the following loan options have their pre-qualification and loan terms that can address the specific needs of small businesses.
Short term loans vs. long term loans
The quickest way to get results is applying for a short-term loan, provided you only need less than 250 thousand dollars that the borrower can repay in under a year. You can get approval in a couple of days. Long-term business loans cater to an established business needing funds to support its growth. The terms allow the entrepreneur to repay their lump sums anywhere from three to ten years.
This type of loan is more reassuring for business lenders. Since it has government backing, it can manage the risk much better because it can recoup up to 80 percent of the defaulted balance. Small businesses can loan as much as 5 million dollars and enjoy lower rates and better terms than when you get a business loan from alternative lenders.
Merchant cash advance
A merchant cash advance is an unsecured loan for small businesses. This financing is often used by restaurants and retailers needing additional funds.
Repayment terms involve a percentage of card sales or cash deposits made to the business bank account. It essentially provides breathing space for the business to adjust to its actual income and borrow from its projected earnings. However, this loan comes at higher interest rates and shorter terms.
Another means of borrowing from future revenue, albeit with a little more certainty than merchant cash advances, is that invoice financing accepts unpaid invoices and provides up to 90 percent of their amount to the borrower. It serves as advance payment, which can help with cash flow issues. An interest fee is usually charged every week until the customer pays the invoiced amount and fees before the invoice is returned to the borrower.
A lender provides funds to purchase machinery, vehicles, or any equipment, becoming collateral for the transaction. It offers relatively lower interest rates and does not require a down payment. If the borrower defaults in payments, the lender has the authority to repossess the collateral you have provided.
How to apply for a business loan for the first time
Now that we have discussed some of the most common loan options that small enterprises can avail of when they need business funding, find out if you are ready to take these steps that help you land the right business loan.
Ask yourself if you really need to secure financing
The first thing is to decide if taking out a loan will help your business endeavor. It could be many things. You might need to buy a major piece of equipment, and doing so will be worth it and give a solid return for you. Or perhaps you need to fund purchase orders, and you lack capital. You are short in cash flow, for the time being, making it hard for you to cover some of the operational expenses. It may be because of payment delays from your customer or seasonal low sales. Such scenarios warrant financing one way or another.
Determine your credit score
As mentioned earlier, it would save you from loan rejection, which can even bring down your credit score further if you submit your loan application only after you’ve verified if your bad credit history is actually reflected in your record or not. Please note that you can get your credit report from several credit bureaus, finance websites, and card issuers.
In case your credit score turns out to be below 700, it doesn’t mean that you’ll never get approved for a loan. You might want to step back a bit and improve your score first. This way, you’ll not only be able to get approval but offered a lower interest rate as well. It means you will have to put off your loan request for several months to a year. On the other hand, there are still other financing options if you require funding right away, regardless. In any case, knowing your credit score beforehand will guide you accordingly.
Talk to your potential lenders
Start setting up appointments with banks and financing institutions and learn about their offerings. Traditional banks and online lenders usually share the same types of loans. You are likely to get a lower rate from a bank, but it has more stringent terms and documentation than online lenders.
During your discussions, the lender will let you know their requirements and give you other information about their loan products that can cater to your needs. Ask about the fees involved and all the hard questions so you can gauge if your current business situation meets their qualifications.
When lenders ask you back, be truthful in your answers and avoid exaggerating your projected revenues. However, it will do you more good if you can pitch the potentiality of your business when you deem it necessary, especially if the lender is on the fence with you.
Choose which business loan will be most optimal to your needs
It’s time to check which small business loan is best for you. If you have a strong personal credit score, you are at an advantage because it allows you to negotiate with lenders that will give you favorable terms such as the lowest annual percentage rate (APR), etc. When you can put up eligible collateral, it even ups the ante for the borrower, with many lenders knocking at your door. If you need a larger amount, you would want to spread the monthly payments over a longer period hence a long-term loan may be an excellent choice.
What you should remember when choosing the right financing for your small business
1. For long-term loans and SBA, you need to go by the book, meaning you need to present a strong case for your business. If you have a decent amount of tenure, good credit history, relatively high revenues, you stand a great chance of being approved. You are also likely to meet the criteria of most banks and other financing institutions, where you often get the most competitive rates.
2. If your business has only been operating for a few months, you still have other friendlier options to your circumstance. A short-term loan may be the right fit for business owners operating for at least six months. You can also consider applying with online lenders who do not have too high qualifications from their borrowers and choose the most suitable loan from their roster.
Tip in boosting your loan approval
1. Presenting additional tangible assets such as real estate property or high-value corporate bonds as collateral can also help you secure a small business loan even if you fall short in some of the requirements. When the borrower pledges collateral, it adds confidence to the lender, giving them more competitive interest rates.
2. Although it may be challenging, having a loan cosigner with a strong credit score, if ever you can find one and are willing to go through the application process with you, can help you land a small business loan approval. You get to have the same benefits because this cosigner extends their favorable situation to you to afford to negotiate your rates and have much better terms.
When it is becoming too hard for you to get a business loan
There are other financing alternatives for business owners who fail to meet the criteria of traditional lenders. Aside from bootstrapping, you can find other means to support your needs. Business credit cards can sustain short-term financial needs that, when managed responsibly, can even help build up your credit score. If your industry qualifies, you can get free money through business grants that the government offers. However, getting approved for this type of funding source may be difficult. In any case, you can check if it can be an option for you.
Another way to help your business without incurring debt is to seek crowdfunding suitable when launching a product or business. You can find several websites that cater to this task. You may also try to find an angel investor, but it would mean giving up a certain percentage of your company ownership. As someone pitching this idea to a venture capitalist, you must be prepared with your solid business plan to assure them that investing in you will be profitable.
Secure your financial documents
Once you’ve chosen your lender, you should gather all the necessary documentation. It includes but is not limited to financial statements, business tax returns/ personal tax returns, business licenses, bank statements, business plans, articles of incorporation, commercial lease, and others.
Submit your business loan application
You will fill out the details in your application form, such as your business name, SSN, Business Tax ID, annual revenue, the purpose of the loan, desired loan amount, etc. Most online lenders have a quick turnaround processing time of two days, depending on which type of business loan. Banks take weeks to process loans, while SBA loans, in particular, are known for their long processing time of 90 days, more or less.