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, equipment, inventory, or other costs.
Unless you have consistent cash flow, you’ll likely need a business loan in order to afford all necessary expenses. Therefore, if you’re a small business owner, you may wonder how to qualify for a business loan.
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 Business Loan Qualification Requirements
There are a variety of small business loan options on the market, but some loan 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 need to see proof that your business generates consistent business credit card sales. This is because the remittance of a merchant cash advance is based on a business’s credit card sales, so that is the main qualifying factor.
However, if you’re seeking a traditional business loan from a bank or credit union, it’s far more difficult to secure. Generally speaking, term loans with selective requirements come with lower interest rates and more favorable terms.
Therefore, it may be worthwhile to improve your track record as a borrower and wait to apply for business financing until you can get approved for the ideal loan for your situation. 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 Ease of Qualification?
There are numerous factors that will determine whether or not you qualify for a small business loan including:
- Financing Lender: Every business financing lender is unique. Banks and credit unions tend to have more rigorous requirements than online lenders and cash advance lenders.
- Business Loan Type: Traditional bank loans, business lines of credit, and SBA loans are typically more difficult to get approved for than merchant cash advances and invoice financing.
- Intended Business Loan Use: You may find it easier to get approved for a smaller loan amount that you hope to use for marketing than a larger loan you want to pay for a costly piece of equipment. If you’re seeking a very large loan amount, it may be more challenging to qualify, and the application process will likely take longer as well.
- Credit Report: Your credit score shows how likely you are to repay the loan on-time and in-full. That’s why many business 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.
- Debt-to-Income Ratio: Debt-to-income ratio refers to how much your small business owes every month vs. how much it earns. Lenders prefer a lower ratio as it shows you have a good handle on budgeting and debt.
- Length of the Application Process: If you find a small business loan provider that offers fast or instant decisions, it’s probably easier to get than pursuing a financing lender that will take weeks or months to make a decision and distribute the funds.
- Industry Risk Level: Some industries are riskier than others. Alcohol, agriculture, and insurance, for example, are considered riskier than solar power and hybrid vehicle manufacturing.
- Time in Business: Most 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
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:
- Improve Your Credit Score: To ensure your credit score is in tip-top shape, 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.
We also suggest, paying your bills on time, limit credit usage, keep debt levels low, and avoid closing accounts. A higher credit score will open your doors to more loan offers with great rates and terms.
- Write a Business Plan: A business plan is a blueprint that outlines the current state of your business and your long-term goals. Most lenders will ask to see a business plan so they get an idea of how their funds may help you.
- Consider Putting Up Collateral To Secure the Loan: If you own a valuable asset like commercial property or equipment, you can use it to take out a secured business loan. Just keep in mind that the business financing lender will seize it if you default.
- Gather Necessary Financial Documents: There are certain documents lenders will ask you to provide along with your application. These may include bank statements, tax forms, business licenses and permits, Employer Identification Number (EIN), and proof of business registration.
- Open a Business Checking Account: If you don’t have a business checking account, it’s time to open one. Lenders will often request your account details so they can distribute the funds directly.
- 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.
- Fill Out a Business Loan Application: Once you find the ideal loan, 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, your industry, your preferred loan amount, and the purpose of your loan.
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. Look for 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.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.