Is It Easy to Get a Business Loan?
Getting a business loan can be challenging, especially if you haven’t been open very long. Fortunately, services that provide quotes from multiple lenders make it easier to get funding for your company than ever before.
You can try these tips if it’s been tough for you to find an affordable business loan:
- Build your personal credit score. You’ll need to show a strong history of paying bills on time. You can also boost your score by using no more than 30% of your available credit. In other words, if you have a personal credit card with a $5,000 limit, try not to carry a balance of more than $1,500 from month to month.
- Make sure you can afford to repay a business loan by looking at cash flow. For this calculation, divide your operating income after expenses by the total debt you take on each year for your business. Ideally, you should aim for a cash flow ratio of more than 1, which means you make more money than you spent paying off debt. Most banks want to see at least 1.35 for business loan approval.
- Develop a comprehensive business plan. If you can’t show a detailed document with full financial projections, lenders may question whether the company has a solid foundation.
- Expand your search. If you’ve only looked at one or two types of loans, you may want to consider additional forms of business funding.
What Types of Business Loans Are Available?
The best business loan for your needs varies based on factors like the type of business, the amount you want to borrow, and why you need the money. Exploring multiple loan types increases your chances of a successful application.
Loans in each of the common categories below may be secured or unsecured. Secured loans are covered by collateral like equipment or a vehicle. If you don’t repay the loan, the bank can seize the property that secures the loan. Unsecured loans don’t require collateral, so they often have stricter approval guidelines.
Funding from the U.S. Small Business Association is a smart choice if you have average credit or below. Guaranteed government repayment means it’s easier for small businesses to qualify for funding through the SBA than through other channels.
The three main SBA loan types include:
- Microloans of up to to $50,000 for equipment, supplies, inventory and/or working capital
- 504 loans of up to $5 million for real estate, equipment, or upgrades that increase the value of property you already own
- 7(a) loans of up to $5 million to buy another company, obtain working capital, or otherwise grow your business
SBA loans have an estimated APR of 3% to 13% and terms of up to 25 years. They’re often the most cost-effective way to get small business funding if you have bad credit, but approval can be slow.
Traditional Bank Loans
Term loans from traditional lenders like banks and credit unions usually have a fixed interest rate of around 9%, so it’s an affordable option if you can meet the relatively strict approval requirements. Most applicants need to provide collateral or a personal guarantee, and you’ll need a credit score of at least 680. Your monthly payments will stay the same for the life of the loan, typically about 10 years.
Business Line of Credit
This type of business loan is similar to a personal credit card. Your company has an open line of credit up to a certain amount. You can make purchases until you reach that limit, making monthly payments toward the principal each month along with interest. Business credit lines usually have interest rates ranging from 7% to 25%.
Accounts Receivable Loans
If you have outstanding invoices, you can get this type of secured business loan. Accounts receivable loans are good for businesses with bad credit since they use your company’s invoices as collateral. Designed to help you pay for short-term expenses and debts, these loans carry an interest rate of anywhere from 10% to 60%.
Merchant Cash Advance
If your business has bad credit but strong sales, you might want to consider a merchant cash advance. Rather than checking your credit rating, this loan lets you borrow a percentage of your future credit card transactions. However, you’ll need to pay a steep interest rate ranging from 40% to 150%.
Equipment and Construction Loans
Your company can use these secured loans specifically for equipment or real estate renovation. For an equipment loan, the equipment acts as collateral. In the case of a construction loan, the property itself counts as the collateral. Equipment and construction loans typically have interest rates around 4% to 40%.
Short-term business financing could also work if you don’t have the best credit. These loans last about three years and top out at about $500,000, but you can borrow much less.
Online lenders usually offer short-term loans and you can even receive the funds within a few days if you qualify. While you might be eligible for an APR of around 8%, some lenders charge sky-high rates of up to 99%. You should also keep an eye out for expensive fees.
What Are the Most Important Requirements for Business Loans?
Lenders consider several factors for approval, but the most important requirements are:
- A good credit score, generally defined as at least 690. However, some online lenders specialize in funding for business owners with bad credit.
- Minimum revenue, often from $50,000 up to $250,000 or even higher depending on the lender. If your company doesn’t make that much yet, you could potentially get a microloan from the SBA or a business credit card.
- Length of time in business. Most traditional banks require at least two years of operation before approval, but you can try for an online small business loan just one year after you open.
How Do I Apply for a Business Loan?
The application process varies for different types of business loans. In general, however, you’ll need to submit the following information to your lender:
- A business plan that describes the purpose of your company and explains how you plan to use the money you borrow
- Resumes for your executives
- Certificates, licenses, and permits for your business
- A history of the company’s cash flow and future revenue projections
- Bank statements from both your personal and business accounts
- Personal and business credit reports, or permission for the lender to run a report for you
- Two to three years of business tax returns
- Three to five years of revenue records
- Current legal contracts, including partnership and franchise agreements
- Current profit and loss statements
What Is an APR?
APR (annual percentage rate) is the total cost of your business loan each year. It combines all the payments, fees, and charges stated in your loan contract. While APR is important, it’s not the only thing that matters when selecting a business loan. By getting quotes from multiple lenders, you can compare APR alongside factors like lender reputation and repayment terms.
American Express Business Blueprint™ Disclosure
If eligible, you can be approved in minutes for a line of credit from $2,000 to $250,000 when we are able to automatically obtain your business data and verify your bank account. If a manual review is required, it will take longer to provide you with a decision. American Express® Business Line of Credit offers access to a commercial line of credit between $2,000 to $250,000. Each draw on the line of credit will result in a separate installment loan. All loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee. Monthly fees range from 3-9% for 6-month loans, 6-18% for 12-month loans, 9-27% for 18-month loans, and are subject to change for future loans drawn under the available line of credit. Not all customers will be eligible for the lowest fee. Not all loan term lengths are available to all customers. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. Lines of credit are subject to periodic review and may change or be suspended, accompanied with or without an account closure. Late fees and return payment fees may be assessed. Loans are issued by American Express National Bank.
* All businesses are unique and are subject to approval and review.
The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.