How Hard Is It To Get a Small Business Loan?

Getting a business loan, business line of credit, or another type of financing can help with growing a small business. However, figuring out the type of financing you can get, finding the lender that matches your business’ needs, and qualifying for the desired amount can be difficult. Here, we’ll take a closer look at the key factors that lenders look at, the information you will need to apply, and different types of financing to consider. 

What makes business loans hard to get? 

Specific loan requirements can vary significantly depending on the type of loan and the lender. But lenders generally consider many of the following factors when making a decision. 

• Number of years in business: Many businesses don’t make it past the first few years, which is why offering loans to brand-new businesses can prove risky. Although some loans are available to newer businesses, traditional lenders often require a business to operate for at least two years before offering a loan. 
• Business size and industry: Lenders will also consider the size and type of business – and any risks associated with your industry. 
• Credit scores: The business’ credit history and business credit score, along with the owner’s credit history and score, will factor into a lender’s review. Many business loans have a minimum credit score, and you may need excellent credit to qualify for the best loan offers. 
• Revenue and profits: Your business may need to meet a minimum monthly or annual revenue amount for certain types of loans. Lenders will also consider how much profit you have and various financial ratios, such as your company’s debt-to-income ratio. 
• Cash flow: Lenders also want to ensure you don’t have cash flow problems that will make repaying the loan difficult. 
• Collateral: Some types of business loans, such as equipment, real estate, and vehicle loans, require you to pledge assets as collateral. Unsecured loans don’t require collateral, but you may still need to personally guarantee the loan. 
• Your business and loan plans: Lenders want to know you have a solid plan for running and growing your business. They may also ask how you plan to use the loan to execute that plan. 

How often are small business loans denied? 

Many businesses have trouble getting the financing they want and need. According to the Federal Reserve Banks’ 2023 Small Business Credit Survey (SBCS) on small businesses that have up to 499 part- or full-time employees, approximately 40% of businesses applied for financing in 2022. In the last 12 months, 21% didn’t get approved for the financing they wanted and 26% only partially got approved. 

Approval rates by type of financing 

Of those who got at least partially approved, success was highest with merchant cash advances (MCAs) and secured loans. 

• Merchant cash advance (90%) 
• Auto or equipment loan (87%) 
• Business line of credit (76%) 
• Business loan (66%) 

Approval rates by type of financial institution 

Those who got at least partially approved had the most success with small, non-bank and online lenders. 

• Small banks (82%) 
• Finance companies (76%) 
• Online lenders (71%) 

Business loan approval rates were lowest from community development financial institutions (59%), credit unions (65%), and large banks (68%). 

How to secure a business loan 

The application process depends on the type of financing you’re applying for and the lender’s requirements. If you’re trying to get a small business loan, here are some suggested steps. 

1. Write a solid business plan

A solid business plan can be important for starting a business and making strategic decisions. Lenders may want to see your business plan to better understand what you’re doing, how well-organized you are, and how you plan to effectively use the money they lend you. 

2. Choose a type of business loan or financing

There are many types of business financing, and some options are more aligned with certain circumstances. For example, if you need to make a large purchase right now, an installment loan might make sense. But if you have several progress payments for a marketing plan or construction project, a line of credit could fit your situation 

Also, consider how quickly you need the funds. If the lender requests a significant amount of paperwork and does a deep dive into your finances, you may find yourself in a position to receive a large loan with favorable terms. If the lender only takes a high-level look at your business, they might offer you funding quickly, but with less-favorable terms. 

There are some exceptions, particularly with online lenders that can connect to your online business banking and accounting software to quickly analyze your business. 

3. Compare lenders and determine if your business qualifies

After narrowing in on a specific type of financing, you can start to compare lenders and their minimum eligibility requirements. If you haven’t already done so, check your personal and business credit scores to see how you might fare with lenders. 

4. Prepare your documents to apply for a loan

Some of the documents you might need include: 

• Your business plan and financial statements 
• Your business tax returns and employer identification number (EIN) 
• Your business bank statements 
• Business registration, licenses and permits 

You may also need different documents depending on the type of business, such as articles of incorporation or franchise agreements. Some loans may also require additional documentation, such as information about the assets you plan to use as collateral if you’re applying for a secured loan. 

5. Gather loan offers and accept the best one

Some lenders may give you several offers with varying repayment terms, interest rates, and monthly payments that you can compare before choosing. Also, if you find lenders that offer pre-qualifications or simple online applications, you may want to apply with several to see who gives you the loan offer with the terms that fit your needs. 

Is there a typical small business loan amount? 

Small business loans generally refer to loans under $1 million, but there aren’t many comprehensive sources for determining the average small business loan amount. 

The most recently released Small Business Lending Survey (SBLS) from the FDIC was conducted in 2016, and the report was released in 2018. This report found that the average small business loan amount was $663,000, and the average SBA loan was $107,000.  

What types of loans are easier to get than a traditional bank loan? 

In general, and depending on many factors, a smaller loan or line of credit with a low credit limit may be easier to qualify for than traditional bank loans. Here are some more examples.  

Invoice financing 

Invoice financing is when you use your unpaid invoices as collateral for a loan. A similar type of financing called invoice factoring is when you sell your invoices to a factoring company. 

In either case, this type of financing might be easier to get because the lender or factoring company might primarily focus on your clients’ history of paying their invoices on time and their companies’ creditworthiness. There could still be minimum revenue, credit score, and time in business requirements. 

You also may need to sell products or services to other businesses that pay you on terms if you want to finance, or factor, your invoices. 

Short-term business loans 

Short-term business loans are installment loans that you generally have to repay within three to 24 months, sometimes with daily or weekly payments. The loan amounts tend to be smaller than with longer-term loans, as the funding is primarily meant to cover immediate needs. 

You may be able to get short-term business loans from online and alternative lenders, and the requirements might be less stringent than what you’ll find from traditional lenders. Also, the application might not require as much paperwork. 

Your credit, revenue, and time in business can still be important, and lenders might set strict minimums. You may find these loans have higher interest rates and fees than traditional lenders’ long-term loans. 

Merchant cash advances 

A merchant cash advance (MCA) can offer quick financing that you repay with a portion of your sales. Generally, it’s easy to qualify for an MCA because your credit isn’t a large factor in your approval. Instead, the MCA provider may focus more on your cash flow and how you accept payments. 

For example, some MCA providers might require you to accept credit and debit cards, as they can automatically collect a portion of those sales before the money hits your account, and some MCAs will accept automatic payments from your business bank account. 

Technically, MCAs are advances rather than loans, which means state lending laws might not apply. And MCA providers might charge higher fees or rates than you’d pay to borrow an equivalent amount of money. Even if it’s easy to qualify, it might be hard to repay the advance and run your business if the payments cut into your cash flow. 

Small Business Administration (SBA) loans 

There are several Small Business Administration (SBA) loan programs that offer different types of business loans and credit lines. The most popular program, SBA 7(a) loans, offers up to $5 million loans. 

SBA loans are partially backed by the federal government, which can make it easier for small businesses to qualify for large loans with favorable terms. However, you’ll need to apply for these loans from an SBA-approved lender. The SBA sets the minimum eligibility requirements, but lenders can set stricter requirements for their loans. 

You may need to have at least the minimum required FICO SBSS credit score (a type of business credit score), sufficient cash flow, and equity in the business. You might be denied if you’ve defaulted on a federal loan, have a criminal history, or run an ineligible business, such as a non-profit or real estate investment firm. Depending on the loan size, you may also need to offer the lender collateral.  

Ensuring small business loan approval 

There’s no way to ensure you’ll get a small business loan, but you can take steps to increase your chances of approval. Knowing your credit and revenue can help you quickly determine which types of loans and lenders will be a good fit. Preparing your business plan and financial documents can make the process go smoother and might increase your chances of getting approved. 

You can consider different types of financing, including a small business line of credit, to see which options might be easiest to get while still offering you favorable terms.