How Hard Is It to Get a Business Loan?

Getting a business loan can be an intimidating and complex process. It involves extensive paperwork, time-consuming research, and skillful negotiations.

It is not impossible to obtain a business loan, but there are specific requirements that most lenders will have to approve a loan. You will need to demonstrate proof of good credit, steady income, sufficient collateral, or a solid business plan before a loan can be approved.

After years of running my own business, I have plenty of experience attempting to secure financing from traditional lending institutions. During these experiences, I’ve learned that the loan qualification process is complex, often lengthy, and requires gathering the necessary documents and presenting them in a way that satisfies lenders.

In this article, I will explain what a business loan is, who is eligible to apply for one, and how to prepare yourself to get approved. These factors can contribute to an overall difficulty rating when obtaining a business loan.

What Is a Business Loan?

A business loan is a type of financing that allows a company to borrow money from a lender, such as a bank or credit union, to finance the growth and development of their business. Yet there are many different types of business loans, so it is essential to know which one you need before applying.

Business loans can be used for various needs, such as: 

• Operating costs
• Capital investments
• Expanding operations
• Acquisition of new assets
• Purchasing new equipment

Business loans are typically provided in the form of either short-term or long-term loans, depending on the borrower’s specific needs. Short-term business loans offer quick access to funds for immediate cashflow needs, whereas long-term business loans provide more manageable payments over a more extended period.

However, business owners who look into small business loans should be aware that getting approved for a loan can involve lengthy paperwork and an in-depth analysis of the applicant’s financial situation, so it’s essential to ensure that all documents are accurate before applying.

Why Is It Hard to Get a Business Loan?

Getting approved for funding may require considerable effort, patience, and luck on behalf of the business owner. Although, borrowers will need to prove they have a sound plan for using loan funds effectively and can repay the debt over time without defaulting on payments.

Once an application is sent, lenders will assess the overall creditworthiness of a business by looking at its previous repayment history, the collateral pledged against the loan, and its current cash flow before it is approved.

Businesses must provide extensive documentation and a business plan detailing every aspect of their operations and outlining why they need the loan and how they plan to use it. They must also show strong credit history and some collateral to secure the loan before it can be approved.

In addition, lenders may also require additional information, such as financial statements or tax returns, to understand your business’s finances more accurately.

The interest rate on a business loan can vary depending on factors such as credit history, repayment period length, and loan amount size. Approval times for most loans may range from one week to several months, depending on the complexity of the application.

What Documents Do You Need for a Business Loan?

As previously mentioned, securing a business loan requires a substantial amount of paperwork. That is why it is vital to keep detailed records of all your expenses over the past few years that demonstrate the stability of revenue coming in.

The most important documents you will need to provide lenders include the following:

• Collateral
• Credit report
• Business plan
• Bank statements
• Business Licenses
• Business income tax return
• Loan purpose and use documents
• An employee identification number (EIN)

Let’s take a closer look at each one of these documents!

Collateral

Collateral is anything tangible you can offer the lender and is an important asset or source of funding to secure a loan. However, the amount and type of collateral required are usually based on the size and purpose of the loan.

It can come in a variety of forms, such as:

• Jewelry
• Vehicles
• Real Estate
• Other valuable property

Although, borrowers should always accurately understand the risks associated with using their assets as collateral before signing any agreement. By providing collateral, borrowers can reduce the lending risk, as lenders can seize it and recoup their losses if they default on payments.

Credit Report

A credit report gives lenders an overview of your financial history and demonstrates how you have handled previous debts. The information in the report can be used to decide whether or not to approve the loan application and determine the appropriate interest rate.

However, those with poor credit ratings may be required to pay more significant interest rates or provide additional collateral before they are approved for a loan. It also gives lenders a good idea of how likely they will receive their money back if they decide to extend a loan.

Business Plan

Developing a business plan is an essential document that all business owners should prepare when applying for a loan. It outlines the company’s goals, strategies, financial needs, market analysis, and future projections.

A comprehensive plan includes information about a business’s: 

• Marketing plan
• Financial forecasts
• Management team
• Operational strategy

Business owners should ensure their plans are up-to-date and accurate to give lenders confidence to repay any loans they might receive.

A thorough and detailed business plan guides potential lenders to understand a company’s overall goals and potential for success. It allows them to assess the risk associated with loaning the business.

Bank Statements

When applying for a business loan, it is essential to provide bank statements that accurately reflect the financial health of your business. Bank statements will provide a detailed snapshot of your bank accounts over a certain period, including deposits and withdrawals.

In addition, they may also show any outstanding debts or missed payments. By providing bank statements with your loan application, you can demonstrate to potential lenders that you have accurate records and are in good financial standing.

Business Licences

Business licenses are essential for securing a business loan. Lenders will require that you have a valid and up-to-date right issued by the local government and other associated permits and certifications.

Depending on the type of business, specialized licenses may be required. It is wise to check with your local government agency to ensure you have all the necessary paperwork before applying for a loan.

Business Income Tax Return

When applying for a business loan, it is crucial to provide the lender with a completed income tax return as part of the loan package. The income tax return should be prepared by an accountant and should include detailed information about company revenues and expenses.

This document will help lenders determine the company’s financial health and ability to repay the loan. It will also provide lenders with an overview of the company’s current assets and liabilities and any potential sources of income that could help repay the loan.

Loan Purpose and Use Documents

When applying for a business loan, it is important to understand what the loan will be used for. Documents that help establish the purpose of the loan include a business plan, a financial statement, tax returns, and proof of reliability.

Additional documents, such as a detailed cash flow projection or collateral agreements, may also be required depending on the lender. Having these documents ready with accurate information can help speed up acquiring a business loan. 

An Employee Identification Number (EIN)

An employee identification number (EIN) is a nine-digit number issued by the IRS that identifies business entities. Applying for an EIN is not necessary to start a business, depending on its location, but it’s required when applying for a loan.

Having an EIN will help lenders quickly verify the identity of your business and provide them with additional information about your business. It will also help protect the identities of those associated with the company and make filing taxes easier.

Business Loans and Credit Scores

Business loans are a great way to get the funding needed to get your business up and running, but they have some strict requirements. One of these requirements is an acceptable credit score.

What Is a Business Credit Score?

A business credit score is a numerical representation of a business’s creditworthiness that range from 300 to 850. The higher the score, the better chance a company has of securing a loan and getting favorable terms.

Do Business Loans Look at Personal Credit?

Business loans are highly dependent on the personal credit of the applicant. Most lenders will look at the personal credit score of the individual requesting a loan before they decide to approve or deny the loan.

This is because lenders need to have confidence they can get money back if they lend. Business owners should ensure their credit is in good shape before applying for a business loan since this can significantly increase their chances of being approved for the requested funds.

What Is the Average Credit Score Needed for a Business loan?

Lenders typically require a credit score of at least 500 for most business loans, but higher scores often result in better terms and lower interest rates. That is why ensuring your credit is in good standing before applying for a loan is important.

How Hard Is It to Get a Business Loan with Bad Credit?

Those with poor credit scores may still be able to secure a loan in some instances, but they may need to provide a bank or lender with additional collateral or larger down payments. Therefore, it is vital for those seeking a business loan with bad credit to be aware of these extra hurdles and plan how to mitigate them.

Business Loans and Your LLC

The legal structure of a business can also affect the chances of getting approved for a loan. Those with a Limited Liability Company (LLC) may face more challenges since lenders see LLCs as higher risk than corporations or sole proprietorships.

However, LLCs can still obtain business loans with an experienced lender and the proper documentation.

Is It Hard to Get a Business Loan With an LLC?

Securing a business loan for your LLC can often be one of the most challenging tasks for entrepreneurs. Depending on the loan size, lenders may ask for detailed financial statements, tax returns, business plans, and letters of credit to verify that your LLC can repay the debt.

Financing institutions may also want to analyze the collateral for covering unpaid debts and review the company’s credit history. The terms and conditions of business loans generally depend on how well-established a business is, as lenders are more likely to offer substantial loans to companies with long track records.

How Big of a Loan Can an LLC Get?

The size of a loan an LLC can get depends on various factors, such as the credit score of the individual requesting the loan, how much collateral is available, and the business’s financial stability.

Nonetheless, lenders are more likely to offer larger loans if they believe the borrower has a greater chance of repaying the debt. Therefore, proving your organization is well-structured and financially secure can help you secure substantial loans for your LLC.

Does an LLC Have Its Own Credit Score?

An LLC typically does not have its own credit score, as it is considered a legal entity and not an individual. Most lenders will consider the personal credit score of the individual applying for the loan before deciding to approve or deny it.

Additionally, because the LLC is considered separate from its owners, lenders may also look at the business’s financials to evaluate loan applications.

Why Do Banks Reject Small Business Loans?

There are several reasons why banks reject small business loans. Most banks are wary of lending money when too much risk is involved.

Therefore, entrepreneurs need to present a compelling case to the bank by demonstrating that their business has the potential for success and can repay any borrowed amount.

Here are some of the main reasons why a bank might reject a loan:

• Lack of collateral
• Poor credit history
• Risk in your industry
• Short business history
• Lack of documentation

Let’s take a more in-depth look at each of these reasons!

Lack of Collateral

Banks usually ask for collateral to back up any funds they lend, which helps them recoup their loan payments if a borrower defaults. Although, they are less likely to approve your business loan application without sufficient collateral.

Poor Credit History

As mentioned earlier, banks will often review an applicant’s credit score before deciding. A lower personal credit score will increase the risk of default, making lenders less likely to approve the loan request.

You can also improve your credit score by making timely payments on current accounts, which will help to increase the likelihood of being approved for a loan.

Risk in Your Industry

Banks may reject applications if they believe your industry is too risky or unstable. To mitigate this risk, you’ll need to showcase your business’s solid financial history and potential for growth.

Short Business History

A short business track record can also affect your chances of getting loan approval. If your LLC is newly established, you must provide extra documentation showing the organization has the funds to repay any debt it takes on.

Lack of Documentation

Lenders will also be more likely to reject an application if they don’t receive the required paperwork. To avoid this, promptly provide all the requested documents and financial statements.

Conclusion

The process of obtaining a business loan can be complex and time-consuming. It is important to research different lenders and find one that fits the specific needs of your business.

It is also essential for an applicant to prepare the necessary documentation and build a strong credit score to increase their chances of being approved. By following these tips, securing a business loan is much smoother and more successful.

Are you a small business owner applying for a business loan? Do you have any questions about how hard it is to get a business loan? Let us know in the comments below!