How Hard Is It to Get a Business Loan in 2023?

Business Loan Approval Factors

When you apply for a business loan, a lender may evaluate various factors to determine whether to approve or deny your application. After a loan approval, the factors below may also influence your loan’s interest rate, loan amount, and repayment term. 

• Credit score and credit history (business and personal) 
• Business revenue
• Time in business
• Collateral

More established businesses with good credit, higher revenues, and lower overall risk profiles can typically borrow more money and qualify for better loan terms. Startups, businesses with bad credit—or other types of high-risk borrowing profiles—may face higher interest rates and lower loan amounts and struggle to qualify for certain types of financing.

Can You Afford a Business Loan?

Qualifying for a business loan can be exciting, especially if your company has an immediate need for capital. Nonetheless, it’s important to slow down and evaluate the cost before you accept any new business loan. 

Here are six important costs to consider when you’re deciding whether a business loan is right for your company.  

1. Interest rate – Anyone who’s taken out a loan to buy a car or home is familiar with the concept of interest. Interest is the price your business pays to borrow money. 

The interest rate on a loan reveals how much the lender charges every year for financing. To calculate the interest rate on a business loan, you’ll need to find a loan’s periodic interest rate and multiply it by the number of times the lender will apply the rate each year.

Interest rates are fluid. They can rise and fall cyclically, impacted by numerous factors, such as the federal funds rate and beyond. Some entrepreneurs believe that you should only pursue business financing when interest rates are historically low. Yet there can be other benefits to getting financing when rates rise, such as improved margins.

2. Cents on the dollar – Sometimes it’s helpful to break down the cost of financing into familiar amounts. And is there anything easier to understand than the dollar for U.S. business owners? The cents-on-the-dollar metric reveals how much you’ll spend in interest and fees for every dollar your company borrows. 

3. Factor rates – Lenders sometimes use factor rates in their quotes for various loan products. A factor rate is expressed as a decimal figure and reveals how much you’ll pay back to the lender. Factor rates are relevant for all types of loans—from short-term financing to loans you pay off over several decades.

To calculate the cost of this type of financing, multiply your loan amount by the factor rate. Because the money in a cash advance is borrowed against future income, you determine the factor rate by dividing the purchase amount by the advance amount.

4. Annual percentage rate (APR) – Annual percentage rate, or APR, represents the yearly cost of a loan. With business loans, APR includes both interest charges and all relevant transaction fees. Lenders express APR as a percentage of the principal. 

It’s easy to correlate APR with your budget to understand how much you can afford. Also, the APR allows for easy comparisons between different loan products so you can make sure you’re getting the best deal available on a business loan.

Many small business owners confuse the term APR with a loan’s interest rate. However, despite the word “rate” appearing in both terms, the metrics are different. Also, it’s worth noting that APR isn’t a comprehensive metric for calculating the full cost of financing because it doesn’t account for the effects of compounding (when applicable).

5. Total cost of capital (TCC) – Sometimes it’s helpful to see the full picture when it comes to the cost of financing. You can accomplish this goal by adding up the interest, fees that don’t incur interest, and additional fees. When you complete this exercise, you arrive at a more thorough metric—the total cost of capital (TCC). 

The TCC for a loan may result in sticker shock. Nonetheless, it’s important to understand the overall cost of financing before you accept a loan offer. The TCC is also helpful when it comes to comparing one loan offer to another.

6. Average monthly payment – Most small business owners operate on a monthly budget. Therefore, it’s helpful to see how much you’ll be paying for a business loan 12 times per year. Even if you have a financing product that requires daily or weekly payments, you can still deduce the monthly amount due.

Approval Odds by Type of Business Loan

Getting approved for a business also depends on the type of loan you need. Below are several popular business financing products, along with your basic odds of getting financed. 

• Business line of credit – A business line of credit can provide a flexible financing solution (similar to a credit card) that lets your business borrow money multiple times from the same source. Your business only pays interest on the money it uses, not the full credit line.
  
  You may be able to qualify for a business line of credit with a credit score as low as 600 or higher, at least $50,000 in annual revenue, and six months or more in business. Yet if you have a higher credit score and better borrowing risk factors, you may be able to qualify for financing from more lenders.
  
• SBA loan – SBA loans are guaranteed by the federal government (the U.S. Small Business Administration). SBA loans tend to feature competitive interest rates, generous loan amounts, and lengthy repayment terms. However, these loans can potentially take a few months to fund.
  
  The minimum requirements for an SBA loan are at least two years in business and a 640 credit score or higher.
  
• Business cash advance – A business cash advance is a fast funding option that can work well for businesses with consistent monthly revenue. In some cases, your business may be able to access funds in as little as 24 hours.
  
  With a cash advance, credit requirements start in the 500s, and time in business requirements start at three months.
  
• Business term loan – A business term loan is what many people think of first when they begin their search for business financing. These traditional installment loans can offer a business a fixed sum of money at a fixed interest rate that it repays over a fixed period of time. The monthly payment amount is typically fixed as well.
  
  To qualify for this type of loan, your company will need at least two years in business under its belt. You’ll also need a personal credit score of 600 or higher and at least $8,000 in monthly revenue.
  
• Business credit card – As a small business owner, a business credit card can offer many benefits. To begin, a business credit card can make it easier to keep personal and business finances separate. These convenient financing tools may also help you establish business credit, and you might even earn valuable rewards or cash back, depending on the type of account you open. (Just remember to pay your statement balance off every month to avoid costly interest charges.)
  
  Most small business credit card issuers will check your personal credit when you apply for a business credit card. So, if you have a personal credit score of 680 or higher, your odds of qualifying for an account should be higher, regardless of your time in business or annual revenue.
  
• Equipment financing – Equipment financing is a loan you can use to buy business-related equipment to help your company run better. The equipment your business purchases typically serves as collateral, often making this type of loan a lower-risk financing option for the lender. As a result, you may be able to expect more lenient qualification requirements, longer repayment terms, and lower interest rates than you might encounter with other types of financing.
  
  Nonetheless, lenders often require a credit score of 550 or higher from the business owner. Monthly revenue and time in business requirements vary widely with some lenders having no minimum requirement and others looking for a minimum two years time in business and $8000+ in monthly revenue.
  
• Commercial mortgage – If your business needs to purchase, renovate, or upgrade property, a commercial mortgage could be an affordable way to accomplish this goal. You might also be in the market for a commercial mortgage if you already have an existing business loan you took out to purchase commercial real estate that you need to refinance.
  
  In general, you’ll need a personal credit score of at least 600 or higher for a commercial mortgage. (Note: Higher credit scores may help you qualify for lower interest rates.) Lenders may also want to see that your business has a monthly revenue of $8,000 per month or higher and at least six months in business with this type of loan.
  
• Accounts receivable financing – Accounts receivable financing using your business’ unpaid invoices as collateral to secure a lump sum cash advance. Also called invoice financing, this type of loan may let your business borrow up to 80% of the value of invoices that its customers are scheduled to pay in the future. You may be able to access funding within 24 hours or less, but borrowing costs can often be high.
  
  The lender charges a factor rate based on the net terms outlined in your company’s outstanding invoices (e.g., net 30, net 60, net 90). Once your company’s customers pay their invoices to the lender, your business receives the remaining balance of any invoices, minus whatever factor fee the lender charges.
  
  Your personal and business credit doesn’t typically play a significant role in your approval odds for accounts receivable financing. Instead, the lender cares more about your total account receivables and will look for a minimum monthly revenue starting at $8,333.

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