Why Are Small Business Loans from a Bank So Hard to Get (2024)

Growing a small business without adequate financing is always a big challenge. To meet financial commitments, entrepreneurs typically look to their banks for small business financing solutions, such as loans and small business lines of credit. However, small business owners quickly realize how daunting it can be to acquire the needed funding for their businesses.

If you’ve never applied for a business loan or a small business line of credit before, you may be in for some surprises. When you go to your local bank, you can discover that commercial loan requirements are much different than what you expected. And yet you know that without business financing, it will be hard to scale, run and grow your company.

Factors that Make Getting Small Business Lines of Credit and Loans Hard to Get

There’s no denying the importance of regular cash flow to a small business operation. Having a positive cash flow is critical to your company’s survival. You not only need money to function on a daily basis, but you never know when you’ll need a quick infusion of money to see you through a temporary crisis or dry spell. Many business owners depend on external funding to save their companies. But they also need money to expand and take their businesses to the next level. Although traditional banks readily court small companies in their marketing efforts, loans and lines of credit for small businesses can be extremely challenging to obtain.

To qualify for small business financing from a commercial or local bank, there are several hurdles to clear:

1. Number of years in business. Most traditional banks won’t risk lending to businesses with no proven track record, such as being in business for five years or more. If you’ve been in business for less than five years, your chances of securing a loan or small business line of credit are low. In addition, bank lenders expect businesses to show excellent cash flow, profits, and revenue to even consider your application.
2. Less than perfect credit. If you don’t have excellent business credit and sometimes personal credit scores, you may want to skip the trip to a traditional commercial bank altogether. Most large financial institutions employ strict algorithms to weed out undesirable applications, and a low credit score (A bank typically wants above a 700 personal credit score from all owners) often means immediate rejection. While there are other criteria banks will use to scrutinize the health of your business, you likely won’t make it past the credit check if your credit is below 700.
3. Lack of collateral. Collateral provides lenders a way to protect themselves if your business defaults on its business loan. That type of business loan is called a secured business loan, and secured business loans are much easier to get, but it is so rare for business owners to have collateral until they have been in business for a long time. Examples of collateral include owned cars, real estate, stocks, bonds, accounts receivable (discounted), and more. Without significant collateral to sufficiently cover the loan or small business line of credit, lenders may not approve the loan unless you have everything else they are looking for.

4. Personal guarantees will be required. In many cases, banks will require apersonal guarantee before lending money to a business. This guarantee makes you the borrower and personally responsible for repaying the loan. If you have trouble repaying, the bank is permitted to collect funds from your personal assets, such as bank accounts or your home. Even if you think you have a tremendous business, the bank will want a personal guarantee. A no PG business loan is often seen once a business reaches the $10 million per year benchmark, and even then, the bank will try to require a PG.

5. Inadequate cash flow. Steady cash flow is critical for running a successful business, and banks look at it to determine if you can repay the loan. If you have insufficient cash flow, it isn’t easy to get a bank loan since the bank considers it an essential factor when determining whether you can make loan payments.
6. Small loan amounts. Finally, you may run into situations where the amount of funding you require is not worth the giant bank’s time and efforts. So many times, business owners believe they deserve more money than a bank is willing to qualify them for.

In these cases, small business owners turn to alternative lending solutions for loans or small business lines of credit. Most small businesses in the last 10 years are now using alternative lenders instead of a commercial or local banks.

What About an SBA-guaranteed Loan?

The Small Business Administration (SBA) does not directly lend money to small businesses. Instead, it acts as a liaison and funding backer for specific SBA small business loans. However, although the SBA makes the loans more accessible to small businesses, they also require a thorough vetting process from the lender, which is always a bank.

SBA loans require you to provide a lot of information about your business, and the application process is typically lengthy and extensive. Be prepared to provide your business’s financial history, payroll costs, seasonal fluctuations, number of employees (full-time and part-time), liabilities, ownership, management, previous contracts, location, etc. Plus, the SBA sets the standard for what it deems a small business based on the economic characteristics of the specific industry it is in.

In a nutshell, the types of SBA loans include:

• SBA 7(a) Loan: The most common SBA small business loan program, borrowers must prove that personal resources and other financing have been invested in and sought after before applying for the 7(a) loan. The maximum loan amount is $5 million.
• SBA Express Loan: SBA Express Loans are part of the 7(a) SBA loan program and offer a maximum loan amount of $500,000. Lenders must review the loan application within 36 hours, and as with the regular 7(a) loan, applicants must have already invested personal resources in the business. Also, a FICO score of 650 or above is preferred, and the company must show a minimum of two years of business income.
• SBA 504 Loan: This loan is available for long-term, fixed-rate financing of up to $5 million. The loan restricts use for “major fixed assets that promote business growth and job creation.” The money can’t be used for debt refinancing, working capital, or inventory purposes.
• SBA Microloans: Microloans are maximized at $50,000 and are available through nonprofit community-based organizations/lenders. Those lenders set the lending and credit conditions, and collateral is required.

Where are the Best Small Business Lines of Credit

Some business owners may find a small business line of credit better suits their funding needs than a bank loan. A small business line of credit is a short-term loan allowing the borrower to access money when needed, up to a predetermined borrowing limit. The loan is a “revolving line of credit,” similar to a credit card. Once the borrowed money is repaid, the loan amount is available to borrow again throughout the draw period. Per the line of credit agreement, borrowers pay interest and fees only when the money is withdrawn. A small business line of credit gives business owners an alternate funding solution by providing them with a lump sum of working capital.

A secured line of credit is one in which the borrower must offer collateral to secure the loan in case of default. This makes the loan less risky for the lender. However, a small business unsecured line of credit does not require collateral. Because these unsecured small business lines of credit are riskier, unsecured business lines of credit rates tend to be higher.

Is There an Easy Financing Option for Small Businesses?

All business owners need a straightforward means of getting financing. But the reality is that banks grant less than half of the small business funding applications they receive. If your business is less than $5 million in yearly revenue, then the approval rates are even in the low single digits. That’s why businesses today are turning to alternative lenders for help.

As an alternative lender, Financing Solutionsoffers an easy application process for a small business line of credit (it takes less than two minutes to fill out) and requires no collateral or documentation to receive a written offer letter. Other alternative lenders have a much longer application process and can be very expensive. Most do not offer a line of credit but a fixed business loan.

The founders of Financing Solutions have started and grown several companies together, so they understand how important it is to keep costs low. That’s why Financing Solutions doesn’t charge to set up the credit line, and there are no maintenance fees. They don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. They make approval decisions based on over a decade of experience working with small businesses. Find out today why Financing Solutions has five-star ratings from the Better Business Bureau and Google. Also:

• There are no costs to set up the small business line of credit or keep it in place.
• There’s an easy 2-minute application online application
• If approved, you’ll receive a same-day, no-obligation offer letter
• The fastest setup, 48-72 hours
• Once you have the line of credit, requests for funds are wired to your bank in minutes.
• You can use your line of credit whenever needed
• Inexpensive when used (low fees)
• There are no restrictions in place or collateral required
• No personal guarantee is required, either
• Financing Solutions is a leading provider of lines of credit
• Financing Solutions is a reputable company with an A+ & 5-star rating
• You can pay off the line whenever you are ready
• The credit line is easy to renew and renews yearly
• You have a secured account portal access 24 x 7

A small business line of credit is a good funding resource available whenever your company needs it, without the heavy burden of long-term business loan requirements. If you want to see if your small business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.