Unlike your friends and family members, loan providers won’t let you borrow money out of compassion and handshake deals. They want to make sure they get paid back on time, plus interest rates for such convenience. With this, they look at your credit score to determine whether or not you’re creditworthy.
The same goes for business loans.
If you have a strong personal and business credit history, you’re more likely to get approved. But if you have a track record of missed payments (or you’re a startup business who doesn’t have a credit history at all), then your chance of getting approved of a loan is slim.
But just because you have bad credit doesn’t mean you can’t obtain business funding. There are alternative business lending options you can consider.
Bad credit? No problem. These 5 bad credit business lending options might help your business get the right funding.
Microloans are small, short-term loans designed for small businesses and those with low capital. The good news is microloans are one of the least expensive financing options. It’s also easy to get approved since they offer small loan amounts.
Now for the disadvantages: microloans might have restrictions on how the loans can be used. For instance, many credit unions and non-profit organizations may restrict you from using the loan to purchase real estate or refinance existing debt.
2. Peer-to-peer lending
This type of lending allows multiple investors to use an online marketplace to contribute to a single loan. With peer-to-peer lending, investors decide whether to contribute to your loan after reviewing your application and profile.
The application process and the transfer of funds are much quicker than with a traditional bank loan. You may need to personally guarantee the loan with personal finances and assets, and pay higher interest rates on the loan. These are to be expected with any loan options for bad credit.
3. A business line of credit
If you have a credit card, you probably know the basic idea behind a business line of credit (LOC) already. This type of funding gives you a credit limit, allowing you to borrow money up to that limit, repay those funds, and borrow again.
Lines of credit from banks can be quite tough to qualify for. The good thing is you can get the same funding option from online lenders. They’re not only accessible and convenient – they’re also more likely to have relaxed terms and credit score requirements.
The tradeoff: watch out for high interest rates and fees.
4. Invoice Financing
Invoice financing is a type of business loan that allows you to get money from your unpaid invoices. The lender purchases your unpaid invoices, giving you a percentage of the amount owed in advance and holding on to a portion of the total amount until the invoice is paid.
To approve the funding and set the rates, invoice financing lenders will look at your customer payment history to assess the likelihood of them paying on time. Just be wary of the high-interest rates associated with this type of loan, which will depend on your customer payment and personal credit history. Weekly fees may accrue until the loan is repaid.
5. Merchant cash advance
Need money. ASAP? Merchant cash advance gives you a lump sum of cash in as fast as 48-72 hours. They generally have little to no credit requirements. Sounds good right? Now, what’s the catch?
Merchant cash advances are like payday loans, which are notorious for their predatory nature. MCAs have notoriously high fees. They may also have a confusing factor rate fee structure that masks the high costs. You can opt to have it repaid from your future credit and debit card sales, or by allowing periodic transfers from your bank account.
Financial advisors advise against merchant cash advances, if possible. There’s a huge caveat that you must do plenty of research on the right providers to transact with, as well as their payment schedules. Stay away from cash advances with higher interest rates, especially with three-digit APRs – even paying it off early won’t give you any benefit.
Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which connects clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.