Many people think that getting a small business loan is completely impossible. This unfortunate belief leads many to think that they simply cannot create a small business, and therefore what could become an amazing enterprise never becomes reality. Are business loans hard to get?
Risky business
When securing financing, it’s important to look at your business from a lender’s perspective. Would you invest in it? Will this business be profitable? How easy is it to recover money or how hard? To get a business loan, you must ensure that it will be so effective that the lender will not lose money. Certainly investors know that every investment involves inherent risk, but to be financially profitable, they must have at least 90% certainty that you will not repay the loan. It’s quite certain. Lenders will examine the following issues:
- Solvency or cash flow: how much money will go to the company and does that suggest profitability?
- Collateral: Should they close down or will there be valuable assets enough to compensate for the difference in loan?
- Legal and tax liability: Does the company present any financial or legal risk?
- Diversification: will your revenue stream be concentrated from one source or will it be more diverse, with the possibility of increasing revenues from alternative places?
Getting a small business loan is difficult
Unfortunately, financial institutions are notoriously reluctant to grant loans to small businesses – according to a recent survey carried out on board more than 10,000 business loan applicants in the US 82% refused funding from their bank. Loans for small businesses, especially startups, are a more risky proposition for banks than mortgage loans or loans for larger, well-functioning companies.
Approval rates by type of loan
Getting a business loan is not just about you and your business. It also depends on the type of loan you are trying to get. Here are some typical business loans and what your chances are for approval.
Dealer’s cash advances
From a credit perspective, it’s easy to get cash advances for traders. Usually, you don’t have to work long either. Where you can hang up is revenue.
Financing invoices
Another secured business loan, invoice financing, is essentially an advance on an unpaid invoice. For example, if you have an invoice that you expect to pay within two months, you can usually get up to 90% of its value by financing the invoice, which is returned when payment is received.
Short-term loans
Short-term loans can help you get financing in the blink of an eye and can be easily obtained from some lenders. This is primarily because the time horizon during which the lender can recover the money is not very long, which reduces the overall risk of the loan.
Equipment financing
When financing equipment, the equipment usually serves as collateral for the loan. Depending on the loan amount, you may also be eligible for a long repayment period.
