Does It Really Need to Be This Hard to Get a Business Loan?

Getting small business loans is not easy.

Just how difficult depends on many factors, but these are the three major ones affecting how likely it is for your loan application to get approved:

  • How long you have been in business?
  • How much revenue your business is bringing in?
  • What does your credit history say about you?

If your business is new, has a low revenue, and your credit history is less than ideal, getting affordable small business loans will be a challenge. On the other hand, if your business is established, bringing in good money, and your credit history is stellar, getting a business loan will be a lot easier.

Your personal credit score also plays a role.

Even though you and your business are technically separate, lenders know that you as the business owner will be the one paying back the borrowed money, so they also look at your personal credit history to gauge how responsible you are when it comes to your financial obligations.

Different types of loans also have different levels of difficulty.

A conventional bank loan or an SBA loan has a low-interest rate but is hard to get because they both have strict requirements and an intensive and lengthy application process. A merchant cash advance, meanwhile, is easy to qualify for and you get the cash after just a few days, but the interest is sizable.

Unlike consumer credit, commercial credit is complicated. Almost all consumer credit transactions are reported to the three major consumer credit bureaus, resulting in consumer credit reports that are mostly consistent. The three major commercial bureaus, however, have inconsistent data because only a handful of companies report to all three agencies.

Many business owners thus find their credit report from one bureau to be very different from their report from another bureau. Those bills you have been diligently paying on time? Your punctuality may or may not be going on your business credit record, depending on the company you do business with.

Another aspect adding to the complexity of small business loans is that business lenders have specializations (check the list here). Some specialize by region, some by industry, and some by loan type. If your business is outside the lender’s specialization, you won’t qualify.

Also note that unlike consumer credit reports (which lenders can only check under very specific cases outlined by law) practically anyone can check your business credit, so you need to be more careful in managing your commercial credit.

One thing that frustrates many borrowers is that if their loan application is denied, it is not clear why. The denial notice will mention a generic reason such as “not meeting the credit standards.” This is because lenders are not required to give you the specific reason(s) why you were denied or to give you a free copy of the credit report they used to evaluate your application.

Nevertheless, getting small business loans do not have to be like pulling teeth. Here are two things you can do to make it easier.

Do your research.

Be clear as to why you are securing a loan and how much you need to borrow. Research the common types of business funding and what kinds of businesses they are suited for.

Get a copy of your personal and business credit reports so you can evaluate your business through the lender’s eyes. Save yourself time, money, and grief by finding out the lender’s requirements before applying for any loan. If your business does not meet the requirements, move on to your next financing option.

Ultimately, how hard or easy it will be for you to secure an affordable business loan will depend on how long you have been in business, your company’s revenue, and your credit scores. It can be overwhelming or even frustrating at times but if your business will benefit from an influx of additional capital, then it will all be worth it in the end.