It is likely that in some point of owning your own business you will need to borrow money for one reason or another. Life happens, so whether you need to buy new equipment, make an immediate improvement, meet payroll, or need some extra cash to keep your business afloat, you may need to consider a business loan. This can be tricky to obtain if you have poor credit and need what the industry calls a “bad credit business loan”.
A traditional business loan from your bank may not be the answer for everyone. Nearly half of all Americans have bad credit (a scored defined as 300 to 629), and out of those who apply only 23 percent of businesses will be approved for the loan. Low credit scores are the number one reason that businesses are turned down by their banks. The acceptance rate is even lower for new businesses, regardless of your credit score. This news can be extremely discouraging if you ever found yourself dealing with financial hardships. However, there are options for obtaining a bad credit business loan for your business in the form of alternative loans from direct credit lenders.
Alternative Or Traditional Small Business Loan?
What is the difference between traditional loans and alternative loans when trying to acquire a bad credit business loan? We already established your credit score is a huge factor for receiving a bank loan. Alternative loans from direct lenders tend to have higher approval rates then traditional banking institutions. These alternative lenders are primarily interested ensuring that you are able to pay them back and may overlook poor credit history in your past. One of the items that these private business lenders use to determine approval is the review of your businesses monthly revenue and/or accounts receivable. If your business has been operational for at least 3-6 months, and is already generating sales or revenue, most non-traditional lenders might be interested investing in your business despite any poor credit history.
Which Bad Credit Business Loan is Best for your Business?
There are many online business lenders and a number of different loan and funding programs available. Let’s explore the different options available for small business loans and business capital funding programs. Generally, alternative lenders offer you some or all of these six different options: Merchant Cash Advances, Banking Only Programs, Business Line of Credit, Working Capital Loan, Inventory Loans, and some also have relationships with banks and can offer a SBA 7(a) Loan Program.
1) Merchant Cash Advances (MCA)
Merchant cash advances, known as an MCA, by the lending industry, are great for the vast majority of business owners even if the business owner has bad past credit history. Merchant cash advance, by legal definition, is not technically a loan. MCA allows the business owner to be advanced “cash” based upon the credit card sales of the business. Basically, what this means is that the lender is purchasing a portion of future credit sales to allow the business to acquire capital quickly.
Each lender my have different requirements based on their own new business acquisition model. To apply for a merchant cash advance, you must have a established merchant account and must be processing transactions for at least 3 months. Although some private lenders do not require credit checks most will require a credit score of at least 400 and no active bankruptcies for approval.
This type of loan or “advance” can allow for the quick and simple approval of anywhere from $2,000 to $1,000,000 in as little as one business day. Many small business owners choose this option because of the speed and easy application process. Merchant cash advances provide you a line of credit that can be accessed almost as soon as you are approved. It is good funding option for business owners who need money quickly or who do not want to go through the tedious process with traditional business loan programs. Another huge benefit of most MCA funding programs is that they do not require the borrower to put up collateral to assure repayment. In additional, non-traditional lenders usually will provide higher risk funding to business owners who may have had poor credit history in their past.
Rates on a merchant cash advance can be higher than a traditional business loan depending on the lender, and many business related factors. In general, when a private lender decides to finance your company without requiring collateral, and accepts bad credit history, this is an addition risk that the lender is taking and thus they will mitigate that risk by charging higher rates than a traditional bank loan. In the case with bad credit business loans, as with any type of loan, it is important that read the lending agreement you are provided, and to make sure that understand the terms you’re being offered to insure that you get the return on investment (ROI) that you are looking to achieve.
2) ACH Loan Programs (“Bank Only”)
ACH loan programs, also know as “bank only” funding are another very popular business financing option for applicants with bad credit. Don’t be fooled when you hear the term “bank only”. It might sound like your poor credit score might be an issue, however, with some direct lenders, this is not the case. The term “bank only” only pertains to the fact that you only need a business bank account and not a merchant account to apply.
The main benefit of this type of an ACH loan program is that the business does not need to have a merchant account in order to obtain funds. Additionally, payment terms and rates can also be much more flexible and private for the businesses over a traditional bank loan. The majority of loan providers tend to base their approval by examining the business’s “cash flow” – meaning, your payment terms and finance rate is based upon your monthly sales and bank deposits.
An ACH loan or bank only loan program is also a great choice for businesses in good financial standing although most lenders will also allow much lower scores than a SBA loan. This provides you with more freedom to negotiate the terms of your rate. In many cases, progressive payment terms can be written where rates decrease if you pay back your loan quicker.
Just like a merchant cash advance, the lending rates tend to be higher than a SBA or bank business loan. Again, these rates are determined on per application basis and with the lending model the funding company follows. Since most ACH loan programs also do not require collateral, the lending rate and loan payment schedule are based upon the risk level the lender calculates for you and your business. Since approval is based on business history, many lenders will not allow startups to apply.
3) Business Line of Credit
If you seeking an extra cushion and security for your business then consider a business line of credit. Prepare for unforeseen expenses such as natural disasters or a lawsuit might. Planning for the future is one of the best things to do for your business. You never know when disaster might strike, so be one step ahead.
Various types of sub-category loans fall under this program including a Working Capital Loan. A working capital loan is to help you cover your day to day operating expenses. When you’re a small business financing investments, such as hiring and training new employees or adding new machinery can burn a hole in your pocket. A working capital loan will ensure that your daily operations go smoothly, giving you one less thing to worry about. A traditional capital loan is difficult for a small business owner to obtain. Banks tend to require high-risk collateral for a “bad credit business loan” they may seek out ownership in your vehicle or your home. An alternative working capital loan provides you with extra time to generate revenue.
Another sub-category that falls under Business Line Of Credit is an Inventory Loan. This type of funding is designed primarily for businesses that are product or retail based. When your typical warehouse is not able to stock enough units as you need for approaching a busy season, an inventory loan may be right for you. The loans are intended to be paid back quickly, as soon as the additional stock has been sold. Inventory loans will keep you ahead of the upcoming busy season and ensures that you will not lose out on business due to limited stock.
A business line of credit is usually a better option than lines of credit provided on business credit cards. Repayment costs are cheaper and the payment terms are more flexible. Just like a credit card, the business owner is given a credit line as high as $1 million dollars from which he can withdraw funds with whenever needed. Most lenders do not require collateral, and you only pay for the money you borrow. A business line of credit is a good option for businesses that often have unexpected expenses due to various reasons. It allows the business to get access to immediate financing without having to apply and wait for approval.
Rates for a business line of credit through an alternative lender are usually considerably lower than which can be achieved from a traditional bank, but again because there is no collateral requirements, and lower credit scores are considered, the risk is higher to the lender and therefore the cost maybe slightly higher. This is precisely why this type of loan also falls into the category of a bad credit business loan. It should go without stating but, just as with any contract a business owners agrees to they should fully understand the terms of the offer. Don’t forget that private lenders have much more ability to negotiate terms and repayment than traditional banks. In order to stay competitive, most alternative lenders will match the rates of other lenders. Business lines of credit are also difficult to get if you are new business or a looking to start a new business.
4) Small Business Administration – SBA 7(a) Loan
Tradition banking institutions also offer a type of bad credit business loan which is called the Small Business Administration SBA 7(a) loan. It is very popular loan program for traditional banks because a guarantee is provided to banks which makes them more willing to give money to small business with lower credit scores.
SBA loans can include lower down payments and longer repayment terms than traditional or conventional bank loans which helps the small business keep their cash flow open for other expenses. Business owners with lower also credit scores and less past credit history may also be considered. SBA business loans are usually structured without balloon payments. These longer payment terms help businesses improve their cash flow.
There are a few disadvantages of a SBA when if you fall under the category of a bad credit business loan. The first is that it they require a lot more paperwork and a much stricter approval process because of repayment insurance that bank received if the business owner defaults on his loan payments. The righter requirements and additional due diligence required by the lender extends the amount of time it can take for approval and funding. On average an SBA loan may take a minimum 60 to 90 days before the loan amount is received. SBA loans require you to be in business for at least 2 years or if you are a startup, banks require you to provide business plans, and proof that you have the experience to own and operate the business you are requesting funding for. Finally, it is more than likely that you will need a much higher personal credit score to qualify for an SBA loan than is required for other bad credit funding programs. Most alternative lenders carry partnerships with banks and can also provide you with an SBA loan even if they are not a bank. For this reason, ask your alternative lender for rates on SBA’s loans just in case you do qualify and so that you know all options available to you. Additional information about the Small Business Administrations bad credit loan SBA 7(a) can be found here.
In summary there are many different loan and financing programs to available to businesses owners with bad credit history who are in need of what the lending industry considers a “bad credit business loan”. Just because you’ve had a few blemishes in your past does not mean that you can’t get the funding you need. Always be sure to review all terms of your agreement, compare rates between different lenders, and consider the finance rate so that you can maximize the ROI.