If you’re a business owner in need of funds then you may be wondering – just how hard is it to get a small business loan? Do you need to have a perfect credit score? What are the minimum qualifications needed for an application to be successful?
For a business that’s thinking about financing, the process may seem daunting. You’ll likely have a lot of questions about the best way to go about it. The key to success is being proactive in your research. There are steps you can take to maximize your chances of being accepted, it’s just a matter of knowing what they are.
In this article, we examine how difficult it is to obtain small business loans and the four key steps to securing one.
How Hard Is It to Get Business Financing?
So, how hard is it to get a small business loan? Let’s start by looking at some recent statistics from industry organizations. According to the latest 2019 data from the Small Business Administration (SBA) and National Small Business Association, businesses are finding it difficult to get loans of any kind.
· In a recent survey, 27% of businesses said that they weren’t able to secure the business funding they needed
· Just 33% of SBA loan 7a applications result in approvals
· Of these, 72% are awarded to male-owned businesses and 42% had been running for more than 2 years
· When it comes to ethnicity, just 3% of SBA loans are awarded to people with black heritage and 7% from Hispanic backgrounds
· Of the businesses that fail each year, 82% state the reason to be lack of cash flow
So, how hard is it to get an SBA loan? According to these statistics, you have a 1 in 3 chance of securing one. If you are female or from a non-white background, then your odds may be significantly lower. However, you can have a better chance of getting a small business loan if you approach an online lender or a provider that’s dedicated to your success. Here are four steps to obtaining finance whatever your background or business situation.
#1 – Select the Right Type of Business Loan
The first step is to evaluate which type of small business financing is right for your situation. This will usually depend on the purpose of the loan as there are different options depending on what the funds will be used for. But another key factor will be how quickly you need access to the funds as some types take a lot longer than others.
· Long-term loans – have the longest repayment periods and lowest interest rates.
· Short-term loans – are the easiest to qualify for and fastest to provide funds but may have higher interest rates.
· SBA loans – these are backed by the Small Business Administration but tend to be more difficult to obtain.
· Equipment loans – are available specifically to purchase machinery or tools that are needed in your business, with the items being used as collateral for security.
· Invoice financing – although this isn’t a type of loan, it can be a source of funding if you have unpaid customer invoices.
Once you’ve decided which type of business loan meets your needs, it’s time to move on to step 2.
#2 – Identify Whether You’re Eligible
There are a number of factors that influence whether you’re eligible to get a small business loan. Understanding what they are before you start applying will significantly improve your approval rating. By identifying which loans you are eligible for, you can focus your time on those that are most likely to accept you. It also helps you to avoid frustrations and wasted time on applications to banks with super-strict eligibility criteria.
The key criteria that lenders typically consider are:
· Your credit score
· How long you’ve been operating
· Your ability to repay what you borrow
· What you can provide as collateral
· How customers pay you
Let’s look at each of these in more detail.
Your credit score will dictate how hard or how easy you find it to secure finance. For business owners, maintaining a sound credit score is financing 101. Obtaining small business loans (or funding of any kind) is much more difficult when you have a poor credit history. So, it’s vital to make all your payments on time, whether that’s for suppliers, credit cards, or car insurance. Anything that’s missed or late will negatively affect your score and therefore your chances of being accepted for a loan. It’s also worth checking your credit file for any errors so that they can be rectified before applying.
Most lenders will want you to have a credit score of 680 or more in order to qualify. At Strategic Capital, we have less strict requirements so 650 is usually sufficient. By understanding the credit score requirements of different banks or credit unions, you can identify whose criteria you meet.
How Long You’ve Been Operating
The amount of time you’ve been operating will also affect your ability to secure business loans. Companies that have been operating for two or more years will usually find it much easier to find lenders willing to approve them. This is especially true if you want to get SBA approval regardless of whether you’re an LLC or full incorporated.
If you’re still at the start-up stage, then you’ll probably find obtaining loans more difficult. Lenders like to see a proven track record of strong annual revenue and operational success. However, that doesn’t mean that all forms of business finance are unobtainable. For newer businesses, invoice financing or a merchant cash advance may be more practical options. At Strategic Capital, we have minimum trading requirements of six months for both these options.
Your Ability to Repay What You Borrow
When a lender reviews your application, they’ll want to be confident that you’ll pay the loan back. This means having the adequate cash flow to cover the monthly repayments on a consistent basis. One method that financial institutions use to assess this is DSCR. This is short for ‘debt service coverage ratio’ and considers your debt relative to your business income.
It’s easy to assess your DSCR for yourself. Grab a calculator and divide your net income by your total debt (including interest payments). If the result is 1.25 or higher, then lenders will look favorably on your debt ratio. If it’s less than this figure, then they may not be confident about your ability to cover the costs of the repayments.
What You Can Provide as Collateral
Some types of small business loan will have strict collateral requirements. These are known as ‘secured loans’ because they involve the borrower providing security against it. This might mean putting up your home, car, or equipment as collateral. The lender uses this as a kind of insurance to protect them in the case of you defaulting. If a situation arises where you can’t meet the repayments, then they will take the collateral instead. They’ll then sell this off in a bid to recoup some of the unpaid loan. If you don’t own anything that you can provide as collateral, then you may find getting a loan hard.
How Customers Pay You
The method that customers use to pay you can also play a role in finance options. Lenders will want to see two years of bookkeeping records to validate your income. But they’ll also be interested in how your customers pay, whether that’s through invoices, credit cards, or cash. Invoices may involve extending credit terms which can reduce cash flow while you’re waiting to be paid. This may open up invoice factoring as an alternative option. Likewise, credit card payments may mean that a business cash advance is more suitable for short-term financial needs.
#3 – Choose Your Lender
Once you’ve identified the loans that you’re eligible for, it’s time to choose your lender. You’ll likely have a range of options to select from; traditional banks, SBA-backed providers, and online lenders. It’s important to compare their offerings so that you’re able to get the best deal. Don’t just look at their interest rates – tally up the total cost of the loan so you know exactly how much you’ll need to repay.
Here are some key points to consider when choosing your lender:
· Have they funded similar businesses in your industry?
· What does their application process involve?
· How quickly can they review and approve your application?
· Are there any fees involved in addition to the interest?
· How long will it take for funds to be transferred?
· Do they require collateral or security?
· Are there options to refinance?
· What are their personal or business credit score requirements?
Thinking about these points will help you to spot a good deal and apply to the best lender for your needs.
#4 – Apply For Your Loan
This is the part that can seem daunting but really doesn’t need to be. It’s common for people to find the process of applying for small business loans hard. Some lenders have complex application forms and ask for mountains of supporting paperwork. It can feel like an uphill struggle to simply complete the form, let alone get accepted. But choosing an online lender will take the time and hassle out of applications.
An online finance provider will usually have a streamlined application process. You simply click the apply button on their website menu and fill out your information. Because they leverage the latest digital software, much of the process happens automatically. This means that it’s quick and hassle-free – there’s no waiting around for someone to wade through a pile of paperwork before getting to yours. They may ask you for accounting information or a business plan but these can be uploaded in a matter of minutes. There’s no need to submit a stack of documents with every last tax return or articles from the local community news. We just ask for the essentials and keep the process simple. Unlike larger financial institutions or traditional banks, online lenders often reply with a decision in hours.
By following these four steps, you’ll put your business in the best position to secure finance. You can select the loan for your needs, identify which you’ll be eligible for, narrow down lenders, and then apply seamlessly!
Business Loans from Strategic Capital
Strategic Capital provides business loans to a wide range of companies across the USA. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business finance solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.
Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts. Upon submitting your application, it’s reviewed by a dedicated Capital Advisor. We generate the best rates and terms at lightning speed through our funding matrix and robust lender network. Yep… it’s that simple.
Learn more about our small business loans, invoice financing, business lines of credit, and merchant cash advances here.