Smiling small business owners

How Hard Is It to Get a Business Loan?

4 min read • Sep 16, 2019 • Barry Eitel

Depending on your business and personal finances, your ability to receive a business loan will vary wildly. Fortunately, there is now a wide array of options for financing, all with different terms and requirements.

Unless your business has been operating for years in relatively good health, though, you should temper your expectations. You’ll likely still qualify for financing, but the principal may be lower and the interest rates higher. Still, your business can likely qualify for some form of loan to meet your needs.

Define Business Loan

When you picture the process of applying for a business loan in your mind, you’re probably thinking about going into your local bank, giving a presentation to a stern-faced banker, shaking hands, and walking away with a check. This scenario is how you would get what lenders call a “term loan.”

While the interest rates are usually desirable, you should expect traditional banks to have a very high bar that you and your business needs to clear.   

Bank loans, however, are just one star in a constellation of financing options for small businesses. All of these options have different terms and requirements, and some are very open to helping out younger, scrappier companies. And with the advent of the internet, applying for small business funding has never been simpler.  

Traditional Term Loans and SBA Loans

As the name suggests, a term loan is a loan that is paid back incrementally according to a term you agree upon with a bank or credit union—often between 1 and 25 years. Interest rates usually range between 6% and 13%, and banks will expect you to show them account statements, business tax returns, business plans, and other financial documentation.

Another common type of loan is an SBA (7a) loan. These loans are offered by some banks and partially guaranteed through the US government’s Small Business Administration. The SBA has an extensive amount of information on its website.

With both of these types of loans, there is a trade-off. The repayment terms and interest rates are favorable, but these lenders are the most selective and require thorough documentation. Additionally, these lenders will typically require your business to have been operating for at least 2 years.  

Loans with Less Demanding Terms

Although term loans and SBA loans are somewhat difficult to receive, other available options are more understanding. Some loans, like accounts receivable financing and ACH cash flow loans, don’t even require a hard pull on your credit score. Other options are quick and fairly straightforward, like a business credit card.

Some lenders will base their decisions on factors that differ from traditional banks. Lenders that provide accounts receivable financing or invoice factoring base their funding decisions on how much your business is owed from unpaid invoices. Equipment financing can be used to finance—you guessed it—equipment for your business (like a large printer or backhoe), with the equipment actually acting as collateral for the loan.

3 Factors Lenders Will Consider

1. Your Credit Score

Almost any lender is going to check your credit score, although some will only do a “soft pull” that won’t impact your score like a hard check would do. Most banks will want you to have a credit score above 720, which is considered good. Having an excellent personal credit score above 800 puts you in the best position to receive a loan from a traditional source.

For less demanding loans, like equipment financing or a business credit card, a score above 600 is usually acceptable. If your personal credit score is in the 500s or below, you will probably have to build your credit before a lender will loan your business any funding.

2. How Long You’ve Been In Business

The majority of lenders will also look at the age of your business in making their decision. Banks and the SBA want small businesses that have been in operation for 2 years—preferably longer. Other options usually require that your business has been open for at least 3 to 6 months.

Because of this requirement, most small business owners find it difficult to receive funding for starting a business. It is common to raise this funding either through your personal savings, friends, or family.  

3. Your Business Revenue

Larger institutions will require your business to have a healthy, continuous cash inflow—this income is how banks can determine that you can pay a business loan back. Banks often require an annual revenue of $100,000, and even many business cards with high credit limits require annual revenues of at least $50,000.

Less demanding lenders, like those that specialize in ACH cash flow loans, will look at your monthly revenues. Typically, smaller-scale lenders will want you to prove your business has monthly revenue of at least $4,000.

Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.