How Do U Get A Business Loan – Small businesses tend to struggle to get the funding they need, with only 48% having access to sufficient funding. Your chances of being approved for a business loan vary depending on your overall
Small businesses tend to struggle to get the funding they need, with only 48% having access to sufficient funding. Your chances of being approved for a business loan vary depending on your overall
How Do U Get A Business Loan
While your chances of getting a business loan depend on things like your overall economic situation, your financial qualifications, and the type of loan, getting a business loan is generally quite difficult, especially for small businesses.
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Only 14.3% of large banks approve loans for small businesses. The approval rates for small banks and non-bank lenders (institutional lenders) are currently 20.1% and 24.9%, respectively. Alternative lenders lead the way in small business financing, approving 26.1% of loan applications1.
With 54% of small businesses in the US applying for loans2, it’s safe to say that most entrepreneurs are not meeting their funding needs. In fact, Fundera data shows that only 48% of small businesses actually get the funding they need3.
Regardless of the level of approval, businesses need loans. Whether you’re starting a startup or expanding your business, access to credit can offer the money you need to succeed. Also, you may have to rely on loans when your business’s cash flow is limited. This need for an infusion of outside cash makes business owners wonder, “Is it hard to get a business loan?”
Your chances of being approved for a business loan vary depending on general economic conditions, the type of loan you choose, and your financial and credit situation.
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Needless to say, the prevailing economic climate is largely (if not entirely) out of the control of small business owners. But it plays a role in loan approval. For example, the loan approval rate as of March 2022 is 13.5%, down from the previous year’s high of 27.3%4. This decline can be attributed to the impact of COVID-19 on small businesses and lenders.
As a business owner, there is little you can do about things like global pandemics. However, some of the factors that affect your chances of getting a loan may be out of your control. This is your financial qualification, which includes your credit history, income, loan amount, and whether you have the required documentation. Here is an analysis of all the factors that may affect your access to business loans.
Many lenders look at your time in business when signing a loan application. They usually require a business to be established within a minimum number of years or months before it is eligible for funding. The exact time depends on the type of loan you are applying for.
In general, the longer you work, the better your chances of getting approved. This is because longevity means less risk. On the contrary, start-ups and new businesses struggle to get approved for business loans because they are high risk. The company does not have long enough experience for the lender to assess its reliability in generating income to repay the loan.
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However, some alternative and online lenders have low or no uptime requirements. You can get approved for a loan even as a beginner or in as little as six months of work. But you may need to provide a personal guarantee.
There are several viable solutions that startup owners can use to access business loans. Whether they work or not depends on the conditions of the lender. But here are some that you can try:
Lenders usually look at operating income and cash flow as they indicate a company’s ability to repay a loan. In general, you are more likely to get a loan if you have a high annual income combined with a positive cash flow. These two numbers show that your business is generating enough revenue to pay off the new debt it will soon take on.
With this in mind, the lender may ask you to provide proof of income as well as cash flow statements. Some may request reports six months old, while others may require a full year’s worth of documentation. Either way, they will use statements to confirm that your business can service the debt. It also puts your debt-to-income ratio (DTI) into context.
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Income requirements vary by lender and type of loan. For example, you typically need $50,000 in annual sales to qualify for a short-term loan. But if you’re going for a business loan, then many lenders are likely to require $90,000 to $100,000 in annual income.
Ideally, it’s wise to wait until you have enough income to qualify for the loan you want. But if you don’t have money, here are a few options:
There is an application process when applying for a loan, expect the lender to pull out both your personal and business credit reports to check your creditworthiness. If reports indicate a lack of diligence in managing past debts, chances are high that your loan application will be rejected.
On the other hand, a solid personal credit score and a strong business credit history can improve your chances of getting a loan. They point to a history of repaying debts with diligence.
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While personal credit score requirements vary from lender to lender, and depending on the type of loan you’re applying for, the magic number to keep in mind seems to be 720. Any score below that, especially if it’s falls below 700, can appreciate it. You find it difficult to access business loans5.
For business loans, between 76 and 100 Intelliscore or PayDek increases your chances of getting a business loan approved. Intelliscore is a credit scoring system used by Experian and PayDek is used by Dunn and Bradstreet. These two, along with TransUnion, are the most popular credit bureaus for business loans.
One great way to qualify for business loans, even if you have a bad personal credit history, is to create a separate legal entity. In other words, if your business is a sole proprietorship, consider listing it as a limited liability company (LLC) or S corporation.
This will allow you to build a business credit score regardless of your personal credit history, and your company can apply for loans using your own credit. Your task will be to improve the creditworthiness of the business and keep the company’s Intelliscore and PaiDek above 76.
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If your company is already established, or perhaps you want to remain an individual owner, here are additional solutions to your bad credit problem:
Some lenders usually require collateral when you apply for a business loan. This gives a sense of security (to the lender) that you will repay the loan. And if you don’t, the lender can confiscate everything you offered to get your funds back.
It is not uncommon for some lenders to require a personal guarantee for a business loan. In this case, you may need to invest personal assets such as a house, car, retirement account, etc. to support your business loan. This is especially the case for sole proprietorships, where the business owner does not have liability protection.
Needless to say, if you or your business does not have enough collateral to cover the loan, the lender may deny you a loan. This is the case with new ventures that have not had enough time to raise funds.
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One option is to provide personal property as collateral. However, this is extremely risky and should only be considered as a last resort. For example, if you list your home as collateral for a business loan, the lender will have the legal right to take it and sell it if you default on the loan. Instead of taking such a big risk, you can consider the following alternatives:
In addition to your business’s financial statements, the lender may ask you to provide additional documentation such as tax returns, bank statements, and a business plan. The latter is especially important because your chances of getting a small business loan may depend on whether you have a business plan and whether it is a sound plan for the future (more on that later).
In addition, creditors use your tax returns to verify your income. They also check bank statements to see where most of your business’s income is coming from and how you are managing financial inflows and outflows.
It is quite simple: collect all the documents that the lender requests. Many of them will go even further and indicate the period they cover. For example, they may ask you to provide a balance sheet, income statement, tax returns, bank statements, and last year’s budget.
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When signing a business loan application, lenders typically use your cash flow and income to determine the loan amount your company is eligible for. In particular, many of them will evaluate your debt coverage ratio (DSCR).
In general, a DSCR of 1.25 or higher indicates a sound financial position6 and may encourage a lender to approve the loan amount you
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