Applying for a business loan in the USA is harder than it should be. There are many factors that go into how loan applications are accepted or rejected at a bank, though it can still remain a mystery to some business owners as to why their applications didn’t succeed.
Just when you thought the difficulty lies in getting accepted, which has been made more difficult due to the weakened economy, arguably the most taxing part of the whole ordeal is the process itself. Banks have an incredibly rigid and fairly dated way of judging applications, which in turn means the application itself is also dated. Cash flow forecasts, credit scores, business plans… It’s very qualitative and bespoke.
This, inevitably, leads to a lengthy process. If not for the filing and presentation of it, but the waiting time for it to be checked and approved. And, if you’re one of the lucky ones to be accepted, you will have another wait for the funds to come through. The entire process can be weeks, and in some cases, months.
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Interest rate rises and how this hurts business
In their continuous push towards taming inflation, the Fed has been nudging up interest rates. Although it’s still far from enough of an increase according to those who believe in the dangers of an over-inflated stock and property market, it’s still enough to radically increase the value of the dollar. In other words, the Fed is doing more than most central banks around the world.
Increasing interest rates is another phrase for increasing the cost of money. If you deposit your money into a bank, you’re charging them a higher rate of interest (i.e. savings accounts). But when the shoe is on the other foot, the increase in interest rates towards banks is passed onto the bank’s customers. Mortgages and loans are now more costly.
Interest rates rose from 0.25% to 2.5% in a matter of months. This rapid increase has quite a shock on the circular flow of money around the economy, and has hurt both investors and businesses. Investors are more likely to settle for bonds and savings rates instead of putting their money into a start-up, because the reward for saving is now higher, whilst businesses are hurt by this lack of investment. Inevitably, if borrowing becomes more expensive, it’s difficult to invest in new capital and grow the company.
It may then seem odd as to why the Fed has done this, but hurting businesses and investors right now isn’t totally a bad thing – from their perspective at least. It means that economic growth will slow, which is an effective way to cool inflation. Of course, current inflation is cost driven (i.e. commodities being more expensive) as opposed to demand-driven, so many will argue that supply-side policies should be preferred to contractionary monetary and fiscal policy.
If loans were expensive before the cost of living crisis, they’re certainly worse now. Traditional bank loans are usually in the 4%-13% ballpark, but the same loans today will be 2%-3% higher than the same loans last year.
Why are you getting rejected from business bank loan applications?
There are many reasons why you may be getting rejected from your loan applications at a bank. Instead of looking at how to get approved for a small business loan, it’s perhaps faster to look at the ways you’re getting rejected and learn from that.
- Low credit score
- Borrowing too much
- Unstable income or unreliable forecasted income
- Not meeting basic requirements
- Unsuitable purpose for a loan
- Banks are tightening up lending requirements because of the weaker economy
Unfortunately, many of the reasons above you can do nothing about. You could grind on improving your credit score, but it’s a lengthy and frankly unfair process. Having a unique business plan or use for the funds that the bank doesn’t agree with is, again, something you can do little about.
Of course, there are ways to optimize your chances of success with a bank loan, but the rest is in their hands. Fortunately, there are alternatives to this that do not judge you in the same unfair ways, like your previous personal credit score.
Are credit card business loans worthwhile?
Credit cards are an option that many people consider when realizing how difficult and slow it is to get a normal business bank loan. And, even if they are expensive, they’re sometimes referred to the idea of giving up equity.
One of the benefits of credit cards for business loan purposes is that they do not necessarily require collateral, which bank loans often do. But, this comes at a cost. Borrowing costs are higher than bank loans, making it difficult to make repayments. And, with that in mind, it is one of the most common ways to further worsen your credit score rating.
Additionally, the debt will be your liability. So in the event of missing repayments, you’re risking a lawsuit. The company’s and your personal assets are in jeopardy of being repossessed and even sued for the unpaid balance.
Credit card limits are usually much lower than pre-agreed business loans of a given amount. It’s difficult to gain anywhere near as much funding, yet those limits can easily be overextended, for which you will be punished with high fees.
Bank alternatives for small business funding
Fortunately, there are plenty of alternatives for funding small businesses. Many do not check credit scores or simply have different ways to ensure less risk for the lender. Here are five of the best bank alternatives for business loans.
Small business loan from an online lender
Online lenders are a direct way to borrow money. Their key selling point is more than just having higher application acceptance rates than banks, but it’s that the process itself is much, much faster. Instead of physical meetings, handing over business plans and cash flow forecasts, and scrutinizing your credit score, online lenders are simply automating the process.
Signing up for these platforms take minutes, and the applications aren’t much longer. From here, it’s usually just the recent financials of the business that they’re after, to which the AI will scan and determine the financial health of the company. This is far more meritocratic than the bank’s process (credit scores sometimes come into play but minimum requirements are lower), and means the decision (and funds) can arrive within days. This makes them the ideal candidate for a bad credit business loan.
These loans are much easier to score than bank loans and are usually unsecured business lending. However, they come at a higher cost, something closer to 10% to 30%. But, they’re not usually intended for long-term financing, but instead are a way to tie a company over for a few months or years. They can be used for growth projects, but usually relatively small ones.
Invoice financing
As we know, secured loans are cheaper because they’re less risky for the lender. But, we don’t always want to put our personal assets in jeopardy, or simply may not have any altogether. Invoice financing is a very clever way to get that security without risking personal assets – instead, we put forward our receivables.
So a company with plenty of invoices that are yet to be chased up can be used to help secure a loan. There are different variations of invoice financing, in which some will collect the invoices on your behalf and receive a cut, whilst others you are still in control of this process. This is ideal for a company that has regular invoices and is looking at ways to gain a loan that is less risky for the lender.
Merchant cash advance
A merchant cash advance is a way to borrow money using your future credit card sales as a type of security for the lender. So, a loan is given to a business, and in return the repayments are made by funneling, automatically, a percentage of future debit and credit card sales revenue (plus a fee). Of course, this stops when the loan is repaid, and it can be quite daunting because of the lack of control you have – a given percentage will be diverted to the lender, and there’s little room for flexibility there.
Of course, this is ideal for some people, as they only make high repayments when sales are high, and low repayments when sales are low. A merchant cash advance can cost an annual interest rate of anywhere between 20% and 200% – they’re a fairly volatile product that needs to be assessed on a case-by-case basis.
SBA loan
An SBA loan is a government small business loan. These are intended to help pay for working capital, growth projects, and startup costs. Whilst it’s government-backed, the lender itself that you take the money from is private. SBA loans have very low annual interest rates (around 5.5% to 8%) – a bit like a traditional bank loan.
However, also like a traditional bank loan is the difficult process to acquire them. Low credit scores are the most common reason for rejection, but so is being a startup. This is ironic as many people associate SBA loans with startups, but unless the company is at least two years old, there’s a risk of being rejected on the grounds of being too risky. Inconsistent cash flow and messy business documentation are also common reasons for rejection.
Equipment Financing
Equipment financing goes by the same sort of logic that follows mortgages. The only reason everyday people are given hundreds of thousands of dollars of debt for a home is that the home itself is security – otherwise, it would be an unthinkable risk for banks.
Well, equipment financing is a way to purchase equipment and machinery for your company with the purchased capital itself being used for security. So, taking out $50,000 to buy a new tractor or 3 commercial stoves? These will simply be under the collateral of the loan. This works great for both parties: the business gets access to financing and the lender gets a guarantee of an asset in case repayments aren’t met.
For this reason, interest in this type of financing can be between 5% and 20%.
Top 3 Small Business Lenders in the USA for 2022
With the help of BusinessLoanCompanies’ Top 10 lenders, here are three top lenders in the USA for 2022.
OnDeck
OnDeck offers some of the best small business loans for those looking for unsecured business lending. The amount a small business can borrow ranges from $5,000 to $300,000, so it’s certainly possible to use these for more than just emergency stop-gaps.
The response time for an application is 1-2 days, and the Trustpilot reviews are 4.9 out of 5. Being established for 11 years now, OnDeck has proven time and time again to be a reliable lender for loans between 3 and 36 months.
The major requirements to fulfill, which are perhaps more stringent than some other alternative lenders, are a minimum annual revenue of $250,000, 3 years or more in business, and a personal FICO score of 600 or more.
Fundbox
Fundbox is a slightly newer fintech lender but is one of the top small business lenders in USA. it’s perhaps an alternative to the alternative – in so far as being very different from OnDeck. $1,000 to $100,000 can be borrowed, but only for 3 to 6 months. Clearly, this is an option for smaller and shorter projects – or outright emergencies.
Loans are unsecured and the requirements are little more than providing your basic personal details, business annual revenue, years in business, and providing invoices. There are no strict limits and credit score isn’t at play here in the same way as OnDeck or banks.
Fundbox won the 2018 Best Overall Business Lending Company by FinTech Breakthrough, as well as scoring 4.7 out of 5 on Trustpilot.
LendingClub
LendingClub is perhaps one of the more experienced online lenders, but was still only founded in 2006. LendingClub offers loans between $5,000 and $500,000 and is considered a large lender – but nevertheless offers unsecured loans.
With a great reputation and quick application process, LendingClub is a good choice for those that can meet the requirements. Loans can be up to 5 years, making them ideal for medium-length projects, as well as having competitive rates.
A credit score of around 640 is likely needed, as well as providing your annual income and social security. But, there’s not too much to it beyond this, and the customer experience seems to be sky-high according to feedback.
