How hard it is to get a business loan depends on how lenders judge your business’s ability to repay the loan. While the overall economic environment and industry you operate in are important, there are six main factors about your business that you can control to influence your likelihood of approval.
- Business loan approval factors
- Cash flow
- Time in business
- Credit score
- Collateral
- Business plan
- Loan amount
- How to get a business loan
- Business loan alternatives
- Business loan FAQ
Business loan approval factors
Lenders consider the factors below when determining whether to approve an application and in determining what interest rate they’ll offer.
Cash flow
It’s important to demonstrate that you have — or will soon have — the revenue to make payments on your small business loan. The prospective lender will ask for your banking and accounting statements so they can do a business cash flow analysis that will show whether you have enough money coming in and if you’re actually making a profit. Doing one as an owner can help you to understand your business finances so you won’t get in over your head on a loan.
→ If you have strong cash flow and need funds quickly, look at merchant cash advances.
Time in business
Being in business for months or years means that you have a track record that you can show to a lender. Simply remaining in business can mean that you have a history of consistent sales and good management to exhibit. The more time your business has under its belt, the more likely it is that it’ll remain in business long enough to repay the loan.
→ Short-term business loans are generally available to companies that have been in business for at least six months to a year.
Credit score
Just like you have an individual, personal credit score, your company can have its own business credit score. The better the score, the more likely it will be approved for a loan and the lower the interest rate it will qualify for. Here’s your guide on building business credit.
→ Business loans for bad credit are available.
Collateral
Collateral is typically a physical object with value, like a vehicle or a building, that a lender can repossess if you default on a loan. This makes the loan less risky for the lender, and makes the loan less expensive for your company. Examples of collateralized business loans include equipment loans and heavy equipment financing.
→ Unsecured business loans can help out if you don’t have hard assets.
Business plan
How do you plan to use the money from the loan? Writing a business plan can be vital as it outlines your company’s purpose and details how it will be successful. Entrepreneurship organizations and the Small Business Administration (SBA) provide resources to help.
→ If you have a great business plan and little else, here are startup business loans that don’t require collateral.
Loan amount
How much you want to borrow is considered in addition to all of the above factors. For example, if your company has little revenue, has only been in business a year and doesn’t have the best credit score, you may only gain approval for only a small amount. You can use this small business loan calculator to run some numbers.
→ If you need a large business loan, SBA loans provide funding for general purpose loans up to $5 million and commercial real estate loans up to $5.5 million.
How to get a business loan
To get a business loan, first review your company’s finances and decide what you need. Then shop around online — look at what business lenders offer and check out common business loan requirements. Identify some finalists, gather your documents and submit your applications.
Here’s more detail on how to get a business loan in seven steps.
Business loan alternatives
Personal loan: You could get a personal loan and use it for your business. There are risks to using a personal loan for business purposes, however and it may not be the best option as it leaves you personally liable and doesn’t help build your business’s credit.
Business line of credit: This is not a traditional term loan, but it is still a form of business financing. A business line of credit allows your business to borrow so much each month and repay it on a revolving basis.
Business credit card: A business credit card can be best if your company needs to regularly make on-demand purchases, such as office supplies and plane tickets.
Frequently asked questions
How hard is it for a small business to get a loan?
The level of difficulty a small business faces when applying for a loan depends on several factors, including its cash flow, time in business, credit score, business plan and desired loan amount. The more that a small business is able to prove that it is able to repay the loan, the easier it will be to get the loan.
What credit score is needed for a business loan?
According to the SBA, most lenders require a credit score of 650 or higher. Generally, the higher the credit score, the better.
Can an average person get a business loan?
You could qualify for a business loan if you have a business and your loan application meets lender standards.
What are the odds of getting a business loan?
According to the 2022 Federal Reserve Banks’ Small Business Credit Survey, 77% of businesses sought financial assistance in 2021, while 66% received it.
How much income do you need to get a business loan?
You need enough income to at least cover your business bills and your future loan payments, with some left over as profit or as savings in case of a rainy day.
