Don't Fret: We Have Your Guide to Business Loans for Bad Credit
As a business owner, it’s imperative to have access to the capital necessary to grow and sustain your business. There are many different ways to get access to said capital…but how do you know which way is best for your business? Let’s take a look at all the options available to you as a business owner.
In 2018, there are many ways for business owners to get the funding they need to sustain and grow their businesses.
Traditional business loans are loans issued through banks. These loans tend to have better interest rates and credit limits than other funding options, but they do have high standards for applications and acceptance.
Federal and state business grants are available for many different industries, but they can be time-consuming to apply for and difficult to get approved. The federal government has grants for businesses involved in areas like health services, energy, defense, food and agriculture. At the state level, there are specific grants available as well.
Business credit cards are a good option for businesses who just need a line of credit for miscellaneous purchases. There are many card options out there with some awesome benefits regarding points and rewards. If you travel for your business, this is a must-have.
Crowdfunding is a way to raise money for a product or business. It is often used to fund new products before they reach the manufacturing or production stage. Through platforms like Kickstarter and Indiegogo, you can create a campaign that allows people all over the world to contribute small amounts of money to fund your business. In 2017, the total crowdfunding volume was $16.2 billion.
A merchant cash advance is a way to get a lump sum of money without technically taking out a loan. You make automatic repayments based on the daily transactions at your business via credit card. This is a quick and easy way to get access to funds, but it will decrease your daily cash flow because of the reduction in revenue due to the repayment for each transaction.
Small businesses have more funding options now than ever before, yet small businesses still struggle to obtain funding. Did you know that:
Being about to obtain funding when it's needed for your business is essential. Did you know that 70% of new businesses say that they need funding to grow? If we dig a little deeper, we find that only 23% of those businesses get the amount of capital that they request. How can that be the case? Well, many of these businesses just haven't been around long enough to have established a solid credit history. Without the necessary credit established, small businesses may not get funded, and if they do they are subject to higher interest rates and bad loan terms.
*2016 Small Business Credit Survey. Federal Reserve Bank of New York
Unlike large companies, small businesses don't request a lot of capital in the form of a loan. In fact, 51% of small business loans are for less than $100,000. It is because small businesses require a lot less capital to operate a small business if maintained properly. If a small business understands its cost structure, loans can be taken out in the exact amounts to cover the necessary expenses.
*Harvard Business School: Why Small-Business Lending Is Not Recovering
Small businesses can make use of small business loans many different ways. The most frequent way is for day-to-day business expenses. These types of expenses can include rent, salaries and inventory purchases. In fact, 42% of small businesses utilize a small business loan to manage their day-to-day business expenses. Ideally, you would want to use these types of loan for business growth, which is why it is important to have a strong understanding of your business's cash flow.
*Source Federal Reserve Bank of New York: Fall 2013 Small Business Credit
For a long time, the only way to get a loan for your business was to go through a bank. Due to the financial crisis in 2008, it became harder and harder for small businesses to obtain a loan traditionally, which led online loan companies to help fill the void left by traditional banks.
Traditional lenders are looking for steady and predictable businesses to lend to. Since 2008, they have increased their qualification requirements and application restrictions in hopes of finding the best-qualified businesses to fund. They are more conservative due to these restrictions and approve fewer businesses for loans (meaning they decline more risky businesses and their owners). Traditional lenders tend to have lower interest rates and higher credit maximums since they are working with less risky businesses. While the terms and credit lines may be higher, the speed to get funded is slower due to the higher qualification standards.
Online lenders make a conscious effort to serve those neglected by traditional bank lenders. They have less rigorous standards for approval, which allows for a larger range of eligible businesses. That said, the loan terms are not as favorable as traditional bank loans because the businesses are more risky investments for the online business lenders. From a speed of funding standpoint, online lenders are the best in the business in getting applications processed and approved.
It takes on average 30 minutes to process an online loan. vs. 25 hours for traditional lenders.
Did you know your business has a credit score just like you do? Traditional lenders use your business credit score just like your personal score to understand how likely you are to make your repayments.
Traditional credit reporting organizations like Equifax and Experian are players in the business credit score game, but there are also new entrants like Dunn & Bradstreet with their credit system called PAYDEX. Their reporting process is slightly different than the normal personal credit process. These organizations rely on businesses to self-report their payment reporting details in order to build their credit history.
If you’re looking to get a traditional business loan, your personal credit history will be a factor. Even if you have a great business credit score, a traditional lender will still take into account your personal credit score and history. This is also the case regarding business credit cards; your personal credit score will impact your likelihood of approval. Getting a small business loan through an online lender can be easier: they may not take into account your personal credit score, instead just focusing on the strength of your business.
Your business credit score calculates a little bit differently than your personal credit score, especially with Dunn & Bradstreet’s PAYDEX system. Below you’ll see a chart that outlines the types of scores there are and where you’ll want to set your sights.
Maintaining a stable business credit score will directly impact the availability of growth cash for your business. If you are relying on a business loan for growth, having a high business credit score will provide access to more capital and better rates on your loan. It’s important to regularly monitor your business credit and make an improvement plan if necessary.