Qualifying for a business loan can be challenging, especially if your business is relatively new. But even for startups, there are some loan options available that are easier to obtain than others. 

If you’re looking to apply for a business loan, here’s what to know about the factors that lenders consider and how the requirements can vary based on the type of loan.

6 Factors Affecting Business Loan Approval

Getting a small business loan is different from getting a loan for personal use, primarily because small businesses have a high failure rate in their first few years. 

Understanding what goes into the underwriting process can help you determine which areas to focus on leading up to your application.

1. Credit Scores

Commercial lenders will typically look at both your personal and business credit scores unless your company is well established and your business credit history is in great shape. 

Minimum credit score requirements can vary depending on the type of loan you’re applying for, but your best bet for approval and an affordable interest rate is to have good or excellent credit. 

If you haven’t had the chance to establish your business credit history, look for companies that can help you build business credit. Many of these options don’t even require prior credit experience with your business, and some don’t require a personal credit check.

2. Revenue

Your ability to repay the loan is another crucial factor for lenders, so they’ll want to see your annual revenue figures and sometimes your revenue over the past few months. 

In some cases, lenders will disclose minimum revenue requirements on their website, so you don’t have to guess as to whether or not you make the cut. 

But others may not provide that transparency, so it’s a good idea to speak with a loan officer before you apply to establish expectations.

In some cases, especially if you have a brand-new business, lenders may also ask for your personal income statements because you may be required to pay off the loan with personal assets if your business can’t.

3. Other Financials

A lender will typically require you to provide them with other financial documents, including a cash flow statement, a balance sheet, and a profit-and-loss statement. 

These documents give the lender more information about the state of your business and whether there are potential issues that could make it difficult for you to keep up with your monthly payments.

4. Collateral

In many cases, commercial lenders will require that you put up some form of collateral to secure your loan. If you’re buying equipment or heavy machinery, the collateral is typically the asset you’re purchasing. 

But for other types of loans, you may be able to use your accounts receivable, inventory, existing equipment, heavy machinery, or any other type of business asset. In some cases, you may also need to provide a down payment.

Note that some lenders may be willing to provide you with an unsecured loan that doesn’t require collateral, but these loans tend to charge higher interest rates.

5. Business Plan

Part of the process for determining your ability to repay the loan includes understanding how you plan to use the funds to grow your business. 

Take your time in creating your business plan to show the lender exactly what you want to do with the capital and how it’s going to impact your business in terms of real dollars.

Your business plan can also provide the lender with a background on your expertise and experience in your field. If you’ve been in this line of work for several years, your chances of failing are likely quite a bit lower than for a business owner who’s new to the industry.

6. Market Conditions

On top of your creditworthiness, lenders will also consider prevailing market conditions that impact your local business environment, the industry you’re in, your competition, and the economy as a whole.

In other words, it can be more difficult to obtain financing for businesses in certain areas or industries. 

You may not have a lot of control over this factor, but don’t be afraid to consult with your loan officer to get a better understanding of how market conditions can impact your approval odds.

How Easy Is It to Get Different Types of Business Loans?

There are a lot of different types of small business loans out there. And depending on the financial state of your business, your business credit, and how long you’ve been operating, some may be easier to obtain than others.

Bank Loans

These loans are offered by traditional banks and credit unions and can come in the form of a term loan or a line of credit.

Bank loans are among the most difficult types of business loans to get because they require an established, good business credit history, strong financials, and at least two or three years of operation. 

They also often require collateral, even in cases when your business credit history is in solid shape. In other words, if you’re just starting out or you haven’t taken the time to build your business credit history, bank loans may not even be an option for you.

That said, bank loans tend to offer flexible repayment terms and low interest rates compared to alternative options, so the stringent eligibility requirements are worth it for those who can qualify.

SBA Loans

SBA loans are business loans that are partially insured by the U.S. Small Business Administration. They can come in all shapes and sizes, including microloans, real estate loans worth millions, term loans, and lines of credit.

The SBA uses the FICO Small Business Scoring Service (SBSS) Score, which incorporates both business and consumer credit report data, as well as your financials and application information. 

The minimum SBSS score for 7(a) loans is 155, but you can qualify for a Community Advantage Loan with an SBSS score of 140. 

Note, however, that while the SBA insures loans, they’re actually being funded by private lenders, so lenders may set higher minimum credit requirements. They also typically require that you be in business for at least a couple of years and have strong revenue and other financials.

Depending on the type of loan you’re applying for and the amount you want to borrow, you may or may not need to provide collateral.

While SBA loans tend to be more difficult to get than other business loan options, they typically offer flexible repayment and favorable interest rates.

Online Business Loans

If your business is relatively new, bank loans and SBA loans may be out of the question. But you may be able to obtain a term loan or a line of credit from an online lender instead. 

Online business loans typically have higher interest rates and shorter repayment terms than bank loans and SBA loans. So, it’s crucial that you run the numbers to determine your capacity for repayment.

However, these lenders are also much more lenient with their underwriting. For example, you may not need a business credit history at all, and some lenders may even be willing to provide capital if your personal credit history is fair. 

Online lenders still typically have minimum requirements for annual revenue and time in business, but in some cases, you don’t even need to have a year’s worth of operating history to get approved. 

Just be sure to shop around and compare multiple options to maximize your savings.

Business Credit Cards

Business credit cards can be advantageous for new business owners because they typically don’t require a business credit history or even annual revenues. 

Even if you haven’t yet made a sale, you may be able to qualify if your personal credit score and income are enough to keep up with monthly payments.

Additionally, business credit card issuers may be willing to approve your application, even if your credit is considered fair or poor, though if you have bad credit, you may need to put up a deposit equal to your credit limit.

Finally, virtually all business credit cards require a personal guarantee when you apply. This is also common with some other types of business loans, but it’s ubiquitous among business credit card issuers. 

With a personal guarantee, you promise to pay off the card balance with your personal assets in the event that your business can’t.

Invoice Factoring 

If you’re trying to obtain financing using your customer invoices, invoice factoring can help you with very low or even nonexistent credit requirements for you. 

This is because the factoring company buys your invoice from you and collects the payment directly from your customer, so your customer’s creditworthiness is more important.

That said, invoice factoring may not help if your invoices aren’t large enough to secure the financing you need. 

Keep in mind, too, that invoice financing is different from invoice factoring. With invoice financing, you’re using your invoices as collateral, but you retain ownership of them. 

In this instance, you may be able to get financing without stringent guidelines, but the lender may still have a minimum credit requirement.

Merchant Cash Advance

Merchant cash advances are among the easiest forms of business financing you can get. In many cases, you can even get approved with bad credit.

That said, merchant cash advances do require that you have consistent credit and debit card sales or deposits into your business bank account. 

The provider will advance you a certain amount and take a percentage or flat amount from your sales or bank account weekly or even daily.

If you don’t have consistent credit and debit card sales or deposits, you may have a hard time obtaining a merchant cash advance.

One thing to note, however, is that while merchant cash advances are relatively easy to obtain, they’re also among the most expensive types of business financing, with some providers charging triple-digit APRs. 

So think carefully about your financing needs and potential alternatives before you pursue this type of financing.

FAQs

Is It Hard for a New Business to Get a Loan?

It’s much harder for new businesses to obtain financing than established businesses, but that doesn’t mean you’re out of luck. 

Online lenders and business credit card issuers can provide easier access to financing when you need it, though you’ll want to make sure you understand the interest rates, repayment terms, fees, and other features that could impact your ability to repay the debt.

What Disqualifies You From Getting a Business Loan?

Having bad personal or business credit can make it nigh impossible to obtain financing for your small business. Also, some lenders may not work with business owners in certain industries, such as casinos, cannabis, financial speculation, and more. 

Individual lenders will also have minimum requirements for credit, revenue, and time in business, so make sure you research these criteria before you apply in order to avoid wasting your time.

How Much Income Do You Need to Get a Business Loan?

There’s no set minimum income requirement for all forms of business financing. However, commercial lenders will use your business revenue and sometimes even your personal income, along with other financial information, to determine your ability to repay the debt.

In some cases, lenders will publish minimum revenue requirements so you can determine your own eligibility before you even apply. 

But that’s not always the case, so consider reaching out to a lender before submitting an application to see if they’re willing to give you some guidance on your approval odds.

What Credit Score Is Needed for a Business Loan?

There are business financing options available for business owners across the credit spectrum, though if you have poor or fair credit, your options are going to be quite limited. 

Also remember that having less-than-stellar credit typically means paying higher interest rates and fees along with shorter repayment periods, which can impact your business negatively. 

While some lenders will provide minimum credit scores up front, that’s not always the case, so consider asking beforehand to avoid an unnecessary hard credit check. 

If your personal or business credit score isn’t in good enough shape to qualify for affordable financing, take some time to improve both before you submit an application.

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