How hard is it to get a business loan? The answer is both simple and complicated: it depends. The difficulty of getting a business loan depends on a number of variables such as:
- The type of financing
- The type of business
- Business performance
- Personal credit
- Personal financial standing
Your credentials as a business are among the chief factors for lenders when determining whether to approve you for a small business loan. You can expect lenders to review various business credentials including how long you’ve been in business, your business credit score and annual revenue, among other things. Because your business needs to have some proven track record of operating, getting a small business loan for a new business can be near-impossible through conventional means.
The other pivotal factor that will decide the difficulty of getting a small business loan is the type of loan. There are a variety of funding methods, each with their own terms, requirements, levels of scrutiny, approval rates and affordability. For example, the type of small business loan that is considered the gold standard is a Small Business Administration loan (or SBA loan) — which so happens to also be the type of loan that’s the most difficult to acquire.
To learn about these various types of funding, read on to find out how hard it is to get a business loan.
Small Business Loan Approval Rates
Another layer of difficulty in getting small business loans is the variation in approval rates. Depending on which kind of lender you go to, small business loan approval rates can vary dramatically, from around 25 percent up to nearly 70 percent.
SBA loan approval rates vary from 20 to 30 percent, with an average of 25 percent. According to the SBA loan program performance report, for the fiscal year 2019, the SBA approved a combined 100,495 small business loans across all programs.
Here’s a look at small business approval rates, according to Biz2Credit’s Sept. 2019 report:
|Lender Type||Approval Rate Sept. 2019||Approval Rate Sept. 2018|
|Big Banks*||27.9 percent||26.7 percent|
|Small Banks||50.3 percent||49.9 percent|
|Institutional Lenders||65.9 percent||64.5 percent|
|Alternative Lenders||56.5 percent||56.6 percent|
|Credit Unions||39.7 percent||40.3 percent|
|*Big banks are defined as those with $10 billion or more in assets.|
There are plenty of lenders for getting small business loans, but there are additional methods beyond the ones listed. You can acquire funding from friends and family, angel investors, crowdfunding, a 401k rollover, and through personal and business credit cards. The latter method is especially beneficial in terms of lower interest rates, speed of funding and flexibility of funds. At Seek Capital, the approval rate for this type of small business funding is 92 percent.
Related: What Is Alternative Lending?
Types of Small Business Loans and Funding
Below you’ll find a list of different types of small business loans and financing listed in order from easiest and most accessible financing to the most difficult.
Merchant Cash Advance
A merchant cash advance is a type of business funding that isn’t actually a loan. As its name suggests, it is an advance that a lender extends to you based on your business’s future credit card revenues. Meaning, the advance is paid off by drawing from debit and credit card purchases customers make at your business. This is done directly by the credit card processor for the merchant cash advance provider.
Not coincidentally, since a merchant cash advance is the most accessible of business funding types, it generally is also the most expensive. Merchant cash advances represent the cost of their funding as a decimal factor rate, rather than a percentage rate. To determine the cost of the merchant cash advance, you multiply the factor rate by the loan amount.
Though they are an expensive form of small business funding, merchant cash advances are definitely a top option for under-qualified businesses in need of capital.
Invoice financing is a fairly accessible business funding option for businesses that may not qualify for more traditional term loans. The way invoice financing works is by using an outstanding invoice that your business is waiting to collect on as a collateral for a small business loan.
Invoice financing is relatively easy to qualify for because it’s a form of funding that is self-secured: The collateral — an outstanding invoice — comes from your own company’s day-to-day operations. With this type of funding, a lender can advance your business up to 90 percent of the value of the outstanding invoice. The way lenders make money from the loan is by charging you a certain percentage of interest per week that the invoice is outstanding.
Business Line of Credit
Business lines of credit are another business funding option that are fairly obtainable for businesses that are less qualified for small business loans from a big bank or through the SBA. A business line of credit works essentially like a credit card without the physical credit card. Your business receives a line of credit from which it can spend, the key selling point being that you only have to pay back the amount you actually spend. This contrasts with a term loan in which, if you end up spending less than you thought was needed, you have to pay back the entire loan amount.
Short-Term Business Loan
Short-term business loans are easier to obtain than more traditional term loans or an SBA loan. It works like a regular business loan, but with some notable differences in terms. With short-term loans in general, the loan amounts offered tend to be smaller, the interest rates higher and the repayment terms shorter. What’s more, you’ll likely pay scheduled daily or weekly payments, instead of scheduled monthly payments.
Short-term business loans may be more expensive and less convenient than regular business term loans, but they are much more obtainable than the latter route.
Equipment financing is a form of small business loan used for buying equipment. Whereas in invoice financing you can finance up to 90 percent of its value, with equipment financing you’ll be able to finance up to 100 percent of its value. of a piece of equipment’s value. Similar to invoice financing, equipment financing is a form of self-secured business funding. In this case, the collateral is the equipment itself, making this business loan type less risky for the lender and more affordable for the borrower. Not surprisingly, these good terms come at the cost of stricter qualification terms. Personal credit score minimums and annual revenue requirements are higher, and your company has to be in business longer compared to qualifying for other more accessible forms of business loans.
Term Business Loan
The second hardest type of business loan to access is a traditional term loan. These types of business loans are very basic. You receive a lump sum that you pay down in scheduled monthly payments including interest. This type of business loan is harder to qualify for based on its high standards in terms of years in business, credit score and annual revenue requirements.
SBA loans are the last type of business loan on this list and are the most difficult funding option to access. The reason why SBA loans are the gold-standard of small business loans is because the SBA guarantees these loans, making lenders more willing to lend to small businesses and usually with better terms. Those better terms come at a price, unfortunately. SBA loans are the hardest type of business loan to qualify for, requiring two years or more in business and minimum personal credit scores of around 640-650, as well as higher annual revenue requirements.
The Bottom Line
If you want to start a business or need money for an existing business, there are more funding options available than you may have thought. The more traditional routes — SBA loans and small business term loans from a bank — are generally the most difficult to access. But you have options like merchant cash advances, invoice financing, business lines of credit, short-term business loans and equipment financing as alternatives that are all easier to access.
The factors lenders consider when you apply for small business loans vary from place to place, but there are some consistent criteria all look at:
- Personal credit score
- Business’s age
- Business’s revenue
Fortunately, if you feel weak on one of those factors, you can still find business funding from one of the many small business loan options besides term loans and SBA loans including gift or loans from family and friends.
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