4 Savvy Bad Credit Business Loans
Great news for the economy- FICO scores recently hit an all-time high. But the reality for many small businesses is just the opposite-poor credit. This causes headaches for companies seeking routine funding from outside sources.
Regulations like Dodd Frank have further harmed lending volumes, while increasing the cost of capital. Such bad credit business loans have become hard to obtain and prohibitively expensive for many smaller companies.
It’s not just bad credit (loosely defined as having less than a 600 credit score) that increases the cost of capital for business owners. A lack of credit history, common among fast-growing ventures, brings similar frustrations.
So-called ‘growth capital’ doesn’t come cheap because it’s much riskier for the lender. Traditional banks often are less interested in putting depositor funds at risk, especially after the Financial Crisis. To help struggling ventures, we highlight four bad credit business loans for newer, fast growing companies to consider:
Small Business Loans for Bad Credit
1. Trade Credit
2. Invoice Financing
3. Secured Business Credit Card
4. EIDL Loans from the SBA
Trade credit is a major source of short term financing for businesses, especially SMEs. Also known as vendor financing or accounts payable, it refers to purchasing supplies, equipment or services on credit.
Many small business owners come to this site with their own liquidity challenges stemming from late-paying customers. But increasing your own accounts payable balance can help improve this cash flow deficit. You want to make sure your payment cycle is providing a net benefit to your business.
For example, if you have make payment to suppliers in 30 business days and collect on accounts receivable in 20, there’s a net benefit to your business of 10 days. Trying to achieve a net benefit position is a short-term, cash flow goal for many businesses. Of course, it’s not always easy to collect on outstanding invoices, but this process can be expedited through invoice factoring.
As you can see, vendor financing strategies are actually cheap working capital business loans. The best part is there may be no interest charged.
No Credit Funding
Trade credit is also a small business funding option for businesses with little or no credit history. Start with modest inventory or equipment purchases and be sure and pay on time (within the supplier’s credit terms). This can also improve or build business credit, allowing you to qualify for cheaper funding down the road. Credit terms can sometimes be negotiated over the phone with suppliers, placing it squarely in the easy, quick business loans category.
If your business does pay suppliers on time, make sure they report this activity to business credit agencies like Dun & Bradstreet or Experian (many don’t). Be sure and select a supplier that reports to Experian, like industrial goods distributor Uline, because many lenders focus on Experian when assessing credit.1
Finally, taking advantage of supplier discounts for early pay, can improve the bottom line. An example by The Balance showed how passing up 2% supplier discount can equate to financing your trade credit balance with an APR of 36.73%.2 If you’re only provided standard net 30 terms, ask for an early-pay discount and take advantage, if possible.
Trade credit shows up in the current liabilities section of the balance sheet (accounts payable), in contrast to our next selection, an asset based lending source.
Tapping unpaid invoices for capital is another small business financing idea. While most banks assess loans based on the applicant’s profit margins, operating history and leverage ratios, invoice finance unlocks the IOUs created from offering credit terms to customers. As long as your business submits qualifying invoices (valid and collectable), there is a capital source.
A factoring company will either buy the invoices themselves (accounts receivable factoring) or finance them, extending credit using the receivable as collateral. The latter is considered secured financing that can be received same day, on many occasions.
Invoice financing provides a revolving, small business line of credit (known as a ‘revolver’) that gets replenished whenever your customers pays their bill. It’s considered a bad credit business loan because the main determinant for approval is the creditworthiness of your customers, not your small business.
After some due diligence on your customers, factoring companies can quickly advance a portion of the face value of unpaid invoices. While they’ll probably still check your credit, it’s really your customers they are concerned with. This makes sense because it’s these account debtors that will be making payment, supporting the collateral of the financing lines. Make sure the factor will not perform a hard credit check on your business before selecting one.
Secured Business Credit Card
It’s great to have a number of bad credit business loans at your disposal but here’s one that can improve your credit profile-a secured business credit card. Here’s how it works.
First, the customer deposits money into an account at the card’s bank, like a security deposit. Depending on the amount deposited (typically a minimum of $250 is required) funds can be accessed with the issued card for purchases. The money can be used for anything such as basic supplies, high-tech equipment, or utility bills.
It seems a bit counterintuitive to access your own deposited funds for a credit card. Isn’t that the purpose of a debit card? Yes, but demonstrated on-time repayments can be reported to the major credit rating agencies.
Depending on the card company, as little as 5 months of on-time payments can be reported to an agency (most require around 9 months of qualifying payments.) The demonstrated fiscal discipline can improve your credit scores, allowing you to access a traditional, unsecured card and increase the borrowing power.
Credit Reporting Agencies
Most secured card companies report to all three agencies (Equifax, Transunion and Experian) while others report only to certain ones. Our tip-be sure you use a card company that will report to Experian, which is the score most scrutinized by business lenders. This highlights how bad credit business loans can actually improve your business’ credit profile.
A number of high-profile, big banks offer secured card products including Citi, Capital One, Discover and Bank of America Merrill Lynch. But small, community banks and credit unions are active in this product as well.
One of our favorite issuers is Affinity Federal Credit Union in Basking Ridge, New Jersey. They offer a Secured Visa card with no annual or application fee and a reasonable APR (annual percentage rate) of around 12.375%.3 Keep in mind this rate is variable so it could rise over time.
You’ve probably heard that in order to qualify for loans from the Small Business Administration, SBA loans you need good credit. You heard right. This is because even though the funding comes from a partner bank, the SBA guarantees [part of] the loan.
But the SBA does have programs designed for extraordinary circumstances. One example is their EIDL (Economic Injury Disaster Loan) program which offers support for small businesses that suffered ‘economic injury’ from a declared disaster. In the wake of events like Hurricane Florence and the California wildfires, it seems appropriate to spotlight such financing opportunities.
EIDLs provide up to $2 million in working capital business loans for small businesses suffering economic impact.4 The access to funding is not precluded by bad credit history.
Typical rates on these loans are competitive and fixed. They also offer flexible repayment terms based on your ability to repay. The financing also comes with a simple interest rate, meaning the APRs (annual percentage rates) won’t get out of hand like with MCAs or certain small business credit cards. Other bad credit business loans can be very pricey.
The funds are delivered through SBA’s four, disaster area offices. An interesting part of this loan is that your business didn’t have to incur actual physical damage from the disaster-just ‘economic’ (monetary) damage. Again, credit is not a major factor when applying. These qualifiers should allow a much broader range of businesses in the area to qualify for funding.
Additionally, pre-disaster mitigation grants provide funding for businesses that cannot obtain financing to prevent disaster damage. Such projects might include moving utilities or retrofitting physical structures. For fiscal year 2018, there is $235,200,000 available from the Federal Government for states and local governments, tribal and U.S. territories.5
There are some downsides to these two programs. Namely, they aren’t the right options if you need the money immediately (if that’s an issue, read our article on quick business loans). Also, SBA disaster loans are not paid out in a lump sum. Rather, they are paid out through installments, similar to construction loans.6