How Easy is to Get a Business Loan?
Whether you’re starting a business or you’re an established business owner, you may be considering a business loan. Running a business can be both exciting and scary, but there’s no denying that it requires a regular influx of money. Are business loans easy to get, though? That depends on several factors. We’ll take a closer look at business loans, what you’ll need to secure them, and what can make the loan process easy or difficult.
Why Should You Consider a Business Loan?
If you need startup capital for your business, it’s obvious why you would want a business loan. However, some entrepreneurs seek business loans even after their companies are established. Here are some additional reasons people consider business loans.
Working Capital
Many business owners assume that once their business is up and running, they won’t need cash anymore. However, businesses need time before they start making a profit, and during this time, you will need working capital to cover things like salaries, rent for the space, utility bills, and inventory. In fact, the average business takes two to three years to become profitable. This means you’ll need working capital for at least three years.
Growth
If your business is doing well, you may want to expand it by increasing the products you’re producing, hiring more employees for additional services, or even opening new locations. And although your profits may be able to pay for some of the expansion, they may not be able to pay for everything. So, you may look for a business loan.
Advertising
In order to bring in more customers, you may want to invest some funds into marketing your company and its product or service. A business loan can be used for advertising campaigns. This can give you more visibility and, in the long run, boost your profits.
Full Ownership
Rather than seek investors who will share ownership of your business, you may prefer to take out a loan and keep full ownership of your company. This allows you to keep all the profits as well.
Cybersecurity and Technology
The growth of technology is exponential, and businesses often have to step up their pace to keep up with new software. You may have to implement new software when accepting payments or securing your premises, or you may wish to invest in cybersecurity if your company handles sensitive information. Upgrading your IT infrastructure costs money.
What Financials Should You Have Before Applying for a Business Loan?
Before you apply for a business loan, you should make sure all your necessary documents are in order. So, what will you need? And how should you prepare?
Business Plan
A business plan is necessary at any stage in your business. If your company is just starting, you will need a business plan that shows your goals and mission. You also need to provide a description of your services or products as well as your target market.
If you’re looking to expand your business, provide a layout of how successful your company has been and why expanding it will bring in more customers. You can provide annual income statements and balance sheets to document the financial health of your business.
Credit Reports
Lenders will look at both your business credit score and your personal credit score. Make sure that you have paid off your debts or are consistently doing so.
Annual Revenue
Lenders will need to see all the financial paperwork that pertains to your business. If you have an established business, provide records of your annual revenue, your expenditures, and all your costs. If you are looking to start a business, provide an estimate of what you expect to make annually.
Balance Sheets
Another important document to provide is your balance sheet. This shows lenders the company’s assets and liabilities. As assets and liabilities may change from year to year, lenders may ask for the annual balance sheets for all your years in business.
Tax Returns
Lenders will also want to see copies of both your business and personal tax returns. This gives them a sense of how stable your business is.
Assets for Collateral
Whether you are just starting a business or have been running your business for some time, lenders may want to see if you have assets that you are willing to put up as collateral. Even if you don’t end up using your assets as collateral, lenders will typically ask you to list them. These may include real estate, vehicles, investments, and more.
Reason for Funds
Along with your business plan, you should write down how you intend to use the funds. Whether it’s as startup cash or to purchase a second store or office, lenders prefer as detailed an outline as possible.
Marketing Plans
If your business is just starting, it’s important to provide a detailed outline of how you intend to attract customers and market your products or services. If you plan to expand your business, you should provide a detailed report about how you will market the new location or new products.
Are Business Loans Easy to Get?
Whether a business loan is easy or difficult to obtain will depend on a variety of factors, such as your credit score, your company’s annual revenue, your debt-to-income ratio, and the lender. Here are some factors that can make it easier or more difficult to secure a loan.
Your Credit Score
Your credit score is one of the key determinants of whether a business loan will be easy or difficult to get. If you have a high credit score, the loan approval process is typically easier. Although some lenders will approve a loan even if you have a low credit score, they are likely to charge very high interest rates.
The Financial Health of Your Company
If your company’s annual revenue is relatively high and you have few to no debts, then securing a business loan should be far easier. If you’re struggling to pay rent on the space or if you’re having difficulty paying your employees, getting a business loan may be more challenging.
The Reason You Need the Loan
If you need a business loan to expand your company, buy additional equipment, or pay for a marketing campaign, it may be easy to secure it. However, if you need a loan for a riskier venture, getting a business loan could be a challenge. For example, some lenders aren’t comfortable making loans for the real estate, sales, or investing industries.
What Kind of Collateral You Have
Some lenders want to be assured that if your business goes south, you will still be able to pay them back. If you have real estate, vehicles, savings, or investments, lenders can seize these assets if you fail to make your loan repayments, assuming you put those assets up as collateral. Of course, not every lender requires collateral, but listing your assets gives lenders peace of mind and makes you a lower risk.
The Type of Lender
If you pursue traditional lenders, their loan criteria may be more stringent. Alternative lenders may be more flexible. However, if you already have a business bank account, you can always ask your bank to extend a line of credit. In this case, getting a business loan through your bank may be easier than going the traditional route.
The Amount You’re Seeking
The amount of money you plan to borrow is important. A small business loan is far easier to get than a large one. Borrowing $10,000 versus $500,000 makes a huge difference to lenders, and larger amounts will require a more involved process.
Do You Qualify for a Business Loan?
Before you start your loan application process, find out if you qualify. Lenders have a checklist they mark off to determine if you are eligible. Here are some steps you can take to see if you qualify for a business loan.
Look at the Requirements for the Type of Loan You Want
To decide if you qualify, research the type of loans you want and the lenders that offer those loans. They typically have a list of criteria. You can find this information on their website or by simply calling their customer service team.
Find Out the Required Credit Score
Lenders usually have a cutoff credit score. Find out what most lenders prefer in a credit score and see if you meet that requirement.
How Long Your Business Has Been Open
If you are looking for a startup loan, this question may not apply. However, if you have been running your business for some time and need a loan to keep it going, the length of time your business has been open is important. Some lenders prefer that you have an established business for a specific amount of time before asking for a loan.
How Much Does Your Business Make Per Year?
Your business should be making some money if you’re going to take out a loan. Otherwise, how will you pay the loan back? Look at your company’s annual income to see if the income meets the required amount. Many lenders prefer that you make $100,000 or more. Some nontraditional lenders may consider lower annual revenue for a startup loan or business line of credit.
What Is Your Debt-to-Income Ratio?
How much debt you have compared to your income is important to lenders. The lower your ratio, the better chances you have of securing a business loan. Most lenders will consider your application if you have a DTI ratio below 50%.
How Can You Improve Your Chances of Getting a Business Loan?
If you are thinking about applying for a business loan but aren’t sure if you’re a good candidate, there are some steps you can take to improve your chances.
Raise Your Credit Score
Lenders will look at both your personal and business credit reports. To improve your credit score, make sure to pay all your bills on time. You will also want to reduce or eliminate any debts.
Improve Your Financials
If you already run a business, you can improve the financial health of your company. Besides keeping accurate records, try to pay off any debt funding. You can also spread out your tax payments and monitor your books efficiently.
Build Collateral
Lenders are more inclined to loan you money if you own assets that can cover the loan in case you fall behind on your payments. Even though some lenders may not ask for collateral, you will have to list your assets on the application. Having assets such as real estate, stocks, or equipment makes it less of a risk for the lender.
Create a Solid Business Plan
If your mission and business goals look well-thought-out and detailed, lenders may view your application more positively. Your business plan should show how you plan to grow your business and demonstrate that you understand the market you’re targeting.
What Kinds of Loans Are Available for Business Owners?
Besides preparing your loan application and ensuring you qualify, it’s important that you research the types of loans available. Here are some types of business loans to consider.
Business Lines of Credit
A business line of credit doesn’t require that you put up any collateral. It is a revolving credit line that you can use for anything you need: equipment, inventory, and more. Interest rates are typically lower than personal loans but may be higher than other types of business loans.
SBA Loans
To apply for an SBA loan, you would apply through a bank or a credit union. Since these are government-backed loans, they are designed to help small businesses. There is no collateral for loans up to $50,000, but lenders will ask for collateral for any loans above $50,000. There are different types of SBA loans: 7(a) loans, 504 loans, and microloans.
Equipment Financing
These loans are designed to help businesses purchase equipment, and the equipment that your company purchases becomes collateral for the loan. The advantage of equipment financing loans is that you don’t have to put up your own assets as collateral.
Working Capital Loans
Working capital loans cover the day-to-day operational activities of a business. These are typically short-term loans that ensure you have money before your company starts generating profits.
Personal Loans
Personal loans often carry high interest rates. However, if you have a high credit score and no debts, a personal loan can be a good option.
American Business Credit Loans
At American Business Credit, our goal is to help entrepreneurs get unsecured financing for their businesses. We offer franchise financing, unsecured business loans, working capital loans, accounts receivable loans, personal loans, and more. Contact us to find out how we can help your new or established business. You can apply for a loan directly on our website.
