Why Bad Credit Is No Longer a Barrier to Business Loans

By Meredith Wood

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There was a time when if you didn’t have a credit score of at least 650, you couldn’t get a business loan

Even as recently as 2013, reports indicated that over 63 percent of small business owners most often looked to traditional banks when seeking to borrow capital. Yet only a dismal 27 percent of these respondents actually succeeded in attaining a traditional bank loan.

Fortunately for many small business owners, traditional banks are no longer the only available source of capital. With the recent growth in online alternative lenders, you now have more options for acquiring funding, even if you are turned down by traditional sources. And because alternative lenders consider multiple factors when offering a loan, including the borrowing company’s revenue and cash flow, your credit score alone doesn’t hold such overwhelming weight. For example, if you can offer collateral on the loan — such as your home or other property, business equipment, or even inventory — this can offset the impact of a low credit score.

Here are a few examples of the alternative borrowing options most commonly available to entrepreneurs with low or no credit:

Online Term Loan – Most similar to the loans available from traditional banks, term loans are what typically first come to mind when most people think of small business lending. These loans are negotiated with a set repayment time of between 3 months and 10 years, a set number of payments, and can have fixed or variable interest rates. But unlike term loans from a traditional bank, non-bank lenders are more flexible in considering multiple factors to determine term loan eligibility. Borrowers can use a commercial term loan to meet a variety of business needs including buying more inventory, purchasing equipment, or paying off other debts.

Microloan – Available through certain non-profit organizations or through the Small Business Administration’s Microloan program, these loans of up to $50,000 are designed to help women and minorities start small businesses. Microloans are typically more lenient toward business owners with bad credit or no credit histories, but are more selective in the types of businesses and demographics they serve.

Merchant Cash Advance (MCA) – This is a lump sum of short term capital offered to a business owner in exchange for a portion of the company’s future credit card sales. Upon entering the loan agreement the lender will automatically withdraw an agreed to percentage of the company’s daily credit card transactions until the loan is repaid plus interest. MCA loans are often a great option for seasonal businesses as the rate of repayment is proportional to current sales, so owners aren’t faced with large payments due at times when revenue is low.

Invoice Factoring – Lenders who offer invoice factoring essentially purchase a percentage of the borrowing company’s outstanding receivables, offering an immediate cash advance of around 80 percent of the borrower’s total invoice balance. The factor (or lender) collects their processing fee from the remaining 20 percent, as well as a “factor fee” dependent on the time until the invoice is paid. Invoice factoring can be a valuable option for companies with a large number of outstanding receivables as an addition to offering cash quickly, invoice factoring companies also take over the collections process from the business owner.

Of course, there is no perfect borrowing solution, and each of these alternative loan options do have downsides. They typically carry higher interest rates and more fees than traditional bank loans — so whenever borrowing, it’s important for you consider all the options and weigh the costs and associated benefits of any loan.

No matter what, having a low credit score will always make it harder to attain a small business loan. That’s why in spite of these new options, it is still important you do everything you can to maintain good credit. Finding the best available funding will always be easier with a higher credit score, but it is nice to know that there are more borrowing alternatives available than was once the case

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