Why is it so Hard to Get a Small Business Loan?

Tighter regulations have made it difficult for banks to innovate and use information other than credit ratings to determine risk. To calculate the amount of a loan payment you can afford, divide your net operating income by your total annual debt to calculate the debt service coverage ratio. A ratio of 1 is acceptable, but lenders prefer a ratio of 1.35, which shows that you have a built-in margin in your finances. Some business owners assume that they can cover all of their bases by applying for several loans at once. However, this can be a red flag for credit bureaus.

Cash flow is another important factor for commercial lenders, as they want to ensure that you have enough income and sales to pay them back. Your debt-to-income ratio is also vital: the more debt you have, the harder it will be to get approved. For new small business loans, lenders prefer a debt-to-income ratio of 1.35. One of the most important factors a lender can consider when applying for a small business loan is your company's credit score and credit report. A survey conducted by the National Small Business Association revealed that 20% of small business owners who were denied funding received denials due to a low credit rating. In addition to making strong business arguments about why you should be eligible for a loan, you must radiate enthusiasm and faith in your company to attract the lender and make them believe in it. Lenders want to see that you have a solid business plan and a plan for continuous profits that show them that you can repay the loan.

Not surprisingly, companies with lower credit scores turned to online lenders and non-bank financial companies more often than firms with high credit scores, according to the Federal Reserve Bank's Small Business Credit Survey. If your credit rating is low, lenders may conclude that you will have difficulty paying your loan in addition to your other monthly payments. Unsecured business loans don't require collateral, but because this makes the loan riskier for the lender, interest rates are typically higher and borrowers must have high credit scores to qualify. You want to avoid applying for small business loans that you can't receive because of the age of your company. Getting approved for a commercial loan depends on the type of financing you choose and your financial and credit situation. Some online and alternative lenders have lower time in business requirements; some will work with you and your business if they've only been in business for six months.

If you want to apply for a small business loan and have considered going to the Small Business Administration, you might be surprised to learn that it's difficult to get a loan from the SBA. To increase your chances of qualifying for a loan, make sure you have a solid business plan and plan for continuous profits that show lenders that you can repay the loan. Additionally, research different types of financing options available and find one with approval criteria that your company can meet. Finally, make sure you radiate enthusiasm and faith in your company so lenders believe in it.

Lorrie Tappen
Lorrie Tappen

Incurable travel fan. Lifelong internet buff. Amateur zombie advocate. Friendly web ninja. Proud food junkie.

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