Are Business Loans Becoming More Difficult for Businesses to Obtain?

It has never been exactly easy for small business leaders to acquire business loans. Banks and other lenders tend to be careful in evaluating prospective business borrowers because they want to be certain that their loans will be repaid, and most businesses are risky operations that are a couple bad decisions away from failure. Diving deep into the history of a business — and a business owner — will give lenders the information they need to determine which terms to extend to which ventures.

Yet, some business leaders have started to notice that it is even more difficult than ever to get a favorable loan. Are banks and lenders actually increasing their expectations for borrowers, and how can businesses continue to receive the loans they need to operate and grow?

Banks Have Rejected More Business Loan Applications Lately

In this case, what business leaders suspect is in fact the truth: Banks are approving small business loans at a lower rate, and in fact, almost all lending to small businesses has stalled.

The reasons behind this shift in lending behavior is rather comprehensible, though it may be frustrating to entrepreneurs and business leaders. In 2022, the collapse of three medium-sized banks raised concerns across the banking industry, and now banks of every size are focused on maintaining liquidity. Now, an impending pseudo-recession is making it more difficult for banks to obtain deposits, and a lack of deposits makes liquidity more difficult to achieve. As a result, banks have become much more averse to risk in 2023, which means they are less likely to offer loans to businesses that have any chance of missing payments. What’s more, inflation has radically devalued collateral, which many businesses use to make up for less-than-ideal credit ratings.

Of course, small businesses still need access to financing options. With the current economic outlook, many business leaders are wondering how to get a small business loan to achieve goals like expansion, to make necessary maintenance and repairs, to meet regular operating expenses or to make payments on other types of debt. Fortunately, there are still avenues to financing available for enterprising business owners and leaders.

Business Leaders Need to Put Care Into Loan Applications

Loan application approval rates are falling, but they are not yet zero. At big banks, about 13 percent of loan applications are still achieving approval, and that percentage tends to be higher at small banks and online lenders. Business leaders who know that their application is less-than-perfect might avoid wasting time with larger financial institutions and look instead to alternative lenders, where they are more likely to get the money their business needs.

Yet, it doesn’t hurt for business leaders to put more time and effort into perfecting their loan applications, regardless of where they are applying. All lenders are more likely to extend favorable terms to attractive applicants, which means businesses might be able to obtain higher principals and lower interest rates with better applications.

The first step to perfecting a business loan application is improving business credit. Most lenders rely heavily on credit ratings to understand the trustworthiness of an institution; a high credit score not only increases chances of approval, but it also tends to reduce interest rates, increase principals, eliminate the need for collateral and more. Business leaders can increase their company’s credit rating just as they would improve their own personal credit score: making payments on time and in full, keeping credit utilization low, reducing the organization’s amount of debt and similar actions.

Next, business leaders need to assemble and organize the documents they will need for their loan application. Most lenders like to review a business plan, which should outline how the loan will be used to grow the business. Additionally, business leaders need to offer documentation on revenues, expenses, debts and assets. Proof of cash flow is essential for lenders to understand a business’s health and determine the amount of loan that a business can handle.

Applying for a business loan is not a fast and painless endeavor, regardless of a business’s current financial health. Still, choosing the right lender and working to perfect its loan application is a good strategy in any economic environment.