Understanding Bad Credit Business Loans
What is bad credit?
If your personal credit score is between 300 to 640, your credit report is considered in poor standing. This may make you feel anxious about getting a loan, but there are lenders who can offer the additional funding you need with bad credit business loans.
Credit scores are numerical representations of an individual’s creditworthiness. This reflects how good or bad you are at repaying your debt. This is also a gauging factor on how timely you repay your debt.
When you submit loan applications to lenders, the latter may look into your credit score. Your credit score can help lenders determine how much risk is at stake in case they give you a loan. For most lenders, your credit report is a deciding factor on whether or not they should offer you a loan. For others, it is a determining factor on how much they can loan you. And for some, it is a calculating factor on what kind of terms and conditions they should extend to you.
Yes! Credit score says it all. For small business owners, having a poor credit history can be very challenging when opting to get some financial help. However, this should not stop you from looking into loan deals that are beneficial for your business. While it is true that you may be going through a needle hole when dealing with traditional lenders, you may check out alternative lenders who can provide better loan offers.
What is an Alternative Lender?
Alternative lenders are loan options outside the scope of traditional lenders. This lending option offers a wide range of loans to many consumers as well as business owners. These lenders can provide more flexible and favorable terms and conditions for borrowers. They can even extend bad credit business loans to those who have a fair to poor credit profile evaluation.
In a typical scenario, alternative lending is available online. Most of these lenders will consider your loan application process through online transactions. Requirements and documents will be submitted through email or other electronic means.
There are two types of alternative lenders. Understanding their differences may help you decide which alternative lending agency will work best for you.
Here are the 2 main categories of alternative lenders:
- Direct Lenders
Direct lenders are financial institutions that can fund small to midsize businesses. These lenders extend loan deals while cutting off intermediaries, such as a broker or an equity firm.
- Peer-to-peer Lenders. Peer-to-peer lenders are those who establish a connection between the borrower and the investor. They are considered indirect lenders or the middlemen.
- Direct Lenders
Whether you choose to get a loan from a direct lender or from a peer-to-peer lender, always evaluate which offer is beneficial for you and your business. Loans that do not require a good credit score are not entirely perfect. In the same light, loans that do not require a lot of documents are not truly awesome. Remember to look into how flexible the loan terms and policies are before taking a loan offer.
Alternative lending has its pros and cons which you may want to consider before applying for a loan. Here are the advantages of alternative lenders:
- They have lower approval requirements
One of the main highlights of alternative lending is that it has lower loan approval requirements. Compared to traditional lending, alternative lenders are more lenient in terms of credit reports. They also tend to require lesser documents to be submitted.
In most instances, they would only require the submission of scanned copies of proof of identity, proof of income, and proof of address. You do not need to go through processing a lot of documents that most banks and traditional lenders would require.
- They give faster access to capital
Another great feature of alternative lending is the fast turnaround time in processing loan applications. For most alternative lenders, it only takes about 24-48 hours lead time to get your funds ready. There is no need for longer anticipation. Whether you qualify for the loan or not, the results are ready in a matter of hours.
Inasmuch as alternative lending is advantageous in terms of approval requirements and turnaround times, it also has its disadvantages. Here are the advantages that you may need to look into before opting for alternative lenders:
- It requires personal guarantees
What are personal guarantees?
Personal guarantees are personal credits and assets that may stand as collateral in case you default in one or more payments. Taking out a loan for small businesses may also risk your personal credits and assets in case the business fails.
The rule of thumb is to look into the terms of the loans before risking all you have.
- They offer high interest rates
The interest rate for most alternative lending agencies is usually higher compared to traditional lenders or big commercial banks.
Why are the interest rates higher?
Higher interest rates compensate for lower approval requirements. The lenders are taking the risk of investing their money with borrowers who can comply with fewer documents or even to those who have bad credit business loans.
With less stringent criteria comes higher risks. With higher risks come higher interest rates. In some cases, higher interest rates also come with shorter loan terms. Alternative financing options typically offer 15% interest rate for a 36-month loan period for a peer-to-peer loan. For direct alternative lenders, they offer up to 45% of interest rate for a 4-month loan term.
Whether you are planning to fund your startup business or expanding on your existing one, consider both the advantages and disadvantages of qualifying for an alternative funding. Evaluate and compare all the offers that you have before choosing a loan deal. Remember that lower approval requirement may not always be the best option. 719
What You Need to Consider When Opting for Bad Credit Business Loans
Every business owner is committed to making it big in their industry. This may seem viable if funding assistance is available readily. Small business owners will opt to qualify for a loan to augment capital funding for their business. Whether it is to supplement asset, equipment, or merchandise funding for startups or to expand your growing business, getting a loan is the best solution.
Small business owners may need to have an easy access for capital funding. This may, however, be challenging for those who have no credit history or those who have fair to poor credit ratings. Even businesses with excellent annual revenue may have difficulty applying for small business loans with bad credit.
Before taking bad credit business loans, consider the following insights:
- How do I qualify for a bad credit business loan?
Most lending institutions look into credit scores. However, there are alternative lenders that provide loan options with minimum requirements. In a typical loan scenario, the following are the general requirements in order for a small business owner to qualify for a loan:
- A credit score that meets the lender’s requirements – may be between 500-670
- Length of doing business – may be months or years
- Minimum revenue – may be monthly or annual
Although some lenders may require additional requirements, meeting these 3 requirements give a borrower a high chance of getting approved for a loan. The loan amount and the repayment terms vary according to the requirements you will submit.
- How do I apply for a bad credit business loan?
In this day and age, we can look up almost everything through internet search engines. Shop for lenders online, and learn how each lending agency process loans. You will notice that most lenders with lower approval requirements process loans online. And requirements are also submitted online. There are, however, lenders with physical offices where you can process loans personally. There are also lending institutions that initiate loan application through phone interviews.
You may choose to get a loan from an agency that provides easier access or faster loan processing. Remember to collect as many lenders as you can so you will have a lot of options to choose from.
- How much can I get for a bad credit business loan?
One of the minimum requirements in availing of a loan is the monthly or annual revenue. This is the determining factor on how much you can loan for. In a usual loan setting, the loanable amount depends on the monthly net revenue deposits of the business.
The loan amount is computed as 60-80% of the monthly net revenue deposits. Another determinant is the type of industry in which your business belongs to. The health and risk factors revolving around the business is also considered in determining how much loan may be granted to you.
The lending company has the privilege of providing the loan amount which may be extended to you. The amount varies accordingly. If one lender offers 80% of your monthly revenue, this may not be the case for other lenders. Thus, it is best to understand the loan processes of each lender.
- How do I repay a bad credit business loan?
The terms of repayment for bad credit business loans are usually frigid. They have shorter repayment terms compared to other small business loans.
Lending agencies may look into your monthly revenues to determine if a daily, weekly or monthly repayment is viable. Most of these loans are paid on a weekly basis and the loan period ranges from 3-6 months. Depending on the capability of the business and the amount of loan extended, repayment may also be on a monthly basis for 3-12 months.
Payment method also varies with the collecting agency of the lender. You may need to check this with the lender before processing a loan. Make sure that the repayment terms of the loan suit your paying capacity. Default in payment may result in additional fees or the repayment of the entire loan. Default in one or more payments may also drive your credit score down south.
It is best that you clarify every repayment terms in your loan contract before processing your loan. You have to ensure that the loan amount, as well as the repayments terms, are within your financial capabilities. Remember that not only is your credit score at stake but your business as well.
- How much will a bad credit business loan cost?
Getting a loan is not free. Lending companies are not charitable institutions. Hence, when you loan, you have to repay the principal loan and the auxiliary fees that come with the loan. Here are the factors that may affect the cost of a loan:
- The factor rate – the interest rate that may be applied for the loan.
- The length or period of the loan – how long will you be paying for the loan.
- Your credit history – this primarily points to your credit score or your creditworthiness.
Picture this. You are offered a loan of $100,000 for 12 months with a rate factor of 1.32. This means that you need to pay the principal amount of $100,000 in a loan period of 9 months with an interest rate of 32%. Consequently, by the end of 12 months, your total payment to the lender amounts to $132,000.
In case of default in payment, the lender will include a stipulation in your loan contract on how much the additional fees will be. Other lenders also charge for loan processing fees. You may need to clarify this with the lender as well.
When you have decided to get a loan, make sure that you clarify all repayment conditions, additional charges, and other pertinent terms and conditions included in the loan contract. If you leave something out, it will be your own lookout in the end. Hence, it is best that every loan term is clear to you.
Getting a bad credit business loan is not a bad idea. You just have to make sure that you know what you are getting into. Remember to avail of a loan only if you truly need it. And ensure that the loan will serve its purpose.