Almost 10 years ago, the approval rate for business loan applications was less than 10%. Today, the approval rate is significantly higher, at just over 25%.
Even though businesses borrow about $600 billion every year, there are many businesses that can’t get approved because of bad credit.
Fortunately, long gone are the days of having no choice but to apply through a bank. There are many available business loans for those with bad credit – you just have to know where to look.
In this guide, we’ll cover different business loans for poor credit, so that you can determine which one might be the right choice for your business.
Different Borrowing Options
Bad credit business loans are available in all different shapes and sizes. Let’s take a look at a few of the various financial instruments available for borrowers.
Merchant Cash Advance
Historically, a merchant cash advance existed predominately for businesses whose revenue comes from debit and credit card sales, primarily. Restaurants and retail shops, for example, commonly use merchant cash advance options for borrowing.
A merchant cash advance (MCA) is more of a cash advance than a loan, and sometimes businesses get funded in as little as 24 hours. The cash advance is based upon credit and debit card sales that get deposited into a business merchant account.
Typically, they’re structured in 2 different ways.
You can get an upfront sum of cash that you repay by setting up a daily or weekly debit from your bank account, OR you can get upfront cash in exchange for a percentage of your future debit and credit sales.
There are 2 types of invoice financing – invoice factoring and invoice discounting.
Technically, invoice factoring isn’t a business loan, either. The way it works is by a business selling its accounts receivable (invoices) to a 3rd party (a factor) at a discount. That business gets an advance on payments for their outstanding invoices.
This way, if a business is waiting for and depending on payment from clients or customers, they can get that working capital to reinvest in their operations sooner than if they waited for all those customers to pay.
For example, an invoice finance provider might pay a furniture business 80% of what their invoices are worth. As soon as that provider receives complete payments from customers, they’ll send the remaining amount back to the business.
The business will then pay interest, fees, or both to the provider, depending on their agreement. Customers are aware of the arrangement, however, so it’s vital only to use this method if you’re confident it won’t reflect poorly on your business.
Invoice discounting is like invoice factoring, except the business continues to collect payment from their customers. What that means is that customers aren’t necessarily aware of the business’ arrangement with an invoice finance provider. In these circumstances, invoice finance providers usually advance businesses up to 95% of their invoices’ worth.
As customers pay their invoices, the business repays their finance provider, plus any associated fees.
Equipment financing involves taking out a loan or a lease to buy or borrow hard assets for a business. It accounts for a significant portion of the burdensome costs new and existing businesses face – those they end up requiring a loan for.
Bad credit business loans are available for those businesses that are in need of some heavy-duty equipment too. Many companies require specific equipment to function, such as company cars, restaurant equipment, and other machinery.
Equipment loan options let you finance up to 100% of the cost of used or new equipment for your business. There are a variety of types of equipment financing loans, so it’s essential to weigh your options to try and find the most cost-effective investment for your business.
One great aspect of equipment financing is that it comes with less risk than many other loans. The reason for this is that the equipment you purchase serves as collateral on your loan. If you can’t make your payments or your business starts to flop, the lender can repossess the asset, making it a lower-risk and more cost-effective way to acquire the equipment you need.
Business Line of Credit
A business line of credit is an excellent way for a business to ensure they have access to the cash they need to meet daily working capital needs and to fill short-term financial needs.
It provides more flexibility than regular business loans. With a business line of credit, you can borrow up to a certain limit, but you only pay interest on the portion of the money that you use. As long as you don’t exceed the credit limit, you can draw and repay funds as you so desire.
The line of credit works similarly to the way a credit card does. Some of the reasons why a business might opt to take out a business line of credit are:
- To repair equipment that is critical to the business
- To purchase inventory or new equipment
- To finance a marketing campaign
- To bridge a seasonal cash flow gap
There Are 2 Types of Business Lines of Credit
There are 2 types of business LOC (lines of credit). The first is a secured business line of credit. This LOC requires that the business applying for the line of credit must pledge certain assets as collateral in order to secure their LOC.
Because a line of credit is a short-term liability, lenders usually ask for short-term assets, like inventory and accounts receivable. They don’t usually require capital assets like equipment or rental property to secure the loan. If for some reason, the borrower can’t pay, then the lender will assume ownership of the specified collateral and liquidate it to pay off what’s still owed.
The second type of business LOC is an unsecured business line of credit. This type of credit does NOT require that certain assets become collateral. A general lien or personal guarantee is typically required, though.
For this type of LOC, credit should be higher, so it’s not necessarily the best option for bad credit business loans. Interest rates can be higher, and unsecured LOCs are typically smaller.
Please note that even though our site exhibits a required minimum credit score of 620, we do have BLOC partners that offer business loans for bad credit that’s even lower. They use an algorithm that can provide a BLOC to a client with a credit score of 590-600, as long as their business financials are strong.
How Does a LOC Work?
When you apply, get approved for, and open a business line of credit, your business receives access to the number of funds agreed upon in the contract. Unlike a term loan, your business will only pay interest for the funds you use AS YOU USE them. You’ll receive a monthly statement that reflects the amount of credit your business uses, and that statement will include any interest charges from your withdrawals.
Once what you’ve borrowed is repaid, including interest, your credit limit remains available whenever necessary. The payment schedule for repayment depends on the lender and your agreement. Weekly, monthly, and periodic payment schedules are all standard.
It’s not uncommon to pay an annual fee for a business line of credit, either. Also, if your business accesses the LOC quite frequently, transaction fees may apply as well.
LOCs under $100,000 can also operate like a credit card account, meaning you can tie a credit card to the line of credit and use that card to make purchases. You can also write checks for the issued account, or withdraw cash. Some lenders will offer options to transfer funds directly into your business account.
What Do You Need Funding For?
Once you’ve come to the resolution that there’s no way you can continue on without financial help, as yourself what you need funding for.
Do you need to invest in marketing or better manage your cash flow? Is it new inventory you need, or are you desperately awaiting payment from customers?
Once you’ve determined precisely what you require funding for, it’s much easier to determine which loan will work best for you and your business.
There are Choices Concerning Business Loans for Those With Bad Credit
Today, it’s much easier to obtain business loans for those with bad credit. From equipment financing to lines of credit, there are plenty of options for business owners who need funding for their new or existing businesses but don’t have good credit scores.
While many loans can get funded rather quickly, it’s essential that you take your time exploring your options and assess what will work best for your business and your ability to make payments.
While it can be tempting to do so, don’t sign off on anything until you’re absolutely sure you’ve made the right choice.
Do you need help figuring out what your best options are? Don’t hesitate to reach out to us so that we can help you strategize and make a choice.
Checking for pre-approval will not affect your credit score.