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Why Traditional Bank Loans Are Still Hard for Many Small Businesses to Get
April 8, 2026
April 8, 2026
It's frustrating to get denied a traditional bank loan when you need the money to get your business up and running. If that's happened to you, don't be discouraged, because many small business owners are experiencing the same.
A recent survey found that 21% of businesses that applied for a loan, line of credit, or merchant cash advance in 2024 were denied. That's nearly unchanged from 22% in 2023.
Traditional lenders have always been selective, but banks and credit unions have grown increasingly cautious about lending to small businesses. Here's why small business loans are hard to get, and what you can do to improve your approval odds.
Demand for small business loans is rising, but banks aren't loosening access. Kansas City Fed data shows that while loan demand increased for the first time since early 2022, approval rates declined across banks of all sizes. At the same time, credit standards have tightened for the thirteenth consecutive quarter.
Research by the Federal Reserve Bank of St. Louis found that despite increasing demand for small business loans from large banks, there has been a decline in the supply of bank-provided capital. Nationally, between 2019 and 2023, bank lending by real dollar amount declined by 18%.
“Lending standards have become stricter over the last few years, partly because interest rates have gone up and partly because of the uncertainty that has set in,” said Michael Baynes, the Co- Founder and CEO at Clarify Capital, who has 15+ years of experience helping entrepreneurs access business funding.
“As interest rates go up, banks become more cautious and tend to become more selective in lending money. There has also been a change in lending standards after the pandemic, with a greater emphasis being placed on documentation and repayment capabilities,” he added.
The result is a lending environment where small businesses are competing harder for a shrinking pool of approvals.
A combination of economic pressures is driving banks to tighten lending standards and rethink risk assessment.
In the third quarter of 2025, average small-business loan rates ranged from 6.3% to 11.5%—a level that significantly raises the cost of borrowing.
As rates climb, monthly loan payments increase, putting more pressure on cash flow. For many small businesses, that added strain makes it harder to keep up with repayments, which raises the risk of default.
Because of this, lenders tend to tighten their standards in high-rate environments, becoming more selective and cautious about who they approve.
Banks have become increasingly focused on minimizing risk, and that shift shows up in how they evaluate small-business loan applications.
As financing expert Carolyn Katz explains, “Banks are not risk takers and never have been, but they've become noticeably more risk-averse in recent years. Those that do fund small businesses are more likely to look not only at the business itself but at the owner's assets.”
In practice, this means lenders aren’t just assessing your business performance; they’re also looking for collateral they can fall back on. Assets like real estate, savings, or other valuable property give banks a safety net if the loan isn’t repaid.
Without those assets, the perceived risk increases, making it significantly harder to qualify for a loan.
"The lending environment shifted pretty significantly after rates were raised in 2023 and 2024, because the cost of capital for banks went up and the margin on a $200,000 small business loan shrank to the point where it barely covered underwriting costs," explained Brennan Kolar, senior financial analyst and founder of Atlas CPA Index.
Banks are now increasingly prioritizing established borrowers who are less risky to lend to so that they can justify the time and cost of lending.
Fed Small Business data shows that the share of firms with more than $100,000 in outstanding debt today is higher than pre-pandemic levels, and this elevated level of existing debt plays a big role in the denial of financing applications.
If you want to get approved for a loan, you have to present your business in a way that satisfies the lender’s specific set of risk criteria. Here's what lenders are generally looking for today.
The Federal Reserve Small Business Lending Study found that 71% of respondents cited borrower financials as the most common reason for loan denials, with credit history and collateral also frequently flagged. Beyond those factors, other common reasons include:
It's worth noting that denial doesn't always mean you'll never get a loan in the future. But before reapplying, you need to determine why your application was denied and address the underlying issues first.
Nearly 40% of potential borrowers don't even attempt to apply for a business loan at all because they assume financing is out of reach, per the U.S. Department of the Treasury.
But even though traditional lenders are strict, most of the factors they evaluate are within your control.
Here's how to improve your chances:
Your personal and business credit profiles directly affect your funding options.
If your financial situation isn't where you want it to be, focus on improving it before applying.
Improving both profiles starts with consistently paying bills on time and avoiding defaults.
"Banks today are heavily focused on debt service coverage ratio and low debt-to-income ratios when evaluating your application," Chambers said.
A high DSCR signals that your business generates enough cash flow to cover its debt comfortably.
A high debt-to-income ratio, on the other hand, suggests you may be borrowing more than you can handle.
"One of the biggest factors that causes viable businesses to be denied is inconsistent or unclear financials. Many businesses are profitable in practice but can't demonstrate that profitability through clean and verifiable financial statements," Chambers said.
"If the story doesn't reconcile on paper, lenders cannot justify the risk." If your revenue is seasonal, be prepared to explain it clearly and show how you manage lean periods.
Most lenders will want at least two years of business and personal tax returns, recent bank statements, a current profit and loss statement, and sometimes a business plan with financial projections.
If you're a new business or lack an established business credit score, you might have better approval odds with a secured loan. These loans are typically easier to qualify for since there’s less risk for the lender when collateral is pledged against the loan.
Traditional bank loans aren't the only way to fund your business. Here are a few other ways to get the capital you need to start and grow your business.
The lending environment has become more conservative, but that doesn’t mean it’s impossible to get approved for a loan as a small business owner. To increase your odds of securing the capital you need, start preparing for the loan application weeks or even months in advance. This way, you give yourself enough time to actually understand what lenders are looking for and address your weakest areas.
And if you can’t qualify for a traditional bank loan, explore other financing paths like invoice financing or working with an online lender.
Jamela Adam is a Financial Copywriter for Bestmoney.com, specializing in content for fintechs, finance SaaS companies, and wealth management brands. She earned her BBA from the University of Southern California and is a Certified Financial Education Instructor. With over 4 years of experience writing for Forbes, Investopedia, Yahoo Finance, and U.S. News, Adam's is a trusted source for all things banking and finance.
