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How to Get a Small Business Loan With Bad Credit?

Bad Credit Business Funding Options?

That is a question often asked by small business owners over the past few years. As small business financing options dried up during the financial crunch and recovery. Not only have commercial banks tightened their small business lending guidelines, but small business owners have seen their business credit impacted — reducing their ability to get a traditional bank business term loan let alone the increasingly rare business line-of-credit.

Commercial banks are only lending to small business owners who have managed their credit very well — and even then, the commercial banks would prefer to fund small business loans tied to a government enhancement (like SBA business loans) to reduce their risk. Where do you go to get the financing you need to grow your business?

What is Considered “Bad Credit” for a Business?

Determining what is “bad credit” really depends. When it comes to small business lending, and more particularly – bank-rate business financing – the usual minimum credit requirement is between 650-700. While a credit score lower than that doesn’t necessarily mean you have “bad credit” it does make the ability to get a bank-rate business loan from a bank, credit union or community lender very unlikely. Banks and community lenders offer the very best rates and terms available among business lenders, and that’s because they don’t take a whole lot of risk. By reducing their risk as compared to more alternative lenders, a bank-rate lender is able to pass on the “lack of losses” to their borrowers – which means lower rates and longer terms.

Are Bad Term Business Loans Only Short in Term?

The longer the term associated with the loan, the more risk the loan presents to the lender. For every day, week, month or year of the term, the increase in the chance the borrower fails to repay the loan. During a time in business, just about anything can happen that puts a company at higher-risk. Additionally, a borrower could find themselves in a rut and in need of additional financing. When a business takes and second business loan or merchant cash advance they put the original lender at risk, being that the borrower will now be responsible for servicing the debt of two business loans stacked together, rather than just one. Therefore, to reduce their risk exposure, most bad credit business lenders will only provide short term business loans to companies with bad credit. Therefore, the most common use of a bad credit business loan is for bad credit business funding for working capital, being that working capital is generally shorter in term.

Types of Bad Credit Business Loans:

  • Bad Credit Invoice Financing: This type of financing is a convenient type of financing for companies with bad credit that have unpaid invoices that are between 30-90 days outstanding. It works by selling your unpaid invoices to a factoring company who will then forward a large portion of the invoices value to the small business, and will charge a small fee during the process. After the invoices in finally paid, the factoring company will then forward the remainder of the balance.
  • Bad Credit Equipment Leasing: by leasing your equipment, the equipment is being used as collateral, and is never actually owned by the small business owner. While leasing the equipment if you have bad credit may come with expensive rates, its an option that may be available when a loan option isn’t.
  • Bad Credit Cash-out Refinancing: This type of bad credit business financing involves using your commercial or investment real estate as collateral for financing. Essentially, the lender will be either providing a new mortgage to the borrower in which cash in provided, or they’ll be buying-out an existing mortgage, and providing the borrower with a little extra cash, and replacing it with a new mortgage.
  • Asset Based Financing: Using your company assets is a great way to obtain financing if you have been unable to obtain bank rate financing because of poor credit, but have good assets that a lender would find desirable to use as collateral. Common types of bad credit asset based loan collateral is commercial or personal real estate, equipment and machinery, inventory or accounts receivable.
  • Bad Credit ACH Cash Advance: To understand how an ACH loan works, one must first understand what a cash advance is: the sale of future receivables at a discount to the funder in exchange for immediate financing. With a bad credit ACH advance, the funder is repaid by taking a set amount from the merchant’s bank account each day until the advance is repaid.
  • Bad Credit Merchant MCA Split Advance: Just like an ACH advance, a MCA split is also the sale of a company’s future receivables. The main difference between a MCA advance and ACH advance is the way the MCA split is repaid. Whereas an ACH advance is repaid by taking a set amount from the borrower’s bank account, a MCA split funder is repaid by taking a percentage of the merchant’s credit card sales each day.

What is the Most Common Bad Credit Financing Option?

Increasingly, the more common request we see for business financing is in the form of merchant cash advances (both ACH and MCA split – although ACH advances are much more common). Its not that business owners with bad credit are only getting merchant cash advances, as many are seeking the other business lending options. Its that the ease of availability for a bad credit merchant cash advance is much easier to obtain than the other forms of financing, as just about any type of credit is accepted, and because merchant cash advances are an unsecured form of business financing.

Where to Get a Business Loan with Bad Credit?

Nearly 63% of business owners attempting to find funding say they most often targeted banks. Where are the other 37% going? Alternative lenders have stepped into the small business financing space. One type, known as Merchant Cash Advance financing (or Business Cash Advance) has filled the online business loan space and helped many small businesses get the short-term funding they need until they build their business credit. A quick Google search for short-term online business loans like “Merchant Cash Advance” or “Bad Credit Business Loans” will come back with dozens of hits. The key is finding the right business loan advance for your business (as the rates and terms of these types of loans vary).

Merchant Cash Advance Rates?

The terms of merchant cash advances are usually between 3-18 months. The payback is usually daily, but only on business days (weekends and holidays don’t count). There are some business advance lenders that allow small businesses to payback weekly if they meet the lenders’ cash flow criteria.

These types of business cash advances rates are called “factor rates” that are usually in the 1.16 – 1.49 range.

What is a Factor Rate?

Since merchant cash advances aren’t business loans (but sale of future business receivables) the interest calculated isn’t done in the fashion you’d see with a business loan provided by a traditional business lenders. Cash advances are calculated using a formula called “factor rates” which are usually in the 1.16 – 1.49 range. A factor rate represents the ratio of the total business loan payback as compared to the amount of the loan advance funded to the small business.

For example, if a small business owner took out a merchant cash advance loan for $10,000 at a factor rate of 1.25, the small business would pay-back $12,500 over the course of the term. This factor rate doesn’t include additional fees that can be up to 10% of the total funding amount. Such fees include banking fees, underwriting fees, ACH fees, etc..

Are Cash Advances Worth It?

It depends upon the small business’ financing needs. If the business owner sees an opportunity to finance a business need where their returns will be larger than the loan amount agreed upon between the business owner and the business lender, and the business owner understand that their bad credit will prevent them from getting a traditional bank loan, then a merchant cash advance may be well worth it to the business owner. But if a merchant doesn’t have a clear plan on how they’ll both use the money, but also ensure that the cash advance’s uses will lead to profits that are more than the cost of borrowing. Unfortunately, all to often these days, many merchants will not just take a merchant cash advances, but will stack-on additional merchant cash advances, sometimes having three, four, five or even six merchant cash advances. When a merchant stacks together too many merchant cash advance positions, they may find themselves hurting their cash-flow, and unable to continue to service the debt.

Additionally, while a cash advance is considered to be a form of unsecured financing requiring no collateral, that isn’t entirely true. While a cash advance doesn’t require specific collateral to be pledged in order for the funding to provide financing, many cash advance companies will require a general lien be placed on the business once the cash advance is funded. Even more, a cash advance funder may also require the small business owner to execute a confession of judgment before financing. A confession of judgement (sometimes referred to as a COJ) is becoming frequently-used by funders to help ensure they can collect should the small business default on their merchant cash advance.

How Fast is the Cash Advance Process?

Cash advances are very fast, with initial online approvals can take minutes, although funding for the business usually takes 24 hours – 7 days (depending on the size of the business loan amount and the amount of risk the business lender is taking). The merchant cash advance funder will require the borrower to supply a signed application and also between 4-6 months in bank statements. If the merchant accepts credit card payments at their place of business, the funder may then require between 3-6 months of merchant credit card processing statements to analyze before offering an initial approval. If the funder does provide the merchant with an initial approval, the funder will then forward the merchant a soft offer for the business owner to consider. If the merchant finds the terms acceptable and choose to move forward, the funder will then supply the merchant with contracts to sign. After the contracts are signed, and additional stipulations are provided, the funder will then place a phone call to the business owner where they will explain the conditions of the contract. After the phone call, the funder will then deposit the cash into the borrower’s bank account.

Bad Credit Hurt Chances?

Bad credit usually isn’t an issue with a business advance loan because the lenders reduce their risk by using a daily payback directly from your small business bank account. The merchant cash advance is almost always based on the cash-flow shown in the merchant’s bank account and/or merchant credit card accounts, therefore credit isn’t necessarily a determining factor. In fact, many cash advance funders will fund credit as low as 500. Other funders will fund any company regardless of credit scores. The commercial funders also price in the risk associated with the bad credit of the business owner (leading to higher rates than traditional bank business loans).

Which Merchant Cash Advance Company is Best?

Before considering a merchant cash advance, start by comparing a business advance to other types of business loans. While a cash advance may be an attractive choice, one should always look to other funding options first. If you can get approved for a more conventional form of financing you should take it before a cash advance. In short: a merchant cash advance should be the last option.

How to Get a Bad Credit Cash Advance?

There are plenty of cash advance options available for merchants on the internet. But not all cash advance companies are the same. Some cash advance funders offer rates that not all that much higher than banks offer. On the other end of the spectrum, there are cash advance funders that offer products that are similar in rates to what a person would see if they took a payday or car title loan. If you are a merchant with bad credit looking for financing and need help finding the best product, reach-out to one of our funding specialists, and we’ll help you navigate the process.

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