How to get a business loan: Types, requirements & alternatives

Any business requires financial resources to improve operational costs and expand its customer base. But what happens if your revenue cannot supplement your company's needs? Yes, loans remain one of the most accepted funding options today, but how hard is it to get a business loan?

According to Statista, in the United States, alternative lenders had the highest approval rates of SMEs and accepted approximately 30% of loan applications. Institutional lenders came second with 27.5%, followed by small banks and credit unions. 

Knowing the various types and business loan requirements is essential for securing credit for growth and development. Let’s find out how hard are many business loan types and what do you need to qualify for them?

Types of business loans

There are different types of business loans, each destined for diverse financial needs. Below are some of the most renowned ones and how hard it is to get them: 

1. Term loans

A term loan is a capital a lender gives to a business that is paid with interest and is beneficial for those who want to invest in expansion or significant purchases. These loans are categorized into short and long-term, implying you can repay them in months or years. 

As much as term loans have a liable monthly payment plan, you must offer collateral, which may be a disadvantage for startups navigating the market.

2. Business line of credit

A business line of credit allows company owners to access funds to a specific limit and only pays when they exceed their maximum value. This model of financial aid is ideal for cashflow management, catering to unforeseen expenses.

If your firm is under financial constraint, you can opt for a business line of credit as it is versatile and facilitates profits.

3. SBA loans

SBA loans are loans given by the government to SMEs.

‍One of their benefits is favorable interest rates and repayment terms.

Although the application process is laborious, it is ideal for those looking to increase their business operations.

4. Equipment financing

Equipment financing is ideal for those looking to purchase significant equipment for their corporations, such as vehicles or machinery.

‍The purchased product is used as collateral, an advantage for those with a restrained credit history.

This option helps SMEs and large companies buy the equipment needed to propel their operations forward without the entire cost.

Additionally, this type of financing is quintessential for those in the construction or manufacturing industries as they can maintain revenue and profits and invest.

5. Invoice factoring

Export factoring is actually a loan alternative that allows firms to increase cashflow by borrowing an advance against their overdue client invoices, used as collateral.

This borrowing model is recommended for those who experience unstable payments and need cashflow to streamline operations. 

6. Commercial real estate loans

Commercial real estate loans cater to commerce ventures that renovate, purchase, or refinance properties.

For this, you must submit a down payment, and any procurement serves as collateral. This financing paradigm helps those looking to grow their audience, profits, and revenue.

So, how do you get easy approval for business loans?

Stay tuned! 

How hard is it to get different types of loans?

Explore the tables below and learn more about each type of loan and funding:

1. Funding type: Loan

2. Funding type: SBA loan

3. Funding type: Line of credit

4. Funding type: Invoice factoring

5. Funding type: Merchant cash advance

Now, let's get to the requirements and see what you need to qualify for a business loan.

What do you need to qualify for a loan? Discover how hard it is

Most lenders, including banks, consider a few factors before approving a loan application.

The decision often depends on time spent grooming your business, cashflow, and credit history, a few considerations used to determine your interest rate. 

1. Cashflow

Financiers look at your revenue/income against what you hope to borrow. Loans for small businesses vary from $36,000 to $2 million annually.

If your company has not yet achieved such financial steps, you must highlight that you can fund your operations and pay your loan.

For this, the lender will ask for your bank statement as they conduct a proper cashflow analysis. Further, this verifies whether your income pledge is true or false.

Additionally, companies that conduct regular cashflow analysis stay longer and avoid financial constraints, especially after borrowing a loan.

2. Time in business

Lenders prefer lending money to businesses that have stayed in the market for at least two years.

If you have been in the market for at least two years, you have weathered its fluctuating seasons. 

Furthermore, staying in business for longer highlights your proficient management and sales skills, meaning you will be around long enough to repay your loan.

3. Credit score

Various lenders have different financing requirements.

If your business is a startup, you can secure financing using your credit score, and although risky, it is a go-to for many. 

Once your company has found its footing in the market, you can opt to use a business credit score to access better financing.

Moreover, if you are an organization or LLC, using a business credit score protects your personal and business possessions.

4. Collateral

Collateral is an asset that a borrower auctions in case they do not pay a loan. Including it in the borrowing process ensures the lender does not incur losses.

Some business credits you can secure as collateral include heavy equipment financing and equipment lending. 

Many business owners prefer asset-based lending when looking for working capital or facing difficulties securing a business loan.

5. Business plan

A promising business plan shows lenders your purpose and goals for your business, factors that are critical in debt repayment. When drafting it, take your time, as it plays a crucial role in sourcing genuine lenders.

What happens if a small business loan request is rejected?

It is common for a lender to disregard your loan application, but often, borrowers reject lenders who offer unfavorable terms. Here are some strategies to secure funding for your business:

1. Consider alternative financing options: business loans are a substitute to secure funding; you can opt for alternative financing over traditional loans.
2. Apply with other lenders: some lenders focus on funding businesses with meager cashflow.

How to boost your loan approval process?

Besides growing your credit score and revenue, there are other steps to consider while you can easily qualify for loans. Below are steps to consider before applying for a business loan:

1. Get pre-approved: Helps you know how much financing lenders are willing to give, which gives you room to negotiate and source other lenders. 
2. Avail all your documents: If you want to apply for a business loan or pre-approval, you must have all the supporting paperwork to simplify the process. 

Try different lenders: Visit different lenders to understand how much they offer and the interest rates.

Types of business loan alternatives

Securing a lender willing to fund your business may be a hustle, especially for those with a poor credit score.

Below are some alternatives to consider:

1. Business credit card

A business credit card is like a personal credit card but only applies to businesses since it has a higher credit limit.

Most startups opt for this compared to a business loan since it does not include interest fees if paid on time. 

Also, BCC’s offer clients benefits and rewards, including bonuses and APRs (Annual Percentage Rate).

Such a structure ensures business owners manage their loans efficiently. 

2. Grant

Grants appeal to many business owners because they do not have to repay as offered for specific reasons.

Due to this, the grant application process is often tedious and lengthy. Some institutions that provide grants include private companies, state government institutions, and NGOs.

3. Crowdfunding

Crowdfunding is another loan alternative for small businesses to cover startup costs or capital.

There are different types of crowdfunding methods, most of which do not require prior applications, interest rates, or credit checks.

However, these spaces charge users overhead costs, including payment processing fees.

4. Peer-to-peer lending

This loan alternative ensures business owners borrow money from investors that is converted to a loan.

If the investor agrees to the P2P model, you must pay back the money with interest in fixed monthly installments. This process requires a credit card analysis, with most sites even allowing users to access pre-qualified benefits before applying.

Benefits of choosing financing alternatives to improve cashflow 

1. Better flexibility

Alternative business finance options, such as invoice factoring and lines of credit, give business legitimate flexibility in cashflow management.

Traditional loan options have rigid payment options and heavy penalties that may impede a business’ progress. 

Such flexibility helps businesses to make quick adjustments regarding cashflow and growth opportunities and makes it easier to manage finances.

2. Faster access to capital

Unlimited access to capital is crucial for businesses that need adequate funding to run their operations.

Alternative financing methods offer quicker funding and approval in hours or days, depending on how soon you need the funding. 

Such a straightforward and quick funding model helps businesses address critical issues that may hamper business operations.

3. Less harsh qualification criteria

Traditional bank loans adhere to strict qualification rules, such as financial documentation and exceptional credit scores.

Alternative financing options ensure businesses secure loans on time by improving their accessibility.

These options focus more on a business’ prospects and less on how they will repay the loan, which is integral in boosting a company’s progress.

4. Equity preservation

Equity is crucial for the progress of a company since its owners have total control over its functions and ownership.

With equity financing, business owners must share the ownership of their companies for funding, ultimately diluting their hold on said business.

Alternative financing options give owners equity and funding. Unwavering equity is crucial for companies looking to expand and grow since businesses can source funding and direct operations to desired goals and objectives.

5. Tax advantage

Using complementary financing options ensures that you enjoy affordable interest rates.

Most of these business loans reduce overhead costs associated with borrowing, ultimately boosting profits and deduction rates.

Also, this loaning model guarantees business owners finance their companies on favorable terms that steer growth. 

6. Fosters business relationships

Investing in financial options boosts the relationship between financial institutions, creditors, and suppliers.

As a business, repaying your loans on time helps you achieve a robust credit score, thus paving the way for reliable and credible financial choices. 

Furthermore, accessing financial alternatives certifies businesses cultivate better payment terms with clients and suppliers because you can efficiently meet deadlines.

7. Manages risk

Financing options cushion businesses against foreseeable risks and uncertainties.

When businesses secure funding easily, they can better manage challenges and unnecessary pressure that come with financial constraints.

Additionally, expanding your financial pool ensures that your company does not rely solely on outside funding. 

What are the challenges of securing a conventional loan?

1. Strict eligibility requirements

Securing conventional loans requires high aptness standards, which is often a mishap for businesses, especially startups.

Before lending you money, companies must assess your credit score, business profitability, and collaterals. 

Due to this, most firms cannot qualify for financing, ultimately limiting their growth and expansion.

2. Extensive documentation

Applying for a conventional loan is a complex process requiring many documents to assess your qualifications. Most lenders require tax returns, financial documentation, business plans, etc., to ascertain a business's credibility. 

Preparing such documents may be a hustle and time-consuming, especially for businesses that lack an accounting team.

Also, the extensive paperwork may hamper the loan appraisal process, thus affecting a company's funding system.

3. Lengthy approval process

Most companies shut down due to lengthy approval processes.

For instance, many lenders delay loan applications by months and weeks, which may cause business stagnation for businesses that need immediate loan approval.

Moreover, delaying funds may hamper growth opportunities.

4. High collateral requirements

Conventional loans need considerable collateral to secure them, an obstacle many business owners do not overcome.

Before approving your loan request, lenders will ask you to put up collateral, such as real estate, title deeds, inventory, and equipment if you default. 

Small businesses and startups often fail to meet these collateral thresholds, restricting their financial sourcing and risking losing their assets.

5. Rigid repayment terms

Different types of business loans come with alternative payment options, repayment plans, and interest rates.

Although most financial gurus suggest that fixed payment plans boost a business' financial planning schedule, it may burden those with inconsistent expenses, which strains their finances.

6. Economic conditions

Economic conditions impact the consistency and availability of conventional loans.

During economic downtimes, lenders preserve their accounts in preparation for any eventualities, preventing businesses from accessing loans. 

Further, this may prevent businesses from accessing and securing funding, which worsens financial stress.

Looking for seamless cashflow?

Growing your business through a loan is essential, especially for those with unstable financing options. Most financial advisors recommend opting for alternative loans for SMBs.

We understand that businesses must take control of their cashflow and inventory to expand their audience. Stenn supports all the goals and objectives of SMEs with seamless financial options with a quick approval process. 

Unlock instant funding for your business with our Export Financing solution immediately. With Stenn, your collateral-free funding gets approved in as little as 48 hours, with no risk of non-payment.