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How Hard Is It to Get a Small Business Loan?

Reviewed by Ty Crandall

June 29, 2024

Securing a loan is the first idea that pops into the minds of entrepreneurs or business owners to raise capital for their businesses. While this light bulb idea is common for business financing, its success rate is relatively low. 

This brings us to the question of the day, “How hard is it to get a business loan?” Let’s find out the details of this question below!

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Your Odds of Getting Approved, By Business Loan Type

When we talk about a loan, a bank loan is usually the first, and in most cases, the only option to enter one’s mind. But when you start searching about the matter, you’ll realize that there are several financing options available in the market that can do the job. 


Whether having this many options is good or not is up for debate, but one thing is clear – choosing the best options for your needs will be a long ride. 


This means not only do you have to search for the other alternative lenders available to you, but also dig deep to understand their compatibility with your business’s requirements. 


To save you that precious time, here is a breakdown of the top 7 funding avenues for your company and how business loans work.


Business loan type Purpose Odds of securing
Traditional bank loans Fulfill business purchases and cover operating expenses Require a good credit score. Can be challenging for startups or businesses with weak financial profiles
Business credit cards Best for recurring expenses Unpaid balances result in bad credit and can affect your chances, is based on your personal credit score
Business lines of credit Short-term business expenses Bad credit can ruin your chances
SBA loans Facilitate growth and expansion plans for the business Lenient qualifying requirements due to SBA guarantees
Merchant cash advance Short-term business expenses Only suitable if other funding circles are limited. Otherwise, it can increase your debt burden
Invoice factoring Immediate cash  Fills cash flow gaps but remember to choose non-recourse invoice factoring
Equipment financing Purchase business equipment Flexible installments depending on equipment value, business revenue, and personal credit history


Traditional Bank Loans

Traditional bank loans, or term loans, are the first to visit your mind when considering business loan options to facilitate your business plan. 


The framework of a traditional bank loan is as follows: a bank lends you the total amount upfront, which is then repaid by you in fixed and regular installments – plus interest – over a certain period of time. 


Short-term business loans range from three months to two years, with daily or weekly installments as repayments. In contrast, the loan term of long-term bank loans can range up to 10 years and beyond. 


Your business’s creditworthiness is analyzed to see its eligibility to secure a term loan. This is why it’s not the best option for startup business loans or businesses with weak financial profiles. 


The purpose of a term loan depends on its duration. While short-term loans usually serve as working capital or to fulfill emergency needs, long-term loans are required for capital investments, business growth, etc. 

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Business Credit Cards

Business credit cards are similar to your personal credit cards, enabling your business to borrow money up to its limit as often as needed. 


The only restriction here is that you’re required to pay off the balance before you can borrow any additional amount for business financing. Otherwise, hefty interest rates can be applied to the amount you owe to the bank.


The revolving credit feature of this option makes it excellent for business owners who seek convenient financial pathways for recurring expenses like supplies, utility payments, or transport costs. 


Moreover, it’s vital to note that your business credit card is associated with your personal credit score for a business loan. Hence, if there are any unpaid balances in your personal loan history, it affects not only your own credit but also that of your business. 

Business Lines of Credit

Business lines of credit work the same way as business credit cards, with the only difference being in their application. You can draw up funds up to the limit in your agreement and then make a loan repayment on the amount you’ve accessed. 


Once your balance is repaid in full, you can borrow against your limit again, giving business lines of credit a flexible flair for funding. 


Other than that, it is a remarkable option for businesses that have large borrowing needs and are looking for potentially low-interest rates to aid their business plan.


However, the terms to qualify vary from lender to lender. The best terms are usually rewarded to businesses with good credit scores and sometimes collateral. In the case of poor credit, you may have to authenticate a personal guarantee with your signature. 


Lastly, there are no grace periods in lines of credit. Thus, even if you withdraw money while the bank is preparing your statement, you’ll have to pay interest. 

SBA Loans

The SBA (Small Business Administration) is like insurance for lenders across the US that offer funding to businesses. 


In the case where a borrower is unable to repay the amount borrowed, the SBA guarantees to protect the lender by making up for 85% of the lending amount. 


Not only does this alleviate the risk and uncertainties involved for the lender, but it also allows them to be more lenient with their qualifying requirements. 


Business owners can borrow anywhere within a bracket of $500 to $5,000,000 from SBA-approved lenders at an interest rate ranging between 2.8% to 13%, as determined by the lender. 


The three most popular loan programs offered by the SBA include:


  • SBA 7(a) loans – The borrowing amount can range up to $5 million, making them the prime choice if you want to secure working capital, get a business loan to buy a business, or grow your company. 

  • SBA 504 loans – Again, the eligible party can access any amount from a 100k business loan up to $5 million with the aim to purchase fixed assets, such as property or equipment. You can also direct these funds toward improving existing property.

  • Microloans – Qualified individuals can receive up to $50,000 for working capital costs, purchasing inventory, etc. 

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Merchant Cash Advances

A Merchant cash advance is like a credit union, providing another way for your business to secure funding in exchange for your daily credit card sales. The merchant cash company analyzes your credit report before finalizing your loan. 


Upon qualification, they give you your desired amount, and instead of making monthly payments to repay this amount, your mode of paying back is by allowing them to take a percentage of your weekly or daily credit card sales. 


This happens until the advance, together with the demanded fee, has been settled. 


Merchant cash advances don’t require businesses to go through a lengthy procedure to acquire resources and are ideal if all other funding doors have been shut for you. However, the significantly high fees they charge add to your debt burden, involving the risk of taking on more than you can pay back. 

Invoice Factoring

Invoice factoring enables you to garner cash immediately without waiting for your unpredictable customers to pay back. 


All you have to do is sell your business invoices that stand as proof that a particular customer owes you a said amount to a factoring company. The factor pays you 70-90% of the invoice amount upfront and takes the responsibility of extracting the remaining payment from the customers. 


Once all dues are cleared, the factoring company transfers you the remaining amount after deducting its service fee. This makes invoice financing a handy way to fill gaps in the cash flow without affecting your credit score. 


Furthermore, choosing the right type of invoice factoring option is integral. While recourse factoring agreements require you to buy back invoices that aren’t paid by customers, non-recourse factoring agreements assign the liability of unpaid advances to your factoring company. 

Equipment Financing

Equipment financing, as the name suggests, is a financing option that enables businesses to buy their choice of equipment needed in the company. 


The amount you can receive depends on the equipment you need to purchase. Plus, the equipment itself is used as collateral for the loan. Thus, if you fail to repay the lender, they can sell the item and recover the losses. 


Because of this, the APR (annual percentage rate) is pretty competitive and can range between 8% and 30% depending on the price of the equipment, your business’s revenue and finances, and the credit score history of your personal accounts. 


These lenders are largely flexible and can divide your monthly installments into quarterly or weekly amounts as per your preference. In addition, these loans can offer repayment terms extending to 25 years and can be used for all types of equipment, be it computers, machinery, or solar panels.

Business Loan Approval Factors

Time in Business

The only thing important for lenders is getting their payments on time. This is why they’ll have to see how long you’ve been in business before they finalize your loan. 


This allows them to see how long you’ve been doing your job and how good you’re at it. The longer your experience, the more polished your expertise will be, keeping lenders relieved that their money is being used responsibly and will be paid on time and in full.


Each financial institution has its own requirements when it comes to this factor. Where some lenders will only lend money if you’ve been in business for around six months, a traditional lender looks for a minimum of two years when approving loans. 


Your business age also determines the repayment options you’ll be offered and their flexibility. This is why entrepreneurs who borrow money for business financing are required to make a down payment, pay higher interest rates, or offer a personal guarantee as compensation in case their business fails. 


A consistent stream of revenue is a reflection of your capability to stay in business in the near future. In the eyes of your lender, this translates into receiving timely monthly, weekly, or daily payments. 


Most commercial lenders require a bank statement with your loan application to validate your revenue claims and monthly cash flow. Sometimes, however, you may even be asked to integrate your bank account so your lender can cross-check your revenue information directly. 


It’s essential that you’ve prepared copies of your most recent monthly revenues, typically the last 3 to 6 months, but the specifics differ for every lender. Some may even demand your business’s financial statements and/or tax returns. 


The main idea here, especially for lenders funding small businesses, is to ensure your business can pay off its debt.

Personal Credit

Personal credit is another eligibility criterion you must fulfill when applying for a business loan, but this depends on your particular lender. Most lenders don’t feel the need to look at your personal credit as long as your business credit score is good enough to keep them satisfied. 


If you’re applying for a loan from a bank to expedite your business plan, then you must keep your personal credit copies ready since banks aren’t very flexible with their requirements. 


Similarly, if you’re a startup or a small-scale business, lenders may need to consider your personal credit to determine the creditworthiness of your loan application for the loan. 


All in all, your personal credit assures the lender that in case your business fails to deliver its repayments and doesn’t have any assets within the company to compensate for the debt, they can seize your personal assets to recover the amount. 

Business Credit

Your business credit score helps the lender evaluate your business’s ability to repay the loan and its financial history. Moreover, the business credit score also gives them a sneak peek into your company’s relationship with past vendors and creditors. 


So, for instance, if your business credit score revealed that some of your vendors didn’t receive their payments, it indicates bad credit and can gravely impact your eligibility for the loan. 


On the other hand, business credit is used to secure the position of your lender by informing them of any significant change in your business, like a recent lawsuit that may put them in trouble’s way too. 


Conclusively, lenders gauge your business’s credit to understand its financials, including its debt position and cash flow health. These metrics indicate whether your business has enough resources to make its financing payments or possesses enough equity to use as a backup if the situation goes downhill.


A collateral can be any equipment or property that your lender can sell off to retrieve your loan amount in case your business defaults and you have no business or personal assets that can be used to make up for the financing.


There are different prerequisites for different types of business loans. For example, an SBA 7(a) loan amount over the limit of $350,000 demands a business asset as collateral for security. 


If the value of your business assets isn’t enough to cover the loan amount, you may have to use your personal assets to make up for the difference.


Lenders are more than likely to lend to businesses in profitable and booming industries instead of those in high-risk industries. The pandemic revealed just how risky industries such as hospitality, tourism, or transportation are, making lenders steer away from them during that time. 


Similarly, with the demand for AI escalating rapidly, lenders are less likely to hesitate in approving the loan applications for such ventures. Other industries that have a high success rate in securing loans include:


  • Dentistry
  • Hotels and motels
  • Consulting businesses
  • Alcohol
  • Software development
  • Physicians
  • Marketing


If you’re applying for SBA loans, you must be aware of their industry-specific requirements or NAICS codes. While they offer funding to almost all industries, exceptions include gambling, religious institutes, multi-level marketing schemes, and charitable organizations.

Get Your Free Business Finance Assessment to Discover your Optimal Path to Improve Fundability™, Build Business Credit, and Get Business Loans


Regardless of whether you aim to expand your business, stock up your inventory, or purchase equipment to assist with daily operations but don’t have the finances to do so, getting a business loan can do the job for you. 


While we’ve all heard that securing a loan isn’t an easy feat, it’s only when we find ourselves in that position that we wonder, “How hard is it to get a business loan?”


With the help of this guide, one thing is for certain – there is no one answer to this question. Several factors are at play when it comes to determining your eligibility for a loan. 


But first things first, if you’re considering applying for a loan now or in the near future, make sure to build your credit score first to increase your chances of qualifying for your desired loan. 


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Credit Suite

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