Inflation, rising interest rates, and economic uncertainty have made it a challenging time to get business funding.
The simple truth: How hard it is to get a business loan depends on how lenders judge your ability to repay the money you receive from them. Inflation, challenging financial conditions, rising interest rates, and economic uncertainty have made it more difficult for business owners to pay back financing.
And while you canât control macroeconomic conditions, you are able to rise above certain factors that go into loan approvals. This article explains what they are and what you can do to gain control over them, so you increase your chance of getting approved for a small business loan, even during these challenging times.
Lenders make small business owners prove that they manage money well and have the revenue required to pay back a small business loan. Itâs critical to have an adequate cash flow to make monthly loan payments.
Prospective lenders will ask you to submit banking and accounting statements when you apply for term loans and other types of financing. Theyâll do a cash flow analysis to see if you have enough cash at the end of the month to pay back the money they provide to you â or could have it based on how you plan to use the loan dollars.
Before applying for small business financing, go over your business financials with an eye on how lenders view them. Ensure that you have enough money to pay back a loan and still earn a profit. If your small business finances donât look completely clean (something thatâs becoming more common because inflation is leaving many companies strapped for cash), take steps to get them into better shape before applying for financing.
Time in business
Most traditional banks and lenders require that borrowers be in business for at least two or three years before they approve them for financing. Startups and other new businesses have a hard time qualifying for traditional loans. Established businesses find it much more manageable. Some online and alternative lenders have less stringent requirements.
Simply staying in business demonstrates to lenders that you have a history of consistent sales, decent cash flow, solid profits, good management, and a satisfying consumer experience. The longer your business track record, the more likely it will remain in business so you can make monthly payments on the loan. And the more likely you will be approved for financing with competitive rates and terms that could help your business move forward into a better future.
This is an area where business owners have a LOT of control. Small business lenders consider the ownerâs and the businessâs credit scores by reviewing credit reports as part of the loan approval process to determine creditworthiness.
Most experts say it takes a minimum personal credit score of 700 and a business credit score of 155 to get approved for financing with a reasonable interest rate and loan term. This is particularly important in 2022âs rapidly increasing interest rate environment.
If you have bad credit scores, take steps to improve them before applying for a business loan. Make it a point to pay bills on time, increase your savings, limit your use of credit to reasonable levels, and maintain healthy cash flow. Doing these things consistently will ensure that your personal and business credit scores will improve over time, making it more likely youâll be approved for financing.
Collateral is something of value owned personally by the small business owner (personal guarantee) or the company (business guarantee). It can be anything including a vehicle, property, jewelry, or investments. Your lender can seize your collateral and sell it if you fail to make payments on your business loan. Always make certain you have assets you can put up for collateral before applying for a business loan. Consider whether itâs something your business â or you personally â could afford to lose if you default on your loan.
Lenders want to know how entrepreneurs plan to use the funds loaned to them. Will you leverage them to grow your business or improve its condition? The only way you can prove this is by submitting a complete business plan when you apply for a loan. Most banks and traditional lenders will require this.
Your business plan should include a complete overview of your business, an explanation of how you plan to use the loan money, historic bank records, and tax returns, and financial projections that demonstrate the positive impact the financing will have on your organization.
If youâre unsure how to write a business plan, templates are available online through entrepreneurship organizations and the Small Business Administration (SBA). Itâs a smart idea to use an SBA template if you plan to apply for a loan backed by a government agency.
During uncertain times like today, your business plan is a powerful tool you can use to qualify for a small business loan.
If flush times when most businesses have solid cash flow, itâs easier to qualify for larger loan amounts. In 2022, with inflation rates on the rise and interest rates increasing, you have to be realistic about the amount of financing you request. All lenders scrutinize loan applications to ensure funds will be paid back.
Unless you and your business have excellent credit scores, youâve been in business a long time, can demonstrate a solid operating record, and have good cash flow and solid annual revenue, you may qualify for less financing than you expect. If youâre considering applying for a small business loan this year, be realistic about how much you could be approved for. If itâs not what you need to get through a rough patch or take your business to the next level, it might make sense to wait to apply in 2023 or beyond when things return to a more economic normal. Getting too little funding could result in you being strapped for cash, putting your operation’s future at risk.
A lender â even in challenging times like 2022 â is more likely to approve people theyâve successfully loaned money to before than ones they havenât. While itâs always important to explore your options, itâs a good possibility youâll get the best deal from a bank or other lender youâve done business with before.
Loan application process
Another area that you have significant control over when it comes to being approved for a business loan in 2022 is the actual application process itself. Getting it right increases your likelihood of being approved. Submitting a sloppy or incomplete application puts your chances at risk.
Start by reviewing your companyâs finances and decide how much funding you need, when you need it, and the purpose of the loan. Ask yourself these questions:
- How much do you need to borrow? You could secure a microloan for as little as a few hundred dollars, while SBA loans could provide a maximum loan amount of $5.5 million.
- How soon do you need the funding? You can receive money in as little as one day from an online or alternative lender, 36 hours with an SBA express loan, or up to three months for some SBA and traditional bank loans.
- How good is your credit score? You will likely need a personal credit score of at least 670 and a business credit score of at least 160 to qualify for financing from a traditional financial institution or one backed by the SBA. Different lenders have their own minimum credit score requirements and definitions of good credit. If your credit history isnât good enough, you may be better off applying through online or alternative lenders that may not have as rigorous requirements.
- How much can you afford to pay back each month? As Iâve already covered, when it comes to getting a business loan, itâs not how much you need to borrow, but what you can afford to pay back thatâs more important to lenders.
- Do you need a lump sum of cash or ongoing funding? A term loan could be a good solution if you need money for a single purpose. A business line of credit makes more sense for ongoing cash needs.
Once you understand why you need a loan, when you require cash, and how much money you need and can afford to pay back, the next step is to select the correct type of loan and provider.
Financing options and providers
Selecting the correct type of financing will improve your chances of getting approved. Here are some standard business loan options.
- SBA loans. The U.S. Small Business Administration partially guarantees many types of loans offered through providers approved by the agency. Some popular SBA loan programs include its SBA 7(a) loans and microloans. They come with low interest rates and favorable terms. You must have excellent personal and business credit scores to qualify and be in business for at least three years.
- Term loans. Short-term loans and long-term ones can be used for many business purposes. Term loans from banks, brick-and-mortar financial institutions, and traditional lenders come with relatively low interest rates but are challenging to qualify for. Itâs easier to get approved through online and alternative lenders, but interest rates are higher.
- Equipment loans. Equipment financing is used to finance the equipment and machines small businesses depend on. They typically come with relatively low interest rates because theyâre collateralized by the equipment theyâre used to purchasing.
- Microloans. Microloans are offered to minorities and businesses in disadvantaged areas for relatively small amounts through a non-profit community-based lender.
- Business line of credit. This is a flexible type of revolving credit that allows you to access a pre-approved amount of money when you need it. You only pay it back with interest when you use the cash.
- Working capital loans. This form of funding is a type of term loan used to improve cash flow and for everyday business needs.
- Commercial real estate loan. Commercial real estate financing is a long-term loan used to purchase property. These loans typically come with extremely long terms, often up to 30 years.
- Business credit cards. Credit cards are a smart way to pay everyday business expenses and separate them from personal ones. Interest rates are typically too high to use them to fund significant business expenses.
- Merchant cash advance. You receive financing based on the future earnings of your business. Credit scores are not considered during the approval process. Be aware that merchant cash advances come with very high interest rates.
- Accounts receivable financing. You can leverage your outstanding invoices to get financing through invoice financing. This is another costly funding option.
- Invoice factoring. With invoice factoring, you sell outstanding customer invoices to a factoring company at a discount (often a significant one). The factoring company then collects on the invoices, which could put customer confidence and trust in your business at risk.
- Personal loans. A personal loan from your bank or credit union can be used to finance your business. This is a common practice among startups. Be aware that your personal credit score could be harmed if you default on the financing.
- Small business grants. While technically not loans, grants from foundations, government agencies, and other organizations can be the best funding for small businesses because you donât have to pay it back.
Shop around for providers
Different lenders specialize in various types of loans and use their own criteria to approve them. You owe it to yourself to shop around to find the right provider to meet your needs.
During the underwriting process, your lender will likely request certain documents, such as a business plan, personal and business income tax returns, bank statements, financial statements, and your business balance sheet. Having these things handy will make the loan application process faster and smoother.
Apply to small business lenders
If you apply for a loan through a bank, credit union, or SBA-approved lender, the process will likely be a cumbersome one that could take weeks or months. However, you will probably be rewarded with relatively favorable interest rates and loan terms. The loan application and approval process is less diligent with many alternative and online lenders. You could get same-day approval and have the money deposited into your business bank account the next business day. However, youâll pay for the speed and ease of getting cash.
When you receive offers, review them to choose the best one. Hereâs what to consider:
- Annual percentage rate. The top factor you must consider is the interest rate on the loan, but itâs not the only one.
- Total cost. Donât just look at the interest rate. Also, consider fees, such as origination fees, prepayment penalties, and other unexpected or hidden expenses.
- Amount and term. Check that the loan provides as much cash as you want for as long as you need to pay it back.
- Repayment terms. See how quickly you need to repay the loan and whether the payments are manageable.
Always ask questions if any part of a loan offer isnât 100 percent clear to you. Another option is to check out the Frequently Asked Questions (FAQs) section of a lenderâs website.
Accept the best small business loan offer for you
If youâve managed your personal and business finances carefully and done your due diligence, you should be able to secure the funding you need for your small business. When you do, use the funding as intended to take your operation to the next level.