Overcoming Poor Credit to Secure Business Loans

Last Update: February 7, 2021 • Business Loans • Credit Report • Loans •

Many businesses have loans and lines of credit. Borrowed funds are critical, especially for people who know what they are doing. A well-planned business loan can make you rich and totally change your life. But there are things you have to complete before you get the money you want.

Things in the lending has the game changed. Businesses now can apply for loans from many online lenders, not only at banks and credit unions. But for this, you have to have high business credit.

Bank Deposit Loans

A low credit score shouldn’t prevent you from starting a business. Small businesses are critical to the economy and the workforce. In recent years, the Bureau of Labor and Statistics has reported that 3.7 million small businesses in the US make up 73.3% of private-sector employers. These new companies 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 business’s annual gross deposits. Instead of using credit history as a risk-mitigating tool, the lender relies on the firm’s steady cash flow. 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 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 on future cash flows predictability. 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 balance the balance 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 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 business’s credit card receipts will not meet expected income requirements to repay, then think twice about going for an 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 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 a loan. High-risk borrowers are often required to sign a personal guarantee. This commitment places make risk on the assets of the business owner. Finally, be sure to read all of the fine print. Hidden fees trap many desperate and too anxious to acknowledge all the risks involved in low credit borrowing.