Is it hard to get small business loans?

Let’s face it. It’s hard to start a business without having a loan. However, it is important to know that your eligibility for receiving a business loan depends on your business as well as your personal finances. Worried? Don’t be and just relax! There are different ways to receive financing for your business, each having its own terms and requirements.

What you need to know

Whether you have a flourishing business or just starting up, you need to be realistic while setting up expectations for your small business loans. The good news is, that you may still be eligible for a loan even if you’re just starting up, however, you may get a lower principal with higher interest rates. So, don’t be anxious as there are still possibilities for your business to qualify for some loans that will suffice the requirement.

What is a business loan?

What is the first thing that comes to your mind when you think of a business loan? Maybe going to your local bank and giving a presentation to a poker-faced banker before he/she is convinced about your business and you can walk away with a check! In reality, that’s the partial truth. A bank loan is just one option for getting a business loan. There are many other options to get a business loan on different terms and requirements. Some of them are even friendlier and very open to helping businesses like yours. Plus, the internet has made the entire process of applying for a small business loan super easy and convenient.

Traditional Term Loans Vs SBA Loans – what is it all about?

Perhaps you’re already familiar with a traditional term loan. As the name suggests, in this loan the paid back amount increases incrementally as per the mutually agreed upon term between you and the bank or credit union. Usually, a term can be anywhere between 1 and 25 years with interest rates ranging between 6 % and 13%. To get a term loan sanctioned, you need to produce your business tax returns, account statements, business plans, and other documents related to your business.

However, there is another type of loan available which is known as the SBA (7a) loan. This is usually sanctioned by certain banks and is usually guaranteed through the US Government’s Small Business Administration (SBA). You can learn more about it here.

Although these lenders have repayment terms and interest favorable as compared to traditional term loans, however, they are very selective and usually, the loan applicant has to go through rigorous documentation. Also, most of these lenders will want your business to be up and running for at least 2 years.

Loans that have fewer demanding terms

As discussed above, it is apparent that you may or may not get the term and SBA loans. But you don’t need to be disheartened as there are still some options for you. Options like accounts receivable financing and Merchant Cash Advances don’t require hard inquiries on your credit score. Such financing options will mostly inquire about how much your business is owed from unpaid invoices.

Top 3 Factors Lenders Will Consider

1. Know your Credit Score

A credit score is important and almost all lenders are going to check it whether a soft pull or a hard pull. Remember, a soft pull won’t impact your credit score as a hard pull would do. Usually, a favorable credit score considered by most banks is 720. You are in the most favorable position to receive a loan from a traditional source if you have a personal credit score anywhere above 650.

A less demanding loan is an equipment financing or a business credit card where a credit score of 600 or above is usually accepted. Anything below 600 is considered bad credit for business loans. You may need to build your credit score in case it is 500 or below before, you apply for a business loan.

2. How Long are you in the game?

Next to credit score, lenders will look out for how long you have been in the business. This plays a crucial role in their decision-making. Most traditional banks and SBA have a prerequisite of 2 years or more in operation. For other lenders, 3 to 6 months of operations are enough.

3. Your Business Revenue matters

Yes, your business revenue matters – to you and to the lenders as well. A healthy and continuous cash flow is important because that’s how banks get to know if you will be able to repay the loan. Many banks often ask for annual revenue of $150,000, and even many business cards with high credit limits require annual revenues of at least $250,000. Fortunately, the less demanding funders who offer Merchant Cash Advances pay more attention to your monthly revenues with minimum requirement of $5,000.00