Banks REQUIRE good credit to get approved as you know. Most people only go to their bank when they need money. But the most common business bank loan, SBA loans, only account for 1.1% of all business loans (Department of Revenue 2013). The reality is the big banks are NOT the suppliers of most business loans. And even though they require good credit to qualify, many sources don’t.
SBA and other bank conventional loans are tough to qualify for because the lender and SBA will evaluate ALL aspects of the business and the business owner for approval. To get approved all aspects of the business and business owner’s personal finances must be near PERFECT. There is no question that SBA loans are tough to qualify for. This is why according to the Small Business Lending Index, over 89% of business applications are denied by the big banks.
Private investors are a great source of business funding. They want average or better credit of 650 scores or higher in most cases. They will also want solid financials for at least two years. Think of private money as being for SBA and conventional bank loans that just miss the mark.
Does the business have existing cash flow proven by bank statements, NOT tax returns? Does the business have over $60k annually received in credit card sales? Does the business have over $120k annually going through their bank account? If the answer is yes then revenue financing or merchant advances might be the perfect funding product.
You must be in business six months for merchant advances and revenue lending. No startup businesses can qualify and you must have 10 monthly deposits or more. Most advertising you see for “bad credit business financing” are these products. These are short term “advances” of 6-18 months. Mostly short term at first, then when half is paid down lender will lend more money at a longer term. Loan amounts up to $500,000 and loan amounts equal to 8-12% of annual revenue per bank statements. For example, a company that has $300,000 in sales might get $30,000 advance initially.
With revenue and merchant financing 500 credit scores accepted and are COMMON with this type of lending. Bad credit is okay as long as you aren’t actively in trouble such as in a bankruptcy or have serious tax liens or judgments.
Collateral based lending lends you money based on the strength of your collateral. Since your collateral offsets the lender’s risk, you can be approved with bad credit and still get REALLY good terms. Common BUSINESS collateral might include account receivables, inventory and equipment.
With account receivable financing you can secure up to 80% of receivables within 24 hours of approval. You must be in business for at least one year and receivables must be from another business. Rates are commonly 1.25-5%.
You can also use your inventory as collateral for financing and secure inventory financing. The minimum inventory loan amount is $150,000 and the general loan to value (cost) is 50%; thus, inventory value would have to be $300,000 to qualify. Rates are normally 2% monthly on the outstanding loan balance. Example is a factory or retail store.