Every business operates on loans and lines of credit. Borrowed funds are critical because a return on a capital investment takes time.. Today technology has changed the lending game. Businesses can apply and qualify for loans from many online vendors. In this article, we’ll review the best resources are appropriate for different credit profiles.
Bank Deposit Loans
A low credit score doesn’t prevent someone from starting a business. New, small businesses are critical to the economy and the workforce. In recent years the Bureau of Labor and Statistics has reported that the total of 3.7 million micro businesses in the US makes up 73.3 percent of private-sector employers. These new firms are the seeds that become household names in the future. However, funding in the early stages is difficult to obtain, especially with a weak credit score. There are some options available for cases like this.
With a bank deposit loan a company can borrow funds with poor credit. The lender will often extend a loan up to 10% of the value of the annual gross deposits of the business. Instead of using credit history as a risk mitigating tool the lender is relying on the steady cash flow of the firm. These receipts prove to the bank that the business is viable with a dependable income. This style of borrowing is also called “revenue-based” lending.
However, there is no need to risk collateral with a bank deposit loan and the repayments, automatic and made daily, are easy to manage.
Fast Online Lenders
Despite a low credit score, many online lenders are willing to cooperate and issue a loan. Consider OnDeck.com. They offer term loans and lines of credit. They advertise a minimum credit score acceptance of 500. Term loans reach as high as $500,000 with interest rates as low as 5.99% with terms ranging from 3-36 months. The online application requires only minutes with some basic input. Additionally, they offer lines of credit up to $100,000. You only pay interest on the amount you draw from the line. The lowest advertised rate is 13.99% with only a $20 per month service fee. OnDeck is designed for small business and low credit score companies that need to move fast.
Kabbage.com. Focus on this lender for loans ranging from $2,000-$100,000. Loan terms come in two options: 6 months or 12 months. The easy interface allows users to estimate repayments quickly. The minimum qualifications are reasonable: you must have operations lasting one year or more and more than $50,000 per year in revenue. Kabbage looks beyond your credit score and lends more scrutiny to real-time data. You can expedite the process by linking any existing services (e.g. PayPal, Amazon, QuickBooks, etc.) to your Kabbage loan.
Merchant Cash Advances
A merchant cash advance (MCA) uses the value of future credit card or debit card sales to finance a loan. Like bank deposit loans, this option puts less burden on a credit score and relies instead on the predictability of future cash flows. As various lenders have entered this space, the offers have improved. Previously this was the world of excessively high-interest rates. While interest rates on these loans are still relatively high, they’re not as expensive as they once were.
The repayment is often automated. The credit company can divide the payments so that the lender receives a regular portion of the sales to defray the balance due gradually. MCAs are attractive to businesses that collect revenue from credit cards and debit cards (e.g. restaurants, retail, etc.). Though credit scores are not as important with MCAs as they are with other options, the lender will still assign you a risk factor. This number (ranging from 1.2 to 1.5) indicates how risky of a borrower you are. A loan of $70,000 with a factor of 1.4 will require a total repayment of $98,000 ($70,000 x 1.4). MCAs are expensive.
Despite the costs, MCAs are still attractive because they’re fast. MCAs are unsecured meaning no collateral is necessary. If you have any reason to believe that your businesses credit card receipts will not meet expected income requirements to repay, then think twice about going for a MCA. Finally, remember, while this is available to those with poor credit you’ll likely face astronomically high-interest rates.
Weighing The Options
Just because you can borrow with a poor credit score doesn’t mean you should. These options are suited for those who need financing fast. However, the burden of repayments can exacerbate the original cash flow problem. If you cannot meet the regular, high-interest payments look elsewhere. In some cases, you may be able to partner with another business with better credit. If this other entity is willing to co-sign on a loan, you may be able to circumvent the low credit score problem.
Avoid relying on a corporate credit card or engaging in any personal guarantees. Even if there is no collateral required you may still be held personally liable if the business defaults on the loan. High-risk borrowers are often required to sign a personal guarantee. This commitment places incredible risk on the assets of the business owner. Finally, be sure to read all of the fine print. Hidden fees trap many who are desperate and too anxious to acknowledge all the risks involved in low credit borrowing.