You may be the boss, but waiting for the results of a business loan application can still make you feel like a little kid sitting outside the principal’s office. It’s nerve-racking for sure. And while other people ask themselves, “Is it actually easy to get a business loan?” what you should be asking is, “How can I improve my chances of scoring not just any business loan, but a business loan with good terms?”
Not all business loans are the same. Approval is never a cinch for any loan, but there are those that are a little easier to get. This brief guide will give you an overview of the non-traditional business loans market and help you choose which may be the right option for you.
Is it easy to get a business loan?
Like almost everything in business, the answer is, it depends on your situation and the type of business loan you are looking for. But what is always true, and what is important to understand when you are deciding which business loans to apply for, is that even an “easy” business loan never means a guaranteed loan. So, what exactly qualifies as an easy loan in the first place?
What makes a business loan easier to qualify for?
When people claim that certain kinds of business loans are easier to qualify for, it is only in relation to other types of available loans, such as going through traditional banks or SBA partners. None of them are shoo-ins. But these are some of the more common factors that make approval for loans easier to get:
- Flexible qualification requirements: Some loans may accept lower personal credit scores, less of an operational track record, or lower the revenue threshold for approval.
- Streamlined applications and fewer documents: Loan applications done online tend to be shorter and require fewer supporting documents since some of the application process is automated.
- Faster underwriting and funding timelines: Some lenders can review loan applications, make approvals, and have money in the hands of borrowers in a matter of days, not weeks, like traditional loans.
- Greater reliance on cash flow or sales instead of long operating history: Depending on the type of loan, the lender may be more interested in seeing adequate sales numbers, and is willing to discount the age of the business.
Types of easy business loans to know about
When it comes to the easiest business loans to get, non-traditional loans usually fall into a specific category of funding. Each of the categories listed below has a number of pros and cons, and is not recommended for every business owner. Remember that “easier” does not always mean “better.” You will have to do additional research to determine which is the best option for you.
Online small business loans
Today, you can do just about everything online, even apply for a business loan. Not only do online small business loans give you the convenience of staying home, but they typically offer faster approval times, quicker access to the funds, little to no collateral, and more forgiving qualifications. However, loans in this category usually come with several trade-offs.
If you are considering an online business loan, be vigilant and do your research. These loans often cost more than traditional loans, need to be paid off quicker, and require more frequent payments. And since everything is done online, customer service is often lacking.
Microloans
Microloans are business loans that are typically under $50,000, and sometimes much less than that amount. For some just starting a business, they are an attractive option as newer or underserved businesses may not have the track record or revenue to qualify for more traditional loans. Some microloans are available through non-profit lenders and peer-to-peer lending, which can have attractive rates, but commercial microloans may charge higher rates. The application process for microloans can take time, some come with special requirements, and receiving the funding can be slower than other options.
Invoice factoring
Collecting payments is part of running a business, but delays with customers paying their invoices can affect your business’s cash flow. Invoice factoring is not really a loan; instead, it involves selling outstanding invoices to a financing company. To qualify for invoice factoring, the financing company will review your customers and the invoices themselves.
Invoice factoring can provide access to quick cash, and may be easier to qualify for since it depends on your customers and not your credit history. However, invoice factoring fees can be expensive, and it is better suited to companies that are B2B.
Merchant cash advances
Merchant cash advances (MCAs) provide a lump amount that a business pays off with a fixed percentage of its credit card sales or daily revenue. MCA lenders are lenient about whom they will approve, as long as the business has steady credit card sales. Typically, an MCA is quick and relatively simple to get, but it can wind up costing a business a lot of money.
The main drawbacks to a merchant cash advance are that it is very expensive. Businesses that accept an MCA agree to repay a fixed amount, which can translate to a large APR (annual percentage rate). In addition, since the financing company takes a percentage of sales, the business can suffer from poor cash flow, which leads to further financial difficulties. That’s why many people view merchant cash advances as a high-cost, high-risk option for businesses.
Tradeoffs to understand with easy approval business loans
Before you decide to apply for the easiest business loan just for convenience’s sake, consider all of your funding opportunities to avoid making a costly mistake. Remember that most so-called easy small business loans:
- Have higher interest rates or fees compared to more traditional loans due to relaxed lending requirements.
- Offer shorter repayment times, meaning larger payments, which can affect your business.
- Demand more frequent repayments, including daily or weekly repayments in some loan categories.
- Increase cash flow pressure due to other trade-offs listed above.
Protect your business’s future by always weighing ease against the long-term impact of these types of funding.
How hard is it to get a business loan compared to other funding options?
Business loans are not the only way you can fund your company. In addition to savings, many startups have found alternative sources of money, including grants, crowdfunding, and business credit cards. When compared with business loans:
- Small business grants, whether from the government or through the private sector, are much more difficult to qualify for, but have the distinct advantage of not needing to pay back the money.
- Crowdfunding necessitates the ability to create a meaningful story that will entice others to contribute to your business dream.
- Business credit cards offer a ready source of funds, but have a high interest rate, although not always as high as some easy business loans.
So, while easy business loans may be more accessible than traditional bank loans for some businesses, other funding options, like those above, are available. In the end, it is a matter of how much time and effort you want to spend on getting a loan, and how much money you want to spend paying it off.
How to improve your chances of qualifying for an easier business loan
Even for easier loan options, you’ll still need to do a bit of prep work to have the best chance of being approved. A few of the areas where you can nudge the results in your favor include:
- Strengthening personal and business credit – Try to pay down as much debt as possible and always make payments on time and in full. Double-check your credit report to ensure it is accurate and up-to-date.
- Showing consistent revenue or cash flow – A consistent and predictable income, even if it is modest, is more attractive than higher revenue that appears random.
- Offering collateral or guarantees (with caution) – In some borrowing scenarios, using collateral can lower the cost of a loan, but it is best to avoid it if possible.
- Having a clear use for the funds – Lenders feel more secure when they know where the money is going, so developing a comprehensive business plan is a good idea.
Lenders do not expect perfection, but if you can show you are trying and continuously improving your business, it can sway them into giving you a loan.
Preparing your business before applying for a loan
You’ve probably heard the phrase, “Proper preparation prevents poor performance” before. Well, it is definitely true when it comes to business loans. To improve your chances of approval, it’s smart to concentrate on the fundamentals of your company, like:
- Forming a legal business with the right business structure – A proper business structure, like an LLC, makes it clear to a lender that you are serious about your venture.
- Filing for an EIN – Some businesses, especially those with employees, need an Employer Identification Number (EIN) to be legal. Lenders don’t want to do business with companies that don’t follow the law.
- Opening a business bank account – You will need a business bank account for most loans.
- Organizing your financial and personal documents – Clear and available paperwork, such as a business plan, profit/loss statement, and forecasts, all instill confidence in a lender.
When “easy” business loans may not be the right choice
Not every business should opt for this type of funding. There are times when doing the “easy” thing may create more problems than it solves. Before signing on the dotted line, consider carefully whether your business:
- Has a very tight cash flow, which may not be able to meet high interest rates and an accelerated repayment schedule.
- Needs quick, but expensive funding, or can wait to find cash at a better rate.
- Is using a high-interest loan for non-essential expenses.
Conclusion
There is no doubt that some business loans are easier to get than others, but easy approval usually comes with caveats that, when not taken into consideration, can cause large issues for your company. When it comes to funding, thinking long-term benefits over short-term gains is usually the best approach.