How Hard Is It to Get a Business Loan?

Few concepts are more rooted in the ideal of the American dream than owning and operating your own business. But making the dream a reality demands more than a great idea, exceptional organizational skills, and dedicated work.

A successful company needs capital: money for payroll, supplies, inventory, equipment, and space to operate.

Whether you’re an entrepreneur launching a startup or a veteran business owner with plans to expand, access to capital is fundamental. For many, this means getting — more precisely, attempting to get — a business loan.

If it were easy, everybody would do it. But if you are properly prepared and persistent, you have a good chance of making it happen. Indeed, according to the Federal Reserve, in 2024, 77% of firms that sought financing received all (41%) or some (36%) of the money they requested.

Business Loan Approval Factors

The process of scoring a business loan is not all that different from securing a personal loan. Potential lenders will weigh familiar factors: income, cash flow, debt burden, credit score and history, potential to post collateral, the amount of the request, and plans for the money.

The key difference is, except in rare cases, it’s the company’s creditworthiness that’s being weighed, not the owner’s. Approval hinges on underwriters being able to answer yes to two pivotal questions:

• Can the business repay the debt?
• Will the business repay the debt?

Here are six factors that figure heavily in deciding whether your business gets a loan.

1. Time in Business

Traditional lenders prefer applicants with a solid history of reliable revenue and demonstrated profitability. Newbies seeking flexibility may find a sympathetic ear with online lenders, crowdfunding, and at the Small Business Administration.

2. Credit Score

Credit scores always play a key role in getting approved for a loan. For traditional commercial loans, the score that matters belongs to the business, not the owner. The better the business’ credit score, the more likely borrowers will be approved for larger amounts and/or more competitive terms.

Generally, the owner’s personal credit score is irrelevant to the lender’s evaluation. One exception: The owner personally guarantees the loan to the business. Establishing and maintaining a strong profile for building business credit can significantly improve a company’s borrowing potential and access to better financing options.

3. Cash Flow

Central to understanding the financial health is its small business cash flow. Money coming in. Money going out. Traditional lenders use cash flow to evaluate whether a business has sufficient revenue to keep it operating and also satisfy the loan terms.

Count on lenders to ask for banking and accounting statements, which allows them to project a business cash-flow analysis. A favored stress test puts the business through a debt service coverage ratio (DSCR), calculated by dividing cash flow — sales minus expenses — by debt payments, either monthly or annually.

The DSCR gold standard is 2, demonstrating that a company generates double the cash flow needed to cover its debts.

To avoid getting caught by surprise, it’s a good idea to perform the same analysis on your own. Don’t like what you found, even though business is good? Improve your cash flow by acting proactively, such as invoicing promptly, offering incentives for early payments, effectively managing receivables, controlling expenses, optimizing inventory, stashing cash in high-interest savings accounts, negotiating favorable terms with vendors, and creating a cash flow forecast.

4. Business Plan

Formulating, writing, and following a business plan — a formal document that describes your company, its purpose, funding options, and execution strategy — is essential for your company. It establishes your company’s reason for being and details how it will be successful.

A business plan that is solid and well thought-out establishes your company’s legitimacy while demonstrating that you have a strategy for success that includes profitability at the same time it repays its debts.

Your business plan should include:

• An executive summary at the 30,000-foot level of your company’s purpose, funding plan, role in the marketplace, and why it will be successful.
• A description of the business opportunity at hand, whether you’re a startup or an existing company planning to grow.
• A company description: Who are you, what do you do, what are your values, and why are you essential now and in the future? Include a brief history.
• A discussion of your business objectives, short- and long-term.
• A description of your talent: Who’s on your team, what are their relevant skills and experience, and what percentage of ownership they may have.
• An industry analysis: What is the outlook for your industry, and how does your company fit and enhance that work?
• A description of your target audience, including demographics, location, and other assorted traits. How will you acquire and retain customers?
• A timeline.
• A marketing plan.
• An operations plan.
• A financial summary.
• Your funding requirements.

For step-by-step assistance, you can find business plan templates online. The Small Business Administration offers an assortment of templates, including traditional and startup.

5. Loan Amount

As the old saying goes, “Askin’ ain’t gittin’.” This applies, especially, to the commercial loan world, where how much you want to borrow is weighed along with the factors laid out above.

If your enterprise is a startup or is still in its early stages, has little revenue and hasn’t established a sterling credit score, lenders may approve only a small amount.

To help land a larger loan, be prepared to provide collateral from your business assets, or guarantee the loan personally (assuming your credit is top-notch).

As you determine how large a loan to request, stay focused on your cash flow, current and projected. Be realistic about your needs, as well as how much you can afford to repay.

6. Debt and Credit History

Businesses that have comparatively little debt and a track record of sticking to the terms of their loans have a better chance at getting funded than applicants with heavy business debt and dodgy credit histories.

Types of Business Loans

Business loans come in assorted styles; some are easier to secure than others. But be wary: Loans with low hurdles to approval often come with punishing terms.

• Term loans are traditional loans that require fixed installment payments, generally each month. They’re difficult to get, but their interest rates are among the lowest. Lenders stress business or personal credit history, time in business, and annual revenue.
• SBA loans are backed by the federal Small Business Administration. Most are term loans, although there are a variety of funding options. They’re difficult to get, but their interest rates usually are low. Again, approval hinges on business or personal credit history, time in business, and annual revenue.
• Lines of credit operate as a pot of money that businesses can draw from as needed. Repayment is required only when the company borrows against it. Lines of credit are difficult to score, but their interest rates are low. Here, too, lenders scrutinize business or personal credit history, time in business, and annual revenue.
• Invoice factoring requires selling your outstanding customer invoices at a discount for immediate cash. These tend to be less difficult to secure, but they come with higher interest rates. Lenders will examine your invoice history and your customers’ credit score(s).
• Merchant cash advances provide a money injection based on your projected credit/debit sales. The loan is repaid as a portion of your daily sales until the advance is satisfied. Approval comes with a lower degree of difficulty, but a higher interest rate. Lenders will factor your credit/debit card sales history, pay less attention to your credit score, and may take your annual revenue and time in business into account.

Alternatives to Business Loans

Maybe you can’t or don’t want to go through the rigamarole involved in applying for a business loan. There are alternatives for financing a business, including:

• Personal loan. Using your credit history and score, you could secure funding for your business. Personal loans are unsecured, so you won’t need collateral. However, if the business cannot keep up with the payments, you will be personally liable.
• Business credit cards are similar to personal credit cards, except that their use is restricted to business purposes. The credit limit usually is higher but beware of the interest charges if a balance is carried month after month. On the other hand, paying off the balance each month means having an interest-free loan. Additionally, some business cards offer rewards and benefits, including signup bonuses, a low introductory APR, cash back or travel perks.
• Grants are gifts of money offered by local, state, and federal government agencies, small business development agencies, and philanthropic organizations. Grants do not have to be repaid, but the competition is fierce, and the application process can be difficult and time-consuming.
• Crowdfunding.
• Angel investors or venture capitalists.
• Peer-to-peer lending platforms.

Next Steps

How hard it is to get a business loan pivots on key factors lenders scrutinize in your application: time in business, cash flow, debt ratio, credit score, business plan, and the size of the loan sought.

The process can be challenging, and even occasionally frustrating, particularly for startups with bruised credit. Still, it’s not impossible, especially if your application package is thoroughly documented.

Prepare carefully, be persistent, and embrace flexibility. If your small business is rejected early on, listen and learn from lenders’ reasons for turning you down. Integrate that feedback into your approach when you try with another lender.