Banks REQUIRE good credit to be approved as you know. Most people only go to their bank when they need money. But the most common commercial bank loan, SBA loans, only make up 1.1% of all commercial loans (Department of Revenue 2013). The reality is that the big banks are NOT the providers of most business loans. And while they require good credit to qualify, many sources don’t.
SBA and other conventional bank loans are difficult to qualify for because the lender and SBA will evaluate EVERY aspect of the business and business owner for approval. In order to get approved, all aspects of the business and personal finances of the business owner must be near PERFECT. There is no question that SBA loans are difficult to qualify for. That’s why, according to the Small Business Lending Index, large banks deny more than 89% of business applications.
Private investors are a great source of business financing. They want an average or better credit score of 650 or higher in most cases. They will also want solid finances for at least two years. Think of private money as going to the SBA and conventional bank loans that miss the mark.
Does the business have existing cash flow proven by bank statements, NOT tax returns? Does the business have more than $60k received annually in credit card sales? Does the company have more than $120k annually in its bank account? If the answer is yes, income financing or business advances could be the perfect financing product.
Must be in business six months for business advances and income loans. No new business can qualify and must have 10 monthly deposits or more. Most of the advertising you see for “bad credit business financing” is for these products. These are short-term “advancements” of 6 to 18 months. Mostly short-term at first, then when half is paid off, the lender will lend more money over a longer term. Loan amounts up to $500,000 and loan amounts equal to 8-12% of annual income per bank statements. For example, a company that has $300,000 in sales could get an advance of $30,000 initially.
With income and business financing, 500 credit scores are accepted and COMMON with this type of loan. Bad credit is fine as long as you’re not actively in trouble, like in bankruptcy or have serious tax liens or judgments.
Collateral-based loans lend 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 VERY good terms. Common commercial collateral may include accounts receivable, inventory, and equipment.
With accounts receivable financing, you can secure up to 80% of accounts receivable within 24 hours of approval. You must be in business for at least one year and the accounts receivable 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 overall loan to value (cost) is 50%; therefore, the inventory value would have to be $300,000 to qualify. Rates are normally 2% per month on the outstanding balance of the loan. The example is a factory or a retail store.