How Hard Is It To Get a Business Loan in 2024?

Factors Impacting Business Loan Approval in 2024

Lenders look for several key criteria for issuing loans in 2024. These factors haven't changed drastically over the years, but the economic environment has shifted the weight of each criterion. Lenders are more cautious, inflation and interest rates are higher, and loan approvals are more dependent on your overall financial health.

In this section, we'll break down the essential factors affecting loan approval, including eligibility requirements, creditworthiness, and how lenders evaluate business loan applications this year.

Eligibility Requirements

Lenders have always had a set of qualifying requirements that borrowers must meet, but in 2024, these requirements are more scrutinized due to economic uncertainties. Here's a look at the most important factors that impact your loan eligibility:

• Credit history. Both your personal credit history and business credit history will be under the microscope. Lenders want to see that you've managed debt responsibly in the past. Missed payments, defaults, or bankruptcy on your record will reduce your chances of approval or result in higher interest rates.
• Annual revenue. Your business's annual revenue is a key indicator of its financial health. Lenders typically set a minimum revenue requirement that borrowers must meet to qualify for a loan. A strong, steady revenue stream makes lenders feel more confident that you can repay the loan.
• Cash flow. Lenders will look at your cash flow to determine whether you can cover loan repayments while managing day-to-day expenses. Getting approved for a loan can be challenging if your cash flow is unstable or negative.
• Tax returns. Lenders often ask for tax returns from the last two to three years to verify your reported income. Consistent tax returns show that your business is stable and can manage its finances. Irregularities or discrepancies can hurt your chances of approval.

These requirements can vary depending on the lender and the type of loan. Traditional banks may have stricter criteria, while alternative lenders may be more flexible. However, you'll still need to demonstrate your business's ability to repay the loan and meet financial benchmarks.

Creditworthiness

Creditworthiness refers to how likely you are to repay a loan, and lenders use a combination of your personal credit score and business credit score to determine it. Let's break it down:

• Personal credit score. For many small business owners, your personal credit score will weigh heavily in the lender's decision. If you're a new business, lenders don't have much financial history to go off of, so they'll look at your personal credit. Most lenders require a minimum credit score of around 600–650 for traditional loans, but a good credit score above 700 will significantly increase your chances of approval. If your score is below 600, expect higher interest rates or stricter repayment terms.
• Business credit score. Lenders will also consider your business credit score if your business has been operating for a while. This score reflects how well your company manages its debts. A business credit score of 75 or higher is generally considered good. Lenders look for a strong score because it shows you've been able to responsibly manage any previous loans or credit lines.

Lenders use these scores to assess your overall creditworthiness — that is, how reliable you'll be when it comes to repaying the loan. If your scores are high, you'll have more options and better loan terms, like lower interest rates. If your scores are low, it could limit your choices or lead to higher costs.

Types of Business Loans Available in 2024

With a variety of business loan types available in 2024, it's important to know which option fits your business's specific needs. From traditional bank loans to more flexible alternatives, the lending landscape has something for everyone. The key is knowing the pros and cons of each type and understanding the approval process for each.

In this section, we'll explore the differences between traditional and alternative financing and look at some of the most common loan types available this year.

Traditional Bank Loans vs. Alternative Financing

• Traditional bank loans. Traditional loans from banks are often the go-to for business owners because they typically offer lower interest rates and longer repayment terms. However, these loans come with stricter requirements, such as a high credit score, strong financial history, and detailed documentation. The application process can also be lengthy, making it less ideal for businesses needing quick access to capital.
• Alternative financing options. If you can't qualify for a traditional loan or need funds faster, alternative lenders like online lending platforms, credit unions, and nonprofit organizations can be great options. These lenders tend to have more flexible approval criteria, often accepting lower credit scores or newer businesses. However, they usually come with higher interest rates and shorter repayment terms. While you might pay more in the long run, alternative financing can be easier to access, especially for startups or businesses with unpredictable cash flow.

Overview of Common Loan Types

There's no one-size-fits-all business financing solution in 2024. Here are some of the most popular types of business loans that could work for you, depending on your needs:

SBA Loans

The U.S. Small Business Administration (SBA) offers several loan programs, but the SBA 7(a) loan is one of the most popular options for small business owners. The government partially guarantees these loans, reducing the risk for lenders. This guarantee makes SBA loans more accessible to businesses that might not qualify for traditional loans, and they often come with favorable interest rates and longer repayment terms.

However, SBA loans can take time to get approved, and the application process is thorough. You'll need to meet specific loan approval criteria, including a detailed business plan, strong credit history, and the ability to demonstrate that your business can repay the loan.

Term Loans

Term loans are one of the most straightforward loan options. You receive a lump sum of money upfront and repay it with fixed monthly payments over a set period. Term loans are available as short-term or long-term options:

• Short-term loans. These are typically repaid in less than a year and often have higher interest rates. They're ideal for businesses that need quick cash to cover immediate expenses but expect to repay the loan quickly.
• Long-term loans. These loans can be repaid over several years with lower monthly payments and lower interest rates. Long-term loans are better suited for larger investments, like purchasing real estate or expanding your business.

Business Lines of Credit

A business line of credit provides flexibility that traditional loans don't offer. Instead of receiving a lump sum, you can draw funds as needed, up to a set limit, and only pay interest on the money you use. This type of financing is perfect for businesses dealing with working capital fluctuations or seasonal expenses. Lines of credit can be easier to qualify for than traditional term loans, but they often come with variable interest rates.

Microloans

If you're a startup or small business that doesn't need a large loan, microloans are a great option. Microloans are typically under $50,000 and often come from nonprofit organizations or government programs. They're perfect for businesses that need smaller amounts of money to get started or cover short-term needs. Since they involve less risk for the lender, the eligibility requirements are typically less strict than for larger loans.

Equipment Financing and Invoice Factoring

Equipment financing is an option for businesses that need to make large purchases like buying equipment. This loan type funds equipment purchases, with the equipment itself often used as collateral. This lowers the lender's risk, making it easier to qualify for.

Similarly, if your business has a lot of unpaid invoices, invoice factoring can provide immediate cash flow. In this setup, a factoring company buys your outstanding invoices at a discount, giving you cash upfront. It's an excellent option for businesses that need short-term cash and don't want to wait for clients to pay their invoices.

Merchant Cash Advances and Business Credit Cards

A merchant cash advance could be an option for businesses that need fast cash without the hassle of a long approval process. This type of financing involves receiving a lump sum upfront, which you repay by giving the lender a percentage of your daily sales. However, these advances often come with higher interest rates, so it's essential to calculate whether it's worth the cost.

Alternatively, a business credit card can provide revolving credit for ongoing expenses. Business credit cards offer flexibility, but carrying a balance can result in high interest charges, so it's crucial to pay off the balance monthly if possible.

Key Considerations for Loan Eligibility

Before applying for a loan, it's important to understand what lenders look for and how you can position your business to meet their requirements. Many factors go into a lender's decision, including your credit scores, financial health, and the strength of your business plan. While we already mentioned this briefly above, we feel it's important to go into more detail for a better understanding.

Credit Scores and Financial Health

Lenders rely heavily on both your personal and business credit scores to evaluate your financial health. A higher score on your credit check shows that you manage debt responsibly, while a lower score signals risk. If your credit scores are below the lender's minimum credit score requirements, it's a good idea to improve them before applying for a loan.

In addition to credit scores, lenders will examine your financial statements, tax returns, and bank account statements. These documents show your business's financial stability and help lenders determine whether you can handle loan repayments.

Tips for improving credit scores:

• Pay down debt. Reducing your outstanding balances can significantly boost your credit score.
• Avoid late payments. Late payments hurt your score, so it's crucial to pay all bills on time.
• Check for errors. Regularly review your credit reports and dispute any inaccuracies that may be dragging your score down.

Business Plans and Financial Projections

A solid business plan is essential when applying for a loan, especially for startups or businesses looking to expand. Lenders want to see that you've thought through your business model and have a clear path to profitability.

Your business plan should include:

• A detailed explanation of your business and how it generates revenue.
• Financial projections that show how the loan will be used and how your business will repay it.
• Market analysis and a clear understanding of your competitors and customers.

Personal Guarantees and Collateral

In some cases, lenders may require a personal guarantee or collateral to approve your loan. A personal guarantee means that you, as the business owner, are personally responsible for repaying the loan if your business cannot. Collateral can include business assets, real estate, or even your personal assets such as your home or car.

While this reduces the lender's risk, it increases your personal financial risk. If you default on the loan, you could lose your personal property, so weigh the risks carefully before agreeing to these terms.

Cash Flow and Monthly Revenue

Lenders are also interested in your monthly revenue and cash flow. Even if you meet the revenue requirement, inconsistent or negative cash flow can make it hard to qualify for a loan. Lenders want to see that your business generates enough income to cover operating expenses and repay the loan on time.

For newer businesses, this might mean showing strong revenue growth trends or providing detailed financial projections. Established businesses should aim to demonstrate stable and consistent cash flow over time.

Challenges Facing Borrowers in 2024

While the fundamentals of business lending remain the same, certain challenges in 2024 make borrowing more difficult for some business owners. Understanding these obstacles can help you better prepare for the loan application process.

Economic Conditions and Higher Interest Rates

The current economic climate has made borrowing more expensive. Higher interest rates and inflation are driving up costs, making it harder for many business owners to afford loans. Lenders are also more cautious, tightening their requirements and raising rates to protect against potential defaults.

For business owners, this means you'll need to factor in higher borrowing costs when determining whether a loan is worth it. Make sure your business can handle the monthly payments, even if interest rates rise further.

Startups vs. Established Businesses

Startup business loans often have more hurdles than established businesses looking for loans. Without a track record of financial performance, startups are considered higher risk, and lenders may be more hesitant to approve their applications. For startups, securing financing might require applying for smaller loans like microloans or relying on alternative lenders willing to take on more risk.

On the other hand, established businesses with a proven track record of success will generally have an easier time securing small business financing. Lenders prefer working with businesses with a solid history of consistent revenue and the ability to manage debt.

Impact of Bad Credit

If you have bad credit, getting approved for a loan can be an uphill battle. Traditional banks may deny your application, but alternative financing options like merchant cash advances or loans from online lenders could still be available. However, these options often come with higher interest rates and less favorable terms.

If you're dealing with bad credit, improve your creditworthiness before applying for a loan. This could involve paying down existing debts, correcting errors on your credit report, or applying for smaller loans to gradually build your credit history.

How To Improve Your Chances of Securing a Business Loan

While the business loan approval process can be challenging, there are several strategies you can use to improve your chances of getting the financing you need. Here are some actionable tips to help you increase your odds of success:

Build Strong Credit

Before applying for a loan, it's important to assess your credit scores and work on improving them if needed. Personal and business credit scores play a major role in determining your eligibility for a loan, so boosting these scores can significantly affect your approval chances.

Explore Multiple Loan Options

Assess all your funding options to find the one that best fits your business's needs. While traditional loans are a common choice, they're not the only option. Consider alternative financing methods like microloans, business credit cards, and even crowdfunding.

For example, microloans may be a great option if you're a startup or only need a small amount of capital. Crowdfunding platforms can also help raise funds for your business without the need for traditional business lenders.

Have Organized Financials and a Solid Business Plan

One of the best ways to improve your chances of loan approval is to present well-organized financial records and a strong business plan to financial institutions. Lenders will want to see your tax returns, financial statements, and bank statements to assess your business's financial health.

Make sure all documents are up to date and accurate, and demonstrate your ability to repay the loan. Your business plan should also outline how you intend to use the loan funds and achieve your financial goals. A clear, detailed plan can instill confidence in lenders and improve your chances of approval.

Get a Business Loan in 2024

Understanding the eligibility requirements, building strong credit, and exploring all your financing options can improve your chances of loan approval in 2024. Whether you're looking for a traditional term loan, a line of credit, or alternative financing, being prepared with organized financial documents and a solid business plan will help you stand out to lenders.

At Clarify Capital, we understand the importance of getting the right financing for your business. Whether you're a startup, an established business, or somewhere in between, we can help guide you through the loan process and find the best funding solution for your needs. Reach out to us today, and let's work together to fuel your business's growth!