November 10, 2021

How Difficult Is It to Qualify for a Business Loan?

Most types of business loans are flexible, meaning you can use them toward any business-related expense. For instance, you can spend your loan on marketing costs, equipment, inventory, or other expenses. As you likely know, running a successful business can be expensive. Unless you have consistent cash flow, you’ll likely need a business loan in order to afford all necessary costs. Therefore, it's necessary to educate yourself on how to qualify for a business loan. That way, when it's time to pursue a loan, you'll be prepared and have a better chance of qualifying. In this blog post, we’ll explain how difficult it is to qualify for business financing, so you can be prepared to apply for a business loan.

How to Compare Different Lenders' Business Loan Requirements

There are many funding options available to small business owners, but some financing programs are easier to qualify for than others. For example, you’ll probably get approved for a merchant cash advance quickly, regardless of your credit score or business history. Typically, the provider will only require that your business generates consistent business credit card sales because remittance is based on future credit card transactions. However, it will be significantly more difficult to qualify for a traditional business loan from a bank or credit union. Generally speaking, term loans with selective requirements come with lower interest rates and more favorable terms. Therefore, you may benefit from waiting to apply for a loan until you've significantly improved your track record as a borrower. That way, you can qualify for your ideal business loan option. If you need fast cash and can’t wait, you may have to settle for higher interest rates, undesirable terms, and costly fees.

What Determines a Business Owner's Ability to Qualify for a Loan?

There are numerous factors that will determine whether or not you qualify for a small business loan including:

1. The Business Lender's Specific Prerequisites

Every business loan lender is unique and have their own set of requirements that they use to evaluate candidates. Banks and credit unions tend to have more rigorous requirements than online lenders and cash advance lenders. Regardless, you should be fully aware of the lender's requirements prior to submitting a loan application. By researching requirements prior to applying, you can avoid applying for loan options that you know you won't qualify for.

2. Business Loan Type

Traditional bank loans, business lines of credit, and Small Business Administration (SBA) loans are typically more difficult to get approved for than merchant cash advances and invoice financing. If you're concerned about not being able to secure financing, we suggest pursuing a type of business loan that you're confident that you can qualify for. New call-to-action

3. Intended Business Loan Use

You may find it easier to get approved for a smaller loan amount instead of a large loan needed for costly expenses such as equipment or real estate. If you need a very large loan amount, it may be more challenging to qualify, and the application process will likely take longer to complete.

4. Credit Report

Your credit score shows how likely you are to repay a loan on-time and in-full. That’s why many traditional lenders place a great deal of emphasis on your business and personal credit scores. The higher your credit score, the less risky of a borrower you are and more likely you are to qualify. However, if you have bad credit, it may hurt your ability to qualify for funding, depending on the lender.

5. Debt-to-Income Ratio

Debt-to-income ratio refers to how much your small business owes every month vs. how much it earns in revenues. Business loan lenders prefer that applicants have a lower ratio because it shows they have a history of managing debt and their budget.

6. Length of the Application Process

If you find a small business loan provider that offers fast or instant decisions, it will probably be easier to secure a loan through them over a financing lender that takes weeks or months to make a decision and distribute funds.

7. Industry Risk Level

Business owners in some industries are riskier to provide financing to than others. Alcohol, agriculture, and insurance, for example, are considered riskier than solar power and hybrid vehicle manufacturing.

8. Time in Business

Most small business lenders require that you’ve been in business for at least two years. Those who cater to startups or don’t have any time in business requirements are usually more lenient.

How to Qualify for a Small Business Loan in 7 Steps

Fortunately, there are steps you can take to position yourself as an attractive borrower and increase your chances of approval for a business loan. Here are several suggestions:

1. Improve Your Credit Score

To ensure that you meet credit score standards, check your credit reports and dispute any errors or inaccuracies. Often, business owners are unaware of mistakes on their credit report, which affects their ability to secure funding. A higher credit score will open your doors to more loan offers with great rates and terms. To improve or maintain your credit score, we suggest following credit score best practices, such as:
  • Paying your bills on time
  • Limiting credit usage
  • Keeping debt levels low
  • Avoiding closing accounts

2. Write a Business Plan

A business plan is a blueprint that outlines the current state of your business and your long-term goals. Most business loan lenders will ask to see a business plan to get a clear idea of how their funds may help you.

3. Consider Putting Up Collateral To Secure the Loan

If you own a valuable asset like commercial property or equipment, you can use it to get a secured business loan. In addition, your business's accounts receivable can be used as collateral. Just keep in mind that the business financing lender will seize the collateral it if you default on the loan.

4. Gather Necessary Financial Documents

There are certain documents lenders will ask you to provide along with your application. These may include documents such as:
  • Bank statements
  • Tax forms
  • Business licenses and permits
  • Employer Identification Number (EIN)
  • Proof of business registration

5. Open a Business Checking Account

If you don’t have a business checking account, you should open one prior to pursuing a small business loan. Most business lenders will require that applicants have a business checking account in order to qualify them for financing. Typically, they'll request your account details so they can distribute the funds directly.

6. Check If You Prequalify

When you prequalify for a small business loan, the financing lender will check your credentials and let you know whether they can extend you an offer. It’s important to note that prequalifying for a loan won’t hurt your credit score, so you can take time to compare loan options before making a decision.

7. Fill Out a Business Loan Application

Once you find the ideal loan option for your business, visit the lender’s website or brick-and-mortar location so you can fill out the loan application. Be prepared to provide information like:
  • Your business address and phone number: The lender will need your contact information in order to communicate with you throughout the application process. They'll also use this information to verify that your business is legitimate.
  • Your business's industry: Your business's industry may determine the loan amount that you're given. In addition, some lenders don't provide financing to all industries.
  • Your preferred loan amount: If you need a set loan amount, be sure to communicate that to the lender. Although you may not qualify for the exact amount you want, they'll likely take this into consideration when evaluating your application.
  • The purpose of the loan: Most business loan lenders don't restrict how applicants can use their loan funds, but may want to know why you need additional financing. This will help them provide you with the best possible offer.

Conclusion: Take Time to Select the Right Business Loan and Lender

Now that you know how to qualify for a small business loan, take time to conduct thorough research. Review the various lenders and loans available to you, and select the one that best fits your needs. Not all business owners require the same funding type, amount, or repayment process, so don’t be afraid to weigh your options. Once you find the ideal funding option for your growing business, read the qualification requirements closely. Don’t hesitate to contact the business financing lender if something in the application process is unclear or you can’t find what you’re looking for. Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.