We've all been reminded at one time or another that money doesn't grow on trees. That doesn't mean, however, that we need it any less. That's especially true for small businesses. Whether your business is in its startup phase, or if you've gotten past the initial growing pains to reach the point where you're ready to expand, renovate, or improve efficiency, you'll need an infusion of capital to make those things happen. In theory, a small business loan would fill the gap. In practice, that funding is hard to come by.
The pre-recession days of easy credit are long gone. Lending for nearly any purpose, be it mortgages or small business loans, now comes with more stringent requirements. Indeed, for most business owners, the picture seems downright dire. Estimates for small business loan approvals by traditional lenders range between 18 and 22 percent, which means that the odds are significantly stacked against most startups and established small businesses.
Your business's credit score is the first metric that most banks will use to determine your eligibility for a loan, and even businesses with good credit are likely to find that good isn't quite good enough, since banks have become highly risk-averse -- at least when it comes to their own money.
|Very Poor||579 or Less|
Qualifying for a Small Business Loan with Bad Credit
Like banks, nontraditional lenders have a series of qualifications that small businesses must meet to receive funding. These qualifications are generally somewhat looser than those used by the bank to determine a business's creditworthiness.
Many lenders place fewer restrictions on the use of the loans they issue, although some lenders still won't deal with businesses in certain sectors, while others may target specific industries. Minimum gross revenue requirements vary based on the size of the loan requested, but business owners should also be aware that loan amounts are often capped on the basis of their business's gross receipts. The application process will often be a shorter form, but will still require the following:
- Credit check
- Proof of time in business
- A business plan with realistic projected revenue
- Banking and/or credit card records
- Purpose of the loan
Caveat Emptor: What To Watch Out For
Non-traditional lenders will take on credit risks that a bank would not, but that risk typically comes at a price. Furthermore, If you're not careful, there are some risks involved for you and your business as well.
Beware of Loan Brokers: Loan brokers are not direct lenders; rather, they match borrowers to lenders. They often promise a quick application process, quick approval, quick disbursement of funds, and a much higher than average rate of approval (some companies boast a 90% approval rate). However, regulation on brokers ranges from shoddy to nonexistent, and many brokers take full advantage, taking fees not only from the lenders to whom they refer borrowers, but also often from borrowers themselves. Broker commissions and closing fees can nearly double the cost of a loan, and may be passed on by the lender, the broker, or both.
Know Where Your Information is Going: Some online "loan applications" aren't even applications; your information is being collected for sale to loan brokers and lenders, or passed on to others who may find it useful. Pay attention to the fine print, and do your due diligence on companies to make sure you're dealing with a reputable company.
Beware of Interest Rates and Fees: If you have subprime credit, you will typically be charged high interest rates, origination fees, and other fees as well. APR for many nontraditional lenders ranges from 18% (for certain microloans) to as much as 113%.
Pay Attention to Repayment Terms: Loan repayment requirements can take several forms, from a percentage of credit card receipts, a percentage of cash receipts, or direct debit. Nontraditional lenders often issue money with much shorter repayment terms (as little as one month if a loan is borrowed against unpaid invoices, with five years being the longer -- and much rarer -- option).
Lenders for Small Businesses with Bad Credit
- Behalf: No credit check, collateral or personal guarantee required; quick approval for loans from $300 to $50,000
- BlueVine: Cash advanced against future invoices with a high interest rate and short repayment period
- Dealstruck: Several loan and advance types available. Requires guarantee and collateral, but has better terms and interest as a result.
- Funding Circle: Takes longer and requires collateral, but rates and repayment terms can be somewhat more favorable
- Kabbage: Fast approval and disbursement, but interest rates can be as high as 113%
- LendingClub: More stringent terms (including guarantee and collateral), but APR is lower than many competitors'
- OnDeck: 500 minimum credit score; short-term loans guaranteed by a lien on business assets
- PayPal: Borrow against future receipts; restricted to businesses that use PayPal as a payment processor/gateway
- Prosper: Higher than average APR, but longer than average repayment term
- Rapid Advance: 500 minimum credit score; generous repayment terms based on credit card receipts, but APR up to 80%
Alternatives to Small Business Loans
|Business Credit Cards||Quick and easy approval||High interest, often capped at less money than you may need|
|Merchant Cash Advance||Unsecured, borrowed against future profits||Often issued at a higher – much higher – rate|
|Credit Partner||You can “piggyback” on a co-signer’s good credit||Failure to pay can damage their credit and your good name|
|Investor||Can be easier than loan process; if a loan, usually involves lower interest||Often means surrendering a degree of control over the business|
|Crowdfunding||Not a loan, low cost of entry||Some platforms won't pay unless goal met or exceeded; problems with production or prototyping can be harmful or fatal to unprepared businesses|
|Home Equity||Not a loan, ease of approval with sufficient equity built up||If you fall behind or your business fails, it could take your home with it|
Loans for small business help to deal with the unexpected in bad times (a budget shortfall or payroll gap) and good times (a short-term equipment lease to take on a big project, ordering more product because of a seasonal spike in business). As we've seen, that financing can be hard to come by. However, if your business has been turned down for a bank loan, there's still hope. With persistence and due diligence, you can uncover alternatives that can help you find the funding you need.