Building a business often requires financial assistance. Many businesses need a loan to grow or even start their business. Cash is essential to running a business and often that means supplementing with a business loan. But, for small businesses in particular, getting approved for a loan isn’t always easy.

So, how hard is it to get a business loan? What do you need to acquire a loan, and how can you improve your chances of success?

How difficult it is to get a business loan will depend on many factors, including your business’s financial success, your personal finances, and more. Read on to learn what it takes to get a good loan, and what you can do to ensure the terms are favorable.

How hard is it to get a business loan?

The difficulty associated with getting a business loan depends on a number of factors, like your debt-to-income ratio, how much you’re trying to borrow, your annual and projected revenue, and your credit history. Even if you’re lacking in one area, it’s still possible to get a loan.

However, it’s important to remember that the better your rating in each area, the more favorable terms you’ll get. After all, lenders want “good” risks. They look for businesses who are likely to pay their loans back, with interest. That’s how they make money. Therefore, when you’re looking for a lender and applying for loans, it’s important to look for institutions who will work with a business like yours.  

How do you get a small business loan?

The process for getting a small business loan is often a matter of applying for the loan and waiting to find out if you’re approved. Here’s a step-by-step guide to help you through the process.

Determine how much money you need

There are three popular reasons businesses take out loans: expanding the company, funding operating expenses, and refinancing existing loans. However, you might take out a loan for other reasons, such as emergency cash flow or refurbishing your existing workspace.

The most important factor here is to determine how much money you’ll need. For example, if you need to remodel your premises, get quotes from contractors first. If you’re trying to purchase new equipment, it’s easy to find out how much that will require. Don’t forget to factor in hidden costs, such as maintenance, insurance, utilities, and more.

Furthermore, if you’re working in an industry where tight margins are normal, this can affect whether you’re able to repay the loan. This is important to keep in mind when applying for loans: some banks may not consider you a safe investment.

Prepare your business plan

Most private lenders will decline loan applications unless they’re accompanied by a detailed business plan so you’ll need to create one if you haven’t yet.  Established companies may already have one. If that’s the case, simply review and amend as necessary to show your company’s current status. Most private lenders will decline loan applications unless they’re accompanied by a detailed plan.

The key here is to show your lender how your company operates and why you expect to be able to repay the loan. If your plan seems viable, you’re much more likely to be approved.

While there are lenders who will approve loans without a business plan, they may not have the most favorable terms. It’s important to research your options carefully.

Research repayment terms

Although a loan provides a fast cash influx, you will eventually need to repay it. Look at your business plan and current financial status to decide what you can afford to pay back, even if your profits stay at the same level. Factor in circumstances you can’t control, such as issues with the supply chain, seasonal dry spells, and political, social, or widespread economic changes.

Your lender will decide how much you should be able to repay, typically based on the type of loan, your business type, how profitable you are, how long you’ve been in business, your income, and your credit history. Naturally, a responsible owner who always makes their payments on time and whose profits increase regularly will get better terms than a brand-new company that’s still growing.

It’s also important to keep repayment periods in mind. Many loans allow you to repay over several years—but if you’re taking out a long-term loan, make sure your company is well positioned to stay in business for the duration.

Talk to your financial advisor

Financial advisors can provide key information about different kinds of loans, repayment periods, and what the “true” cost of the loan will be. Best of all, they can evaluate your finances and help you create a repayment plan that works for your individual business needs. If you don’t already have an advisor, this is a great time to find one.

Choose which type of loan you want

Finally, you’ll need to decide which type of loan you want to apply for. Here are the most common types:

  • Term loans: This is the most common type of business loan. It’s usually repaid over two to 10 years, but the application requirements may disqualify many new or struggling businesses.
  • SBA loans: Small Business Administration loans are similar to term loans. They typically offer loans with better terms to companies who might struggle to find financing elsewhere. You’ll generally need a business plan and some collateral, and repayment periods may be up to 25 years.
  • Online loans: Online lenders are becoming more popular, especially those who offer unsecured loans to small businesses. Many offer both short- and long-term loans to businesses with lower scores, shorter time in business, and whose revenue is low.
  • Invoice factoring loans: If your company waits a long time to get paid, invoice factoring can help manage your cash flow. Lenders will purchase outstanding invoices. When your clients pay, you pay the lender with interest.

What affects the chances of business loan approval?

Factors affecting business loan approval include:

  • Time spent in business
  • Credit history, both business and personal
  • Collateral (or lack thereof)
  • Business plan
  • Annual revenue
  • Amount of the loan

Depending on how you score in these areas, it can be difficult to get a good business loan. However, there are always lenders who will work with newer, less profitable businesses that may not have collateral.

How to improve your chances of getting a good business loan

The best way to improve your chances of getting a loan is to critically evaluate your business’s status. Try to gather all the documents and information you’ll need before applying, such as business name and contact information, your business plan, personal and business financial statements (including credit history), and personal details about the business owners.

When you have this information ready to go, it’ll be easier to tell which lenders will approve your application, and whether you’ll need to accept less favorable terms to get your cash influx.

Another key way to improve your loan application is to build your credit history. For example, by making on-time credit card payments. 

Bolster your business finances with North One

North One’s small business banking services make it easy to track your small business finances, making business loan acquisition a bit easier. From low fees and favorable terms to great customer service, you’ll always know exactly where your business finances stand. Sign up for an account today!