How Hard Is It To Get A Business Loan?

Here’s what you need to know about applying for and getting approved for a business loan.

small business owner getting approved for a business loan and shaking hands with the lender
June 21, 2022
McKenna Themm
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Reading time about 8 min

Whether you are in the process of starting your first business or simply growing your existing enterprise, you probably have a lot of questions about funding. Perhaps you’ve been wondering, “How can I start my own business with no money,” or “where will I get the funds to take my business to the next level?”

This is a common question and often a source of anxiety for many business owners. Not to worry. Most businesses are dependent on funding, both when they’re starting out and as they grow. It’s just a matter of knowing exactly what type of funding your business needs.

Here is what you need to know if you are trying to get approved for a business loan.

How Difficult Is It to Get a Business Loan?

If you’ve been considering different financing options for starting or growing your business, you’ve probably thought about getting a loan. If you’ve been wondering, “Can the average person get a business loan,” the answer is “Yes!” But, there are a few questions that you will want to ask yourself before you begin the process. It will be helpful as you are embarking on your business loan application process to know that there are several factors that will significantly impact loan approval.

Sometimes, getting loan approval depends on the larger economic situation. For example, U.S. approval rates can vary from month to month, depending on where you live and what type of business you own or seek to start.

Here are some factors to keep in mind when deciding how difficult it may be to get a business loan.

 

How Long Have You Been in Business?

If you’ve been in business for a few years, you’ve probably had a business plan in place for a while. Many financial institutions that offer loans — such as banks or credit unions — often want to see that a business has been operating for a while so they can predict how the business will perform in the future.

Most banks require you to be in business for at least two years to qualify for a loan. As you might imagine, businesses are considered less risky when they can show they’ve established themselves. With a solid track record of sales and business success, you can increase your odds of getting approved for a business loan with better repayment terms.

However, if you’re just starting a new business, you may be wondering, “Well, how hard is it to get a startup business loan?” Afterall, if you need money to start your business, how can you ever prove profitability to lenders if you never get started? Not every lender requires you to have already established a business to extend a loan. So what is the catch? Lenders will charge a higher interest rate or personal guarantee that the business will not fail. A personal guarantee allows lenders to sue you personally, not just the business, for repayment of the loan.

Finding an alternative lender is another option for business owners. Some online lenders have lower requirements for how long you need to be in business before you can be approved for a business loan. In fact, some lenders do their best to support entrepreneurs and startups who have only been in business for six months to one year.

Image that indicates revenue growth

Does Your Business Generate Revenue?

One of the questions every lender will ask you when you’re applying for a business loan is if you have the means to repay the loan. Financial institutions want to be sure that your cash flow is strong enough to make monthly payments, on top of all your other business expenses.

If your business is already generating revenue and you are in the process of getting approved for a business loan, you’ll most likely need to provide proof of revenue. Some lenders will require that your business generates a certain annual revenue, which can range from $50,000 to $250,000. Typically, banks, credit unions, and other lenders will want to see bank statements or tax returns that verify your businesses profitability.

Graphic that shows credit scores poor/fair/good/excellent and add numbers to show: Poor 300-639/Fair 630-689/Good 690-719/Excellent 720-850

What Is Your Credit Score?

When individuals go into business for the first time, they often worry, “Are business loans based on personal credit?”

In most cases, yes. Approval for a business loan is often based on both your personal credit, as well as your business credit. Your personal credit score only relates to your personal financial history while your business credit score relates to your business’s financial history.

Some lenders might focus on your personal credit or primarily focus on your business’s credit as they’re making a decision. However, your personal credit score will almost always have an impact on a lender’s decision to offer you a business loan. Typically, having a personal credit score in the range of 680-720 is what you will need to secure a loan.

 

How Much Are You Looking to Borrow?

Maybe you’ve been wondering, “How much should I take out for a small business loan?” The answer can vary based on a few factors.

The average loan for small businesses is about $80,000. Most business loans range from $5,000 to $500,000. The most important thing to keep in mind is that lenders will calculate your loan amount on how much revenue your business is generating.

Perhaps you just need a small loan to get started and you’re wondering, “What is the minimum for a small business loan?” Microloans can be as little as $500-1,000. On the other hand, SBA loans can go up to $5 million. We will look more closely at loan types later in this article.

Lenders will usually look at your debt-to-income ratio when assessing whether or not they’ll offer you a business loan. A good rule of thumb is that your total business income should be at least 1.25 times your total expenses, including your rent, loan amount, payroll, and other costs. In short, you should be making more than you’re spending in order to both be profitable and pay back your loan.

Business owner comparing numbers

Are There Different Types of Business Loans?

Now that we’ve addressed some of the questions and concerns you may have been asking regarding how hard it may be to get a business loan, let’s take a look at six different types of business loans that may be available to you.

 

SBA Loans

The United States Small Business Administration (SBA) is a government agency devoted to helping small businesses. The SBA helps small business owners and entrepreneurs by backing up loans from banks and other lenders. Since this can help minimize risk, SBA loans can go up to $5 million and usually have relatively low interest rates.

 

Bank & Credit Union Loans

If you’ve been thinking about your loan options, you may be asking, “Do banks give loans to start a business,” and the answer is “Yes!”

Getting a business loan from a bank or credit union can be the right move if you have excellent credit and a good amount of what lenders call time-in-business. Each lender has different time-in-business requirements, which can vary from mere months to years. When it comes to lending amounts, bank loans typically range from $5,000 to $5 million. When it comes to larger commercial banks, some business loans don’t have a borrowing limit for established businesses or individuals with a reputable business background.

 

Lines of Credit

For a business line of credit, you can borrow cash from a lender — usually ranging from $10,000 to $1 million — to cover your business expenses such as payroll, rent, mobile marketing, or equipment. For this type of loan, you are only required to pay interest on the money you actually use.

 

Microloans

A microloan is an excellent option if you’re an entrepreneur with a start-up looking for a small amount of money to get started. Most microloans range from $500-10,000 and can also be great if you have a cash flow issue or another business emergency.

 

Online Loans

If it doesn’t look like a bank loan, SBA loan, or another type of loan will work out for one reason or another — such as having a poor credit score — looking into online loans can be a good option. In fact, qualifying for an online loan is typically much easier than qualifying for a bank loan or SBA loan. However, one drawback is that interest rates are usually higher for online loans than for traditional ones.

 

Short-term Loans

A short-term business loan can be a good option if you’re able to pay more regular payments, such as daily or weekly payments — rather than monthly ones. Short-term loans typically last for about a year and can range from $5,000-$500,000.

How Do You Apply for a Business Loan?

When it comes to the process of applying for a small business loan, it’s essential to remember that there isn’t a one-size-fits-all approach to getting a loan. You should take into consideration your specific needs and business goals.

The first step to getting a business loan is conducting research and determining exactly what type of loan you are interested in and which you are likely to qualify for based on some of the criteria we’ve already discussed. Spend time comparing business lenders and weigh the benefits of a bank loan versus an online loan or an SBA loan versus a line of credit.

Next, you’ll want to decide what you can afford to spend every week or month on your repayment plan. Remember, you will still have all of your usual expenses and you may not experience revenue growth in your first few months or year, so a conservative estimate is key.

After you’ve selected the loan that works best for your small business, you can do a few things. Putting up collateral or making a down payment can present less risk to a lender and potentially increase the funds you can receive.

Device with congratulations message that loan has been approved

How Does a Beginner Get Started without a Business Loan?

If your business is relatively new and your sales are still growing, you may not be generating much revenue. If a financial institution does not approve your request for a business loan at this stage, you may need to consider some of the following alternative options.

 

Bootstrapping

Many small businesses begin with entrepreneurs bootstrapping the business — which simply means they invest their personal savings into the business. As the business grows and generates revenue, the business will begin supporting itself over time. Keep in mind that building a business this way may take some time unless you have a significant amount of savings.

If this seems like the best plan for your business, it’s important to keep these things in mind:

  • Create a business plan based on what you can reasonably afford
  • Utilize marketing strategies that can quickly grow your business small business SMS
  • Choose a business model that generates cash quickly
  • Keep overhead low, use coworking space only when necessary
  • Put every expense under a microscope
  • Establish an emergency fund

 

Family & Friend Loans

Another option is reaching out to family members, friends, or members of your community with a business plan and seeing who may be interested in investing in your business at the ground floor. Borrowing money from family and friends to get a start-up off the ground is more common than you might think.

Here are some things to keep in mind if choose to go this route:

  • Treat family members and friends as investors, putting aside personal matters during business-related conversations.
  • Prepare a business plan and present your case in a professional manner.
  • Provide details about exactly how you plan to use investment funds, mapping out costs related to things like payroll, equipment, marketing, advertising, and even rent.
  • Propose a clear repayment plan with a start date
  • Have a backup plan just in case you need more funding or you miss a payment.
  • Put all the terms and conditions in writing.
  • Set up a repayment process, whether through direct deposit or a money transfer service.

Discover How EZ Texting Can Help Your Small Business

One of the ways you can expand your business — whether you are ready to apply for a business loan or want to wait — is by reaching a wider audience through small business mass texting.

At EZ Texting, we help small business owners like yourself get in front of customers with messages that introduce new products, announce sales, provide discounts, and show customer appreciation. Take a look at our texting guide to discover how we can benefit your small business.

If you’re ready to start today, you can start a free trial and explore how much we can help!

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