How Hard Is It to Get a Small Business Loan? Your Options

Susan GuilloryUpdated December 17, 2023

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re new to running your business, you might just now be realizing that if you had a little extra money, you could do great things with your company.You know that there are small business loans online and through banks and the U.S. Small Business Administration (SBA). But you may be asking yourself questions like, how hard is it to get a small business loan? Is it worth the hassle? How much red tape would I have to go through?The prospect of finding and applying for small business financing can be daunting if you’ve never dealt with it before. It can be helpful to know what might lower your chances of being approved for a loan. It’s also a good idea to do a little research before you apply to help you find your best chances.

Factors That Could Make It Harder to Get a Small Business Loan

Let’s turn back to the question, is it hard to get a small business loan? The answer is that it depends on your unique situation. Each lender has its own criteria for what type of business qualifies for financing. There are, however, a few common factors that might make getting approved more challenging as outlined below:

Your Business Is Brand New

How hard is it to get a loan to start a business? Often pretty difficult, as it turns out.Traditional lenders like banks, credit unions, and the SBA don’t often lend money to startups or startup companies. In fact, they may require that you have been in business a minimum of two years to qualify for financing.The reason for this is that a business that has been in operation for a few years may be seen as more established and less risky. In other words, it might be perceived as more likely to be able to pay back a small business loan.If your business is relatively new, you might want to consider other financing options like short term loans or merchant cash advances.

Your Business Is in the Wrong Industry

Some lenders, including the SBA, won’t lend to companies in certain industries or that have certain characteristics, like being based abroad. The SBA, for example, may not approve loans for a company that is:

Primarily involved in lending
Located in a foreign country
Using pyramid or multilevel sales distribution plans
Deriving more than ⅓ of gross annual revenue from legal gambling
Involved in illegal activity
A government-owned entity (except for businesses owned or controlled by a Native American tribe)
Primarily engaged in political or lobbying activities
A speculative business engaging in risky endeavors
Located within the Coastal Barrier Resource System
Otherwise in an ineligible category

It’s a good idea to look at a potential lender’s website to see what requirements it has for businesses that want to borrow money.

Your Revenue Isn’t High (or Consistent) Enough

Another factor that a lender may look at to assess the likelihood that you’ll be able to pay back your loan is your company’s annual revenue. If it’s not high, or if it changes drastically from one year to the next, a lender may not approve your loan application.The SBA, for example, typically looks for borrowers with $100,000 or more in annual revenue.

You Already Have a Lot of Debt

The more debt you have, the greater the risk may appear that you won’t be able to pay it all back.Lenders may want to see your business’s debt ratio. This is, your company’s total liabilities divided by its total assets. The higher that ratio, the more debt you have, comparatively. Lenders look at this number to determine whether they want to lend to you. Most prefer a debt ratio to be between 0.3 and 0.6.

Your Credit Is Poor

Are business loans hard to get if you have bad credit? They can be. At the least, your options for low-interest rates are likely to be reduced. Lenders may want to see your personal credit score (as well as your business’s credit score, if it has one yet). Typically, traditional lenders that look at your personal credit score will want it to be at least 650, but requirements vary, and may be even higher.Again, it’s all about risk. A low credit score can suggest some sort of financial issues on your part. Maybe you have a bankruptcy on your credit report. Or maybe you’ve missed a couple of loan payments or made them late. All of these are negative or derogatory marks that can lower your credit score. That can, in turn, impact your ability to get approved for financing.But getting a business loan with bad credit is still possible. There are many lenders who look at factors other than your credit scores to determine eligibility, including your annual revenues. Just know that funding from these lenders tends to have much higher interest rates.Recommended: Guide to Personal Credit vs. Business Credit

You Want to Borrow Too Much (or Too Little)

Even the amount you want to borrow may help determine how likely you are to be approved for a loan. If you’re looking to borrow just $5,000, you might not have luck with your bank. Some commercial banks may have a minimum loan amount starting at $25K. You can consider a microloan if you need less than $25K in business financing.On the other end, some loans have a cap, and if you need more than that cap, they’re not a good fit. Make sure to look around for lenders who can offer as much capital as you need.Recommended: Growing Your Landscaping Business or Launching One

Mistakes to Avoid

The good news is that if you’re searching for the term “how difficult is it to get a small business loan,” you’re already ahead of the game. That’s because you care about doing whatever you can to get the funding you need.To that end, here are some mistakes you can avoid:

You Apply for Only One Loan

Don’t make this rookie mistake! Your chances of getting approved at the first place you apply may be slim, depending on your qualifications. But another reason to explore and apply for many types of small business loans is because you may get a better offer at the fourth place you look than you get from the first.

You Apply Only with Your Bank

Let’s say you have excellent credit. You might assume the best place to get a business loan is with the bank you’ve had a relationship with for years.Not necessarily. It’s still a smart idea to shop around, whether that’s at other banks, credit unions, online lenders, or with the SBA. You can compare loan offers and choose the most competitive one.

You Don’t Ask for Enough/You Ask for Too Much

Let’s say you’ve calculated how much you want to borrow, but it turns out you missed the mark. So perhaps you run out of cash quickly and then discover that, unfortunately, lenders may not want to loan you money if you recently took out another loan.Or else you borrow too much but spend it all. Then once the money is gone, you’re having trouble paying it back.It’s critical to budget carefully when you’re figuring out how much you need to borrow for your goal. It’s equally important to have a plan to pay it back.

How to Improve Your Chances of Getting a Loan

There’s no guarantee you’ll get approved for a small business loan. That being said, building credit and making required payments when due can help. If your credit isn’t good, you may want to spend several months building it.

Other Small Business Loan Options and Alternatives

Traditional loans through a bank, credit union, or the SBA aren’t for everyone. Even if you don’t qualify for those, there are other options to consider:

Alternative Small Business Loans

Yes, there are small business funding alternatives to traditional financing, and they tend to have more lenient qualifications for potential borrowers. You might explore options like business lines of credit or merchant cash advances. But know that some of these may have higher interest rates if you have poor credit.

Small Business Grants

Another way to get access to capital — and one that doesn’t require repayment — is a small business grant. There are government agencies and private corporations that offer grants to businesses to help them grow. Some are aimed at specific groups, like veterans or minorities who are running businesses. And some may have requirements about the industry you’re in.You may explore small business grants in your particular state, such as the following:

Crowdfunding

Here’s one last option to consider: small business crowdfunding. With crowdfunding, you attract investments from anyone who wants to support your company. Typically, these funds don’t have to be repaid, but you may need to provide a token of gratitude for different tiers of investments.

The Takeaway

In the end, the answer to is it hard to get a business loan is that it really depends. The good news is, by being diligent about reviewing what you need to qualify for financing, you’re already one step ahead. If you need small business loans, Lantern by SoFi can help. Just fill out a simple form and find the right financing for your business.Lantern can help you find fast funding for your small or medium-sized enterprise.

LCSB1223010

About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

Share this article: