Bad Credit Small Business Loans

Getting a small business loan with a bad credit record can give you a headache. No lender wants to risk losing a massive chunk of cash on someone with a FICO credit score of less than 600. While we understand that lenders have to protect their money, we also cannot ignore that some people usually end up with poor credit scores due to circumstances beyond their control. Say, for instance, you were laid off unexpectedly, and this led you into debts. Or maybe you became critically ill and lost a lot of your money on medical bills. Some people even end up in crazy debts simply because they went through a crazy divorce.

One’s past poor financial habits and mistakes can also damage your credit score, and this may affect your ability to get a small business loan several years down the line.

Whatever the reason is behind a bad credit record, everyone deserves a second chance especially if they want to start or boost the growth their business. The good news is that various lenders in the market are still willing to take a chance on you. While having multiple lenders is a good thing because it provides options, it also becomes a serious concern since not all of them offer these loans with favorable terms.

The last thing you’d want as a small business owner is to end up with a loan that you cannot service yet it continues accruing interests with every passing month. If you are not careful, such loans can easily run your business dry and leave you in an even bigger mess than you were in. Don’t worry though because this article will provide you with valuable information that will help you understand everything about taking small business loans and how you can get one with your bad credit record.

Types of Small Business Loans

1. Merchant Cash Advances (MCA)

Merchant Cash Advances are arguably the easiest loans to get for small business owners with bad credit, but there’s a catch. The lender will give you a tremendous amount of cash, and you are supposed to pay it back as a percentage of the money you will be making in your daily or weekly sales. These payments will either be done through credit or debit card sales or directly from your bank account. MCA loans also have high interest rates. If you are a high-risk borrower, the fees will go even higher, and the terms become stricter.
Another problem with MCA is they tend to be addictive. Since these loans give you a considerable amount of cash within a short period, most businesses owners develop a habit of acquiring them even when it’s not necessary without paying attention to the implications that come with them.

In general, MCA is a bad choice for small business owners, but if you are really desperate, then you might want to consider them.

2. Invoice Financing

Invoice Financing or Invoice Factoring is a solution to business owners with cash flow issues. With this option, you will provide the lender with the details on your unpaid invoices and sell them at a discount. The lender will then pay you around 80% of the cash owed which will allow you to keep your business running. The remaining amount will only be cleared after the invoices are paid.
In Invoice Financing, the lender will charge interest on the cash advance, and there is also a factoring fee which is a percentage of the invoice. You will need to make your calculations on all these fees and ensure that they don’t become too much for your business.

3. Equipment Financing

This loan is ideal if you want to buy a piece of equipment for your business. You can get financed to buy computers, machinery, vehicles, furniture, etc. Some of this equipment may also serve as collateral for the loan.
It’s important to note that some lenders may not be willing to offer the full amount needed to buy the equipment. Some will give you just 80% of the total cash, and you will have to top up the remaining amount.

4. Term Loans

Term loans are for everyone looking for capital. These loans give you a lump-sum of money which you are required to repay over some time with some interest. These loans can help you expand your business, but you must be keen with the interests charged.

5. Business Lines of Credit

Business lines of credit function like credit cards. Here, you are given access to a pool of funds with a set maximum limit. You can then take the amount of cash you need for your business expenses and repay them over some time. The repayment will include the principal amount and the interest of the amount taken. One good thing with this financing option is that the payment schedule is usually flexible. You can make the minimum payments alone in case you are in financial constraints. Once you are done repaying the loan, you will regain access to the full limit.

As you can expect, the poorer your credit record, the lower the maximum limit and the higher the interest rates.

Choosing a Lender

A particular loan may be right or wrong for your business depending on the specific needs of your business. The following factors will help you make a decent choice and apply for a loan where your chances of getting approved are pretty high:

a. Check the eligibility requirements 

Different lenders have different requirements. You must go through the minimum credit score, annual revenue, years in operation and other requirements from the various lenders that you are eyeing. Avoid applying for loans that you don’t meet the minimum requirements since you will probably get disqualified and this may affect the operations of your business.

b. Loan Options

Analyze what your business needs and choose one of the loans discussed above that will solve the problem in the most cost-efficient way possible.
c. Costs 

You need to do thorough research and get a lender with the lowest costs possible. This allows you to enjoy more value from the loan. Check on all the costs including down payment, APR, underwriting fees, origination fee, factor rate, closing costs, and other additional fees. You should also check the penalties in case of late payment and other issues.

Top 3 Small Business Loans

The following loans are considered the best for specific purposes. This means that some loans may be best for business owners with, e.g. large invoices while others are only best for people in need of quick funding.

1. Fundbox

Fundbox is a great financing option for every business owner with poor credit score. The lender doesn’t do any credit checks, and the overall requirements are also highly accommodative. This lender offers two types of loans; Direct Draw and Fundbox Credit commonly known as the line of credit and invoice financing respectively. They also have a good record of providing loans to women and minority-owned businesses.

Fundbox is a favorite to a lot of small business owners because getting approved is easy and they also disburse the funds pretty quickly.
To qualify for Fundbox loans, you must have annual revenue of at least $50,000, have an accounting software or business checking account and your business must have been in operation for at least three months.
Fundbox doesn’t charge any origination, termination or maintenance fees. They do however have late fees in case you fail to make your weekly payment on time.

One major drawback with Fundbox is that the loans have to be paid in 12 weeks. If you take a huge loan, the weekly payments will be quite high, and this may put pressure on you and your business.

2. Kabbage

Kabbage has made the application process for small business loans look seamless. Their website is user-friendly helping you to navigate with ease and get all the necessary information you need and start your application. You will also see that the lender offers different types of loans from MCA, equipment financing to invoice factoring. Upon completing your application, the lender will go through your application, and if you are approved, the funds will be released within a very short time. You can access these funds through the online dashboard on the website, mobile applications or via a Kabbage Card.

To qualify for Kabbage loans, you must be generating annual revenue of at least $50,000, and you must have been in business for at least a year.
The limitation with Kabbage is the high annual rates, costly monthly payments and there is also no option for early payoff.

3. Accion

Accion is a non-profit lender that’s focused on providing business financing to disadvantaged people with bad or no credit history. The lender is a decent option if you are looking to start up a business. The minority, veterans, and women stand a high chance of receiving loans from his lender.

The problem with Accion is they have to collect as much of your information as possible to verify that you are disadvantaged and in need of the cash. A lot of people usually feel uncomfortable with giving out this information. Compared to the other lenders, Accion also takes quite a long time to approve loans.