Need a Loan? Lending Trends That Affect Your Chances of Getting Funds

Lending trends impacting the small business funding landscape

Many types of business loans exist, but all are impacted by overall trends in business lending. Here are a few to watch for and what they may mean for your business.

High interest rates

Because of persistently high inflation, the Federal Reserve has raised the interest rate at which it lends to banks. In response, banks raise the interest rates they charge for loans and other forms of debt. Beginning in 2022, the Federal Reserve raised interest rates 12 times, from a historic low of 0.08 percent to 5.5 percent, the highest it has been in more than 20 years. The purpose of interest rate hikes is to slow the economy by making it harder for businesses and consumers to borrow money.

According to the Federal Reserve Bank of Kansas City, as of the third quarter of 2023, the average interest rates for several loan options are as follows: 

The Fed has held the interest rate steady since the third quarter of 2023, not raising it from 5.5 percent. At its December 2023 meeting, the Federal Open Market Committee predicted that the Fed would make three 0.25 percent cuts during 2024, leading to a rate of 4.6 percent by the end of the year. However, this prediction is in jeopardy because the latest inflation rate report showed that inflation is not cooling as quickly as expected.

What this means for lending

High interest rates mean that borrowing is more expensive. If you can wait until the last quarter of 2024, it makes sense to do so. If not, you might want to consider a variable-rate loan with the assumption that rates will go down.

Increased economic uncertainty

Numerous factors contribute to the overall uncertainty in the financial arena. One is that although inflation did decrease from a high of 9.1 percent in June 2022 to 3.5 percent as of March 2024, it is still higher than in June 2023, when it was 3.0 percent. Additionally, the wars in Ukraine and the Middle East impact global prices for grain and fossil fuels. They also impact global shipping, snarling supply chains. Finally, there is always uncertainty when a presidential election is imminent, and highly partisan politics makes the 2024 presidential election even more fraught.

What this means for lending

In addition to potentially lowering consumer confidence, the wars will likely contribute to higher prices, keeping inflation a factor. As discussed above, higher inflation will mean that interest rates will remain high and fall only slightly. 

When the economy is uncertain, consumers tend to spend less, which means businesses sell less and have less revenue. Lenders respond to this environment by tightening their criteria for loan approval, only lending to those businesses that can prove they’re profitable and cash-rich.

Access to more lending sources

In the past, a business needing a loan would contact its bank and perhaps reach out to a few other large banks. Today, technology helps businesses easily and quickly shop around for the best loans through individual lenders’ websites and loan marketplaces. Businesses can see lenders’ rates and criteria at a glance and are exposed to many more choices, including large banks, alternative lenders and credit unions.

What this means for lending

When businesses have more choices, competition in the market increases. This situation can benefit businesses by keeping interest rates and lending qualifications somewhat in check.

AI-driven risk assessment

Lenders are increasingly using artificial intelligence (AI) to assess borrowers’ risks instead of relying on humans in their underwriting departments. When dealing with people, it is easier to explain any less-than-optimal business results or ratios; AI does not accept this type of explanation and is unlikely to deviate from an initial decision.

What this means for lending

AI-driven risk assessment will likely prompt faster lending decisions. However, businesses must understand what factors and ratios will be used for these assessments and ensure these factors are optimal before applying for a business loan. 

Tips for increasing your chances of getting the funds you need

Given the current trends, here’s how to improve your chances of getting approved for a business loan. 

1. Ensure your business and personal credit scores are at least 650.

Review your personal and business credit reports and dispute any items that are incorrect. For personal credit, you can file a dispute with any of the three major credit bureaus: Equifax, Transunion and Experian. For business credit, file a dispute with Experian Business Credit, D&B or Nav.

In addition, pay down revolving debt like credit card balances and generate as much revenue and cash as possible before applying for a loan to improve your debt-to-income ratio.

2. Have all your loan paperwork ready.

Lenders want basic information, such as how long you have been in business. However, they may also want to know how you plan to use the money you borrow. 

When applying, have your financial statements and tax returns for the last three to five years on hand. A projected income statement for the next year or two can also be helpful. If you have plans for a strategic partnership, expansion or acquisition, have any relevant documents available.

3. Increase income and decrease operating expenses.

To strengthen your company’s financial position, implement low-cost marketing initiatives, such as contests and co-marketing campaigns with complementary companies, to increase revenue. At the same time, ensure you trim waste and reduce operational costs. These measures will result in higher profitability.

4. Research loan options thoroughly.

There is ample information about business loans available online. Take the time to research your options to learn which loans you are most likely to qualify for based on your credit scores and other criteria. Apply only for loans for which you have a good chance of getting approval.

5. Be open to different types of loans and lenders.

It may be that the best loan for your business, given current trends, is from a company you’re unfamiliar with. When researching potential lenders, look at their years in business, customer ratings and financial stability. If those factors seem optimal, you should seriously consider applying with them. 

Under different financial circumstances, you may not have considered options like a variable-rate loan, merchant cash advance or business line of credit. However, these funding options may be more viable under some conditions than traditional term loans.

If you do all this and still can’t get a business loan, you may want to explore crowdfunding or partner with someone.

Best business loan providers

Finding the best business loan for your company will take careful research to ensure your needs are met. Consider the following options as you evaluate potential lenders: 

Biz2credit

Biz2credit is a marketplace lender, not an individual lender. You’ll go online and complete a single application, and its system will match you with multiple lenders based on your needs and qualifications. This format can streamline the loan research process and give you an excellent chance of getting approved for a business loan. Our Biz2credit review explains how the platform’s lenders offer various loan types, interest rates, terms and collateral requirements. 

Balboa Capital

Balboa Capital requires a credit score of only 620 or higher, at least one year in business, and monthly revenue of at least $25,000 – somewhat lower requirements than most lenders. The application process is quick and straightforward, and you can expect a decision in as little as one hour. Read our Balboa Capital review to determine if this lender is right for you.

Accion

Accion lends to business owners from underserved communities. Its interest rates are well below average, and it doesn’t require a minimum credit score. Accion is a nonprofit organization that is less focused on making a profit and more focused on helping borrowers succeed. Its loan amounts range from $5,000 to $100,000. Read our Accion review to learn more.

The next few years may be challenging for small businesses seeking funding. To obtain capital for growth, they will need to be particularly diligent, discerning and savvy.