Why is it so hard to qualify for a business loan?

• Traditional business loan applications require extensive documentation and processing time.
• Long wait times clash with the need for immediate cash, adding stress to the process.
• Cash flow underwriting is an alternative to the traditional underwriting process that can cut down on paperwork and shorten approval timelines.

Most businesses will use a loan at some point. But qualifying for a business loan can be trickier than you might expect.

The speed of approval decisions and the arduous nature of the application can present legitimate challenges for businesses. When you hit a gap in cash flow and financing options are also slow to secure, your business can find itself in serious trouble.

Understanding the lending process, including the timeline of traditional business loans and your alternative options, allows you to access cash on a timeline that matches your needs.

When you apply for a business loan, lenders consider several factors to determine eligibility:

Credit history is one of the primary considerations for traditional loans. The exact details — and documentation necessary for verification — will likely vary by lender and circumstance.

Between the long timeline, the extensive information gathering, and the ongoing frustrations, a business loan application can feel invasive.

• Lenders need access to documentation, with extensive requests covering everything from business bank statements and legal ownership documents to personal tax returns and accounts receivable records. The sheer number of requested documents can feel overwhelming.
• The nature of much of this information is sensitive, which adds to the pressure. Owners may have to disclose how the business earns, spends, saves, and borrows money. It can start to feel like a defense of ordinary financial decisions, especially if the record turns up unusual deposits or financial changes.
• Delays are common, adding even more emotions into the mix. An underwriter may request clarifications, while outdated documentation can create a domino effect that takes time to reconfigure. Missing information on any document means another delay.

If your business is already under pressure, the thorough process of applying for a traditional bank loan can feel painfully slow. Plus, the potential fees attached to a business loan can add up and increase existing financial strain.

Most companies apply for a business loan when they already need cash, and they need it now. This causes extra difficulty in the loan process:

• Paperwork and admin are harder under tight deadlines.
• Urgency makes the process more stressful.
• Comparing options under time pressure can force unwise decisions.

Qualifying for a business loan can be a frustrating catch-22 for businesses that need more available cash, precisely because lenders can sometimes look at available cash as a qualifying factor.

Even if you’re profitable, limited liquidity (even temporarily) can look like a risk factor. Inconsistent revenue can make lenders cautious. New or seasonal businesses can struggle to prove their stability on paper.

An owner’s personal expenses may also be strongly considered in the case of new businesses. If the business is profitable but the owner has other creditworthiness flags, the business could have trouble qualifying.

In cases where a traditional loan doesn’t align with your timing or other needs, consider alternatives like cash flow underwriting.

Use this kind of financing to pay tax liabilities or other urgent needs.

Cash flow underwriting looks at how money enters and leaves your business to determine financing eligibility. Some lenders will issue loans based on this snapshot of your business, rather than requiring hard credit checks and other invasive methods to determine risk and eligibility.

A lender who uses cash flow underwriting typically looks at business banking data, often through a secure integration that grants full visibility to average daily balances and recurring bills. This gives the lender a sense of cash flow volatility, a primary factor that determines your ability to pay back any money your business borrows.

This difference in evaluation criteria (cash flow snapshot vs bank statements, tax returns, profit and loss statements, articles of incorporation, etc.) can simplify the approval timeline and application process for businesses, limiting the amount of paperwork they need to prepare and submit. Cash flow underwriting models also tend to work well for businesses with limited credit history.

One of the benefits of cash flow underwriting is reduced paperwork. The process looks at connected financial data like bank account transactions, which means less manual document collection and potentially fewer forms.

With faster access to current financial information, the process is less likely to be slowed down by back-and-forth confirmations and outdated statements. It’s less administratively demanding — which can cut down on frustrations and intrusive feelings.

Avalara Capital uses Plaid to securely connect to your bank account. It can also connect to QuickBooks or NetSuite to post loan entries and save you even more time.

Businesses that use cash flow underwriting to obtain financing still have to go through an approval process. The lender evaluates risk, just through a different process than with traditional loans.

Connecting your bank account for cash flow evaluation doesn’t guarantee eligibility or approval. Terms and available loan amounts depend on your business’s financial profile.

Access cash when you need it, not after weeks of frustrating paperwork.

Avalara Capital uses secure connections and cash flow underwriting to quickly determine your financing eligibility. Learn more on how you can manage tax, compliance, and cash flow — all from the Avalara platform you already use and trust.

A traditional loan from a bank can take up to six weeks to process. Government-backed loans can take even longer. Small Business Administration loans, for example, take anywhere from 30 to 90 days for approval.

Some lenders evaluate the owner’s personal credit to determine repayment risk and business eligibility. Personal credit checks are more common for newly established businesses or those with personal guarantees attached.

It can. Whether or not a business loan affects your personal credit score depends on how a lender evaluates your creditworthiness. If they perform a hard inquiry into your personal credit during the application, this can lower your score by a few points.