Are Small Business Loans Hard to Get?

by Backd Business Funding
October 25, 2022
Are Small Business Loans Hard to Get?

Whether you’re looking to expand your service offerings, repair or replace equipment, grow your inventory in preparation for a busy season, or take care of any other business priorities, access to working capital is a necessity. And while your revenue can likely cover you in most situations, there may come a time when you need an influx of cash to cover a high-priority or urgent need. That’s where small business loans come into play.

But are small business loans hard to get? And if you’re struggling to find an option you qualify for, what alternative methods exist?

Small Business Loan Requirements

Every small business loan, whether it’s backed by the Small Business Administration (SBA), a bank, or a credit union, will have its own requirements. Here are some of the basic requirements to help you understand, at a high level, how to get a small business loan.

  • Credit Scores: When applying for a small business loan, your credit scores will be evaluated. While requirements vary, individuals with higher personal and/or business credit scores are more likely to qualify. What is the minimum credit score for a small business loan? In general, those with “excellent” or “good” credit scores are more likely to qualify. These numbers range from 690 to 850.

  • Business Plan: Many lenders will ask you to submit your business plan as a part of the loan process. You will be asked how you plan to use the loan funding and how you’ll be able to afford loan repayments.

  • Financial Information: Be prepared to share bank statements, cash flow reports, and balance sheets, in addition to information about your monthly and annual revenue. Lenders will use this information to assess your business’ financial health.

  • Collateral: Some loans may require collateral, or assets they may seize should you fail to make repayments. This might include things like equipment or real estate.

As you look for loans or other financing options, be sure to understand what information you need to apply. 

What Disqualifies You From Getting an SBA Loan or Other Small Business Loans?

In general, there are a few different things that may make it challenging to qualify for a small business loan. Now that we’ve looked at some of the basic requirements, let’s look at some of these: 

  • Lower Credit: As discussed above, lower credit scores may make it difficult to secure an SBA loan or a loan through a bank or credit union. Those with credit scores under 640 may struggle to qualify for traditional small business loans or SBA loans.

  • Limited Revenue: Some lenders may require a certain amount of annual revenue in order to qualify for a loan, often between $50,000 and $250,000 depending upon the loan amount. 

  • Limited Cash Flow: In addition to annual revenue, lenders often look at cash flow to gauge how likely you are to be able to make regular, consistent payments on your loan. If you have limited or seasonal cash flows, qualifying for a loan may be a challenge.

  • Short Time in Business: If you’ve been in business for a short period of time, you may struggle to secure a traditional loan. Most lenders require companies to have been in business for somewhere between six months and two years before approving a loan.

Why Is It So Hard to Get a Small Business Loan?

For many small companies, loans are hard to qualify for. In fact, approval rates for small business loans from banks and credit unions are currently hovering somewhere between 15% and 21%, depending upon the lender. While these numbers are slowly growing, they’re still significantly lower than they were before the pandemic. 

Why has it become so challenging to qualify for a loan? It’s not necessarily that the requirements for a small business loan from the government, banks, or credit unions have changed. Lenders have historically wanted to ensure—to the degree possible—that their applicants will be financially able to repay the loan. But, the current state of the economy presents a lot of challenges for small business owners, such as:

  • The labor demand has increased wages across the board. While this is certainly a benefit for many employees, it is impacting businesses’ ability to hire and their bottom lines.

  • Business owners are struggling with inflation. As of September 2022, inflation rates hovered at about 8.2%, as compared to the 1.4% rate we saw in September 2020. Inflation directly impacts the price of raw materials or finished goods and ultimately a company’s profits.

  • Supply chain issues remain persistent. These include port crowding, driver shortages, and price increases. Until the supply chain regains some degree of normalcy, companies may struggle to keep up with business as usual.

For some small businesses, all of this may add up to lower credit scores as well as limited revenue and cash flows. So what are your other options?

Are There Alternative Financing Options Available?

Whether you’re struggling to qualify for SBA or traditional bank-backed loans or you’re simply asking yourself, “Is it smart to get a small business loan right now?,” it’s important to understand all your options. Alternative business financing by Backd is a loan alternative that empowers small businesses to bridge their cash flow gaps. Whether you need help to cover seasonal inventory, paychecks, high overhead costs, new equipment—really, anything you may need for your business—we’re here.

Backd provides working capital financing with easy payment structures, amounts that range from $10,000 to $2 million dollars, all with a quick, 24-hour decision! To qualify, you simply need to:

  • Have been in business for one year

  • Have a minimum annual revenue of $100,000

  • Have ownership of a business bank account

  • Have a brick-and-mortar business in the U.S.

Ready to get started?

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What would you do with the right amount of capital?

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