How to Get Business Loans with Bad Credit
Most entrepreneurs think that because they have bad credit there is no
chance of them getting a loan. But in reality, there are actually many
different financing options that business owners have in which they can
qualify, even with severe credit challenges.
As you already know, banks REQUIRE good credit to get approved for business
financing. But still, most people only go to their bank when they need money because it’s the only place they know to go to. But the most common business
bank loan, SBA loans, only account for 1.1% of all business loans (Department
of Revenue 2013). The reality is that the big banks are NOT the suppliers of
most business loans. And even though they require good credit to qualify, many
sources don’t. The big banks are very conservative, as most know. Due to this
they commonly won’t lend to businesses in which the business owner has
challenged credit. But businesses can succeed even if the owner doesn’t have
perfect credit. And many business loans make really good sense and have risk
low enough based on other factors, even if the owner doesn’t have good
credit. So what types of funding can and can’t you get with bad credit?
Before you know where to go to get money if you have credit problems, you
first should know where NOT to go. These sources might be appealing based on
their offers and promotions, but they will not typically lend money to you if
you have challenged personal credit. SBA loans, conventional bank financing,
private investor money, and unsecured financing, all have stringent credit
requirements.
Where NOT to Get Financing with Bad Credit…
SBA and other bank conventional loans are tough to qualify for because the
lender and SBA will evaluate ALL aspects of the business and
the business owner for approval. To get approved all aspects of the business
and business owner’s personal finances must be near PERFECT.
There is no question that SBA loans are tough to qualify for. This is why
according to the Small Business Lending Index, over 89% of business
applications are denied by the big banks.
Many people think that when they have bad credit, a private investor is the
best answer. But in reality, investors typically want average or better credit
of 650 scores or higher in most cases. They will also want solid financials for
at least two years. This means they’ll want to see tax returns showing large
net profits that are increasing over time. Think of private money as being for
SBA and conventional bank loans that just miss the mark.
“Unsecured” means no collateral is required for approval. No collateral
GREATLY increases a lender’s risk. No collateral requirements usually mean
it’s the quality of credit that determines qualification. Any type of financing
that has no collateral requirements, or no cash flow requirements, WILL require
good credit to qualify.
Where TO Go to Get Financing with Bad Credit…
Revenue-based financing, collateral-based financing, equity financing,
crowdfunding, business credit, and unsecured financing using a credit
partner/personal guarantor, are all great funding options for any entrepreneur
with personal credit issues.
The truth is, there is a LOT of capital out there that business owners can
obtain, even with personal credit issues. And most of it isn’t available
through big banks. And the great news is that you can qualify for this massive
amount of available financing based on your business strengths, as long as your
business has even one strength. The big banks require your ENTIRE business and
you to be near perfect to get money. But as you’re about to discover, there are
a lot of other sources who will lend you money, even lots of money, based just
on one strength. So as long as you have a strength to offset your
weakness of having bad credit, you can be approved. This is often
called compensating factors.
Cash-flow Based Financing
Many businesses have already proven “concept” and have consistently
increased sales. Their strength is that they have shown stability and that
they can effectively run a growing business. The risk to the lender is less as
they are established businesses that are growing. How are your sales? Sales are
the difference between an untested concept or idea, and a real operating
business. Will your idea be well received? Do YOU know how to operate a
business? Sales answer these questions.
If you have consistent sales, the next question is does the business have
existing cash flow proven by bank statements? There are lending options
available that only require a quick bank statement review for approval. They
won’t even need to look at your tax returns, so even if your business
shows a loss you’ll still be okay.The next question is does the business have
over $60,000 annually received in credit card sales? Does the business have
over $120,000 annually going through their bank account? If the answer is yes
then revenue financing or merchant advances might be the perfect funding
product.
For this type of “cash flow” based financing you must be in business six
months.No startup businesses can qualify. You should have at least 10 monthly
deposits or more going through your bank account, not just a few larger
deposits. Most advertising you see for “bad credit business financing” are
these products. These are short term “advances” of 6-18 months. Mostly short
term at first, such as 3-6 month terms. Then when half is paid down lender will
lend more money at a longer-term, such as 12- 18 months. Loan amounts typically
go up to $500,000. Your actual loan amount is based on your revenue, usually, you can get lent 8-12% of annual revenue, based on your verifiable revenue per
your bank statements. For example, a company that has $300,000 in sales might
get a $30,000 advance initially.
With revenue and merchant financing, 500credit scores accepted and are COMMON
with this type of lending. Bad credit is okay as long as you aren't actively in trouble such as in bankruptcy or has serious recent and unresolved tax liens
or judgments. For this type of cash flow based financing rates of 10-45% are
common depending on risk. Risk factors include Industry, Time in business,
Bank statement details- number of deposits, average daily balance, NSF charges,
amount of deposits monthly, and credit quality. Usually, rates are higher on the first advance until you “prove” yourself to the lender. No tax returns are
required, no other income docs are required, and no collateral is required.
Collateral Based Financing
Collateral based lending lends you money based on the strength of your
collateral. Since your collateral offsets the lender’s risk, you can be
approved with bad credit and still get REALLY good terms. Common BUSINESS
collateral might include account receivables, inventory, and equipment.
With account receivable financing you can secure up to 80% of receivables
within 24 hours of approval. You must be in business for at least one year and
receivables must be from another business. Rates are commonly 1.25-5%.
You can also use your inventory as collateral for financing and secure
inventory financing. The minimum inventory loan amount is $150,000 and the
general loan to value (cost) is 50%; thus, inventory value would have to be $300,000
to qualify. Rates are normally 2% monthly on the outstanding loan balance. An example is a factory or retail store.
With equipment financing lenders will undervalue equipment by possibly up to
50% and work with major equipment only. The lender won’t combine a bunch of small
equipment, and first and last month’s payments are required to close. Loan
amounts are available typically up to $2 million dollars.
Common PERSONAL collateral that can qualify for collateral-based lending
might include a 401k and stocks. 401k or IRAs can be used to obtain up to 100%
financing and rates are usually less than 3%. A retirement plan is created
allowing for investment into the corporation. Funds are rolled over into the
new plan. The new plan purchases stock incorporation and holds it. The
corporation is debt-free and cash-rich. With securities-based lines of credit, you can obtain an advance for up to 70-90% of the value of your stocks and
bonds. These work much the same as 401k financing with similar terms and
qualifications.
Equity Financing and Crowdfunding
With equity financing, you exchange a percentage of ownership in your
business for financing, much like on the TV show Shark Tank.
Personal credit is NOT an issue, but equity investors are looking for a tested
and proven concept and sales really help approval. You might find some investors
to invest in a concept only or invention. But most will want to see that you
have an operating business that’s earning money and making profits.
And expect that they’re going to want a large piece of the equity. For it to
be worth their time to invest, they might want 10-60% ownership of your
business. That means they’ll be taking a large part of your future earnings,
something you want to consider before recruiting an investor.
There are lots of websites in which you can obtain crowdfunding for your
business. This type of funding gathers money from a “crowd”, or a lot of people
instead of one
big investor. If the crowd likes your idea, they may donate money to your
project. Much of crowdfunding doesn’t need to be paid back and many investors
are people you know. But if you really look into crowdfunding, you’ll find there
are all types available.
Some types of crowdfunding sources do want a certain percentage of return;
some want a percent of equity ownership. And there are different sources and
platforms for different needs, and even unique niches or industries. So make
sure you find the right crowdfunding platform for you before you post a
project.
Business Credit and Unsecured Credit
Business credit is a great way to get money as approvals are not based on
personal credit. Business credit reports usually get started with a few vendor
accounts who will initially offer credit. Initial accounts create tradelines
and a credit profile and score are established. The company’s new profile and
score are used to get credit. Newly obtained credit is based on the company’s
credit per the EIN, not the owner’s credit based on the SSN. Personal credit
doesn’t matter as the credit linked to the EIN is used for approval.
When you use vendors to build your initial credit, you can then leave your
SSN off of the application and can apply for business credit based solely on
your EIN at most retail stores. Plus, you can get cash credit also, like
high-limit cards with MasterCard and Visa. But building business credit all
starts with vendor accounts. Without them, you won’t be able to start your
credit profile initially, and that profile being established is the key to
getting cash and store credit cards for your business. Once you find the
vendors you want to apply for, apply, and use your credit, it takes about
1-3 months for those accounts to report to the business bureaus. Once those
accounts are reported a business credit profile and score are then established,
and that can be used for you to get store credit cards next. Once you have
about 10 payment experiences reporting, you can then start to get cash credit
like Visa and MasterCard accounts. Payment experience is the reporting of an
account to one business bureau. So if an account reports to two bureaus, it
would actually count as two payment experiences.
You can get approved for vendor accounts right away that offer credit on Net
30 terms. Once you use those accounts they are reported, which takes about
30-90 days. At that point, in only 90 days or less, you can use your newly
established credit to start to get high-limit store credit cards. Then in about
30-90 days longer you can be approved for $5,000-10,000 limit cash credit cards
that you can use almost anywhere. Due to this fast building and approval time,
business credit makes a lot of
sense for credit-challenged entrepreneurs.
Unsecured credit requires no collateral, but it DOES require good credit.
But if you have credit issues you can still get approved if you have a good
credit partner or someone who will sign as a guarantor who does have good
credit. The guarantor is then liable for the business debt in case that account
defaults. Approval amounts range from $10,000 to $150,000.Card limits are equal
to what the signer has on their credit now. These accounts do report to the
business bureaus in most cases, so they also help build your business credit
and they are NOT reported on the guarantor’s personal credit report. Your
guarantor will need excellent personal credit to qualify.
Read more at https://ebprofessionals.com/
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