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How Hard is It to Get a Small Business Loan?

How hard is it to get a small business loan: 3 myths busted aims to clear the air, shedding light on the realities of the loan application process.

As a CEO and business owner, navigating the landscape of small business financing can often feel like charting unknown territories, filled with myths and misconceptions about the difficulty of securing a loan.

In my experience, while challenges exist, understanding the lending criteria, preparing your application meticulously, and knowing where to look can significantly demystify the process.

This piece is crafted from firsthand encounters and insights, designed to empower fellow entrepreneurs with the knowledge to confidently approach financing, debunking common myths that may stand in their way.

Is It Hard to Get a Small Business Loan?

A new or small business owner may have a harder time procuring a business loan than a larger company that has been in business for a while. For a bank or other lender, there is more risk associated with financing a new or small business because there is less to look at to demonstrate financial responsibility and payment history. There is also less evidence to support ongoing financial stability.

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According to the Small Business Credit Survey – 2019 report, 64% of the companies surveyed faced some financial challenges over the past 12 months.  Perhaps more surprising is that a whopping two-thirds addressed these challenges by using the owners’ personal funds, meaning they provided the company with a personal loan.

Some forty-five percent of these businesses took on additional debt while almost one-third cut their staff, reduced their employees’ hours, or downsized their operations.  The latter figure suggests that the business owner thought the approval odds were not favorable.

The vast majority of owners look to self-fund, use personal finance, or use retained earnings versus seeking help from financial institutions.  Is this an indication that business loan approval is too challenging in today’s economy, or are companies profitable, affording them the luxury of this strategy?

If we know that approximately 70% of the small firms have debt outstanding, where does it originate?   It appears that the vast majority of business owners rely on their personal credit history and their personal credit score to provide personal guarantees.

On top of the PG, the business owner typically offers a combination of personal and business assets to secure their business debt.

Less than fifteen percent of the employers relied solely on their business credit, while less than 50% used only their personal credit score or a combination of business credit scores and personal.  These facts lead us to the following question.

How Hard is It to Get a Small Business Loan?

The qualifying process for a small business loan depends on you and your business. The type of business you run, the amount of time your company has been up and running, and the amount of revenue your business brings in all factor into the approval process.

If your business is still in the newer stages or is small, you may need to provide other information as well.

It seems that just over half of all the reasons to seek funding revolve around growing or expanding the business, taking advantage of new opportunities, or acquiring business assets like equipment or inventory.  Statistically, it appears that almost half of the companies who went through the application process received the loan amounts they sought.

Those looking for business loans received approvals because of their low credit risk.  These approvals mean the personal and business credit scores were strong.  When you dig even deeper into the numbers, it seems that smaller firms requesting bank loans of less than $250,000 were most likely to experience a shortfall.

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Again, this shortfall is a reflection of low credit scores (therefore considered a high risk based on personal credit, meaning bad credit), not profitable, location, and startup loans. Established businesses stand a better chance of receiving the funds they seek than startup funding.

How Do You Qualify for a Small Business Loan?

You may find some differences in qualifications among lenders, whether they are banks, community banks, and credit unions, or online lenders (sometimes referred to as alternative lenders).   Generally, they are pretty similar. However, to qualify for a small business loan from traditional lenders (think brick and mortar), you will need to have the following:

A good credit score, either personal or business, or both.  All SBA loan applicants must demonstrate their ability for loan repayment.  There will be a detailed cash flow analysis.

Be able to demonstrate both good payment history and income-to-debt ratio.

Many SBA loans (also known as a 7a loan) require you to be in business for two years.   You must bring in annual revenue of at least $50,000 (the reality is that banks don’t consider yearly revenues less than $500k unless you provide exceptional personal credit and collateral and happen to be in a business that the bank looks to fund regularly).

Lenders may also look at the net income of your business. The lenders want to ensure you are consistently making more than you spend on operating costs.  They require providing a P&L, Balance Sheet, and other financial statements like accounts receivable or accounts payable.

You will also be required to provide, along with your loan application, the past two, if not three, years of personal and business tax returns for all owners of the company.

Possible options for collateral in case of default.  This collateral or assets include but are not limited to your residence or any other real estate, automobiles, and cash (possibly including stocks, bonds, etc.)

You may be required to have a detailed description of how you plan to use the funds, meaning having business plans.

What is a Good Credit Score for a Small Business Loan?

How hard it is to get a small business loan often depends heavily on your credit score. Most traditional lenders will look for a score of 650 or higher before they even begin to consider lending to you. However, establishing financial responsibility allows some lenders to consider working with you even if you have a lower credit score.

Some lenders specialize in working with new or small businesses, which means they know which types of loans will be best for you and what you will qualify for. The best action plan is to meet with this type of lender and ask lots of questions about various loan options.

How hard is it to get a small business loan with bad credit?

As mentioned above, some lenders will work with those who have dinged up or challenged personal credit.  While these applicants will not qualify for an SBA, rest assured that the alternative lender will lend to small businesses that don’t qualify for bank loans.

Unlike the loan processing mentioned above and all the endless paperwork, most online lenders will approve the loan with a simple one-page application and the last three months of business bank statements.  The biggest challenge is for those looking to start a business without any history.

Loan Options 

There are, however, several options when it comes to startup or small business loans. Each one works a little differently, so make sure you understand your loan’s terms and conditions before you finalize anything.

SBA Loans (Small Business Administration Loans) 

An SBA loan is a traditional term loan where the total amount borrowed is given to you to spend; however, you need to within your business, and then the funds are repaid in regular installments for a set period. This type of loan typically has the highest standards for qualifications, making it the hardest to acquire.  The Small Business Administration does not offer these loans.

The SBA backs or guarantees the loan.  The loan and approval process is still through your bank.

Business Loans/Term Loans

These can also be difficult to qualify for but are much more accessible than SBA loans. Typically, the business owner needs a credit score of at least 550 and one full year of operation in the business.  The key is, can you make the loan payment?

Being able to make the payments is usually predicated on your cash flow.  The loans can be short-term, meaning 6 months to 12 to 18 months.  These business leaders will consider what you may call bad credit business loans.  Term loans can include cash advances.  Merchant cash advances will also fall into this category.

Capital Loans

Capital loans are typically for a specific purpose, working capital. In other words, the funds are for operational costs for a short period or a temporary need. For example, you can use a capital loan for acquiring inventory, making payroll, purchasing equipment, or renovating.

The best time to use this type of loan is when you know you can pay it off quickly, like purchasing seasonal inventory and paying it off after the items sell.  Remember that equipment financing is an option but can be credit-driven.

Business Line of Credit 

A line of credit works the same way as a credit card, except you can withdraw cash instead of only using credit. You pay only for what you spend and can use it until you reach the maximum amount.  The challenge with the LOC (line of credit) is that it does require a credit score above 650.

According to the same federal reserve study, the highest approvals are for the merchant cash advance, followed by equipment financing and business line of credit.  The business loan and SBA loan were in the bottom three in terms of approvals.

Sunwise Capital 

Check out the business loan options available from Sunwise Capital and speak with one of our small business finance experts today.


Frequently Asked Questions

1. Is it really hard to get a small business loan?

It can be challenging, but it largely depends on several factors, including your credit score, business financials, the lender’s requirements, and the type of loan you’re applying for. Preparation and understanding of what lenders are looking for can greatly improve your chances.

2. What do lenders look for when evaluating a loan application?

Lenders typically evaluate your credit history, business revenue, profitability, business plan, and sometimes collateral. They also consider your industry, time in business, and financial statements to assess risk.

3. How can I improve my chances of getting approved for a small business loan?

Improving your credit score, maintaining strong business financials, providing a solid business plan, and applying for the right type of loan that suits your business needs can improve your chances. It’s also helpful to reduce existing debt and demonstrate steady cash flow.

4. Are there specific types of loans that are easier to get?

Yes, some loan types, like merchant cash advances, business credit cards, and microloans, have less stringent requirements but may have higher interest rates. SBA loans, while competitive, offer favorable terms if you can meet their criteria.

5. How does my credit score affect my loan application?

Your personal and business credit scores play a crucial role in the loan application process. They influence not only the approval decision but also the interest rates and terms of the loan. Higher scores are associated with lower risks for lenders and can lead to better loan offers.

6. Can startups get small business loans?

Startups can obtain small business loans, but it might be more challenging due to the lack of financial history. Lenders might require a solid business plan, personal credit history, and sometimes collateral. Exploring alternative financing options like angel investors or venture capital might also be beneficial.

7. What should I do if my loan application is rejected?

First, understand the reasons for rejection by asking the lender for feedback. This can help you address the issues before reapplying. Improving your credit score, revising your business plan, or seeking alternative lenders or loan types are viable next steps.

8. Are there alternatives to traditional bank loans for small businesses?

Alternatives include online lenders, crowdfunding, peer-to-peer lending, microloans from non-profit organizations, and merchant cash advances. Each has its own set of requirements, benefits, and drawbacks.

Remember, the key to securing a small business loan is thorough preparation, understanding the lending landscape, and choosing the right financing option for your business needs.

Mark Kane 2

Mark J. Kane, Founder & CEO of Sunwise Capital, is a distinguished entrepreneur with over 16 years in business financing. Beginning as a psychologist, he quickly became a trailblazing Hospital Administrator. Mark has built multiple ventures, notably accelerating a startup to $18M within months. His transition to Sunwise Capital stems from a deep-seated desire to empower business owners with strategic financial solutions. Recognized for his expertise, Mark's leadership at Sunwise Capital reflects his commitment to fostering business growth and success. Click the link to read more about the author.

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