No matter how you slice it, the term “bad credit business loans” just leaves a bad taste in the mouth, akin to payday loans and back alley pawn shops. They sound like desperate products for desperate situations. But the reality these days is that both these products and the businesses that they serve are much more mainstream than you may think. In some cases, business owners are able to use these kinds of small business loans and other forms of bad credit financing as a vital tool to recondition their credit and promote the healthy growth and development of their business.
But not all bad credit business loans and their providers are created equal. There are many sharks out there pushing costly and even deceptive products that can quickly drain your working capital, ruin your credit, and ultimately bring your business to a grinding halt. In the following article I’m going to explain the revolution that has been taking shape in the world of small business financing, show you how to weed out the good lenders from the bad ones, and ultimately empower you to pick the best possible source of financing for your small business if you are struggling with poor credit.
Why Alternative Lending is the New Traditional Source of Small Business Financing
Before we get to the nitty gritty of bad credit business financing, you need to understand what’s been happening over the past few years in the alternative, non bank financing sector. One of the biggest misconceptions floating around about alternative lending is that these sources of financing are marginalized, last ditch options for those businesses that can’t get funding anywhere else. Many merchant cash providers in particular have been heavily targeting the sub prime market while playing up the fact that they’ll finance just about anyone.
To a certain extent there is some truth to this idea. Alternative lenders were there both during and straight after the Great Recession to offer financing to struggling small businesses even as the banks and other traditional lenders turned business owners away. Today, for the vast majority of small business owners, alternative lending actually ends up being their primary source of financing regardless of if they first try their luck at the bank. But, lately this form of business finance is attracting even relatively healthy small businesses that still can’t fulfill the bank’s strict requirements for funding.
Over the years since the Recession, the small business financing sector has gone through a revolution that has left it forever changed. What exists today is primarily the result of three major trends:
1. Banks have stopped lending to the smallest of businesses. Banks are both unable and unwilling to make small business lending a profitable enough investment to be concerned with, and recent legislation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act has only made banks clamp down harder. Most banks have chosen instead to set their sights on other more profitable investments, such as offering financing to bigger more established companies. Even within the coveted SBA loans program, banks seem to be favoring bigger companies over smaller ones.
On the other side of the coin, small businesses have been unable to get commercial business loans or even a business line of credit due to a blemish in their business or personal FICO score, a lack of collateral to back up the loan, operating in an industry that is considered “high risk,” such as retail or food services, or simply asking for a loan that is too small. Indeed, according to an economic analyst from the Federal Reserve Bank of Cleveland, traditional small business lending has dropped significantly since the Recession:
“While some measures of small business lending are now above their lowest levels since the economic downturn began, they remain far below their levels before it. For example, in the fourth quarter of 2012, the value of commercial and industrial loans of less than $1 million—a common proxy for small business loans—was 78.4 percent of its second-quarter 2007 level, when measured in inflation-adjusted terms. And despite an increase of nearly 100,000 small businesses over the period, the number of these loans dropped by 344,000 over the 2007 to 2012 period…”
This same trend was seen in the 2013 Mid-Year Economic Report by National Small Business Association (NSBA). “Today, just two-thirds of small businesses (65 percent) report they are able to obtain adequate financing, down from 73 percent six months ago.”
2. Alternative lending is going through a Renaissance. Ever since the credit markets crumbled, the alternative lending industry has been growing in leaps and bounds. As small business owners faced fewer traditional financing options, many non bank lenders quickly arrived on the scene to fill in the financing gap. Using big data combined with innovative technology and systems, some of these lenders pushed the short-term financing model to places that were unheard of a mere few years ago.
Today, there are hundreds of players in the industry, offering many different flavors of short-term financing each targeted to a specific pool of businesses. While these operations are willing to take the kinds of risks that most banks will not, the cost of these forms of financing can be significantly more expensive than a traditional small business loan. Since alternative lending is at the moment an unregulated industry, there is nothing to stop these businesses from charging usurious rates or following other unscrupulous practices.
3. More small businesses are looking for financing. The economy has been improving, albeit slowly, giving more small businesses opportunity to expand even if they’ve taken a financial hit in the recent past. Several reports, such as the monthly Small Business Optimism Index conducted by the NFIB, confirm that both sales and cash flow have been steadily improving over the past couple of years. Though we’re not out of the woods yet in terms of a full economic recovery, there has definitely been some positive movement in that direction, and many small businesses are now actively looking for ways to increase or expand operations.
Moreover, the financial health of some of these businesses seems to be trending up as well- again due to economic improvements. At Sunovis Financial, we’ve had a lot businesses come to us with a poor credit profile, yet they had a solid operational history and a steady stream of sales. We place less emphasis on what the credit bureaus report, so in most cases we were able to help with short term business financing packages that allowed them rebuild their credit and ultimately qualify for better, cheaper products later on.
Not all such businesses are as fortunate, though.
Over the years there have been many alternative lenders who have tried to take advantage of the credit crunch, and they have given the whole industry a bad name. While there are some good lenders out there that can provide small businesses with the financing they need even with bad credit, business owners need to go in armed with the right information.
The Bad Credit Business Loans You Need to Stay Away From
Where ever your business lies on the bad credit spectrum, the reality of the alternative lending industry is that borrowers need to exercise caution before agreeing to work with a particular lender. One thing that you should keep in mind about alternative lenders is that these companies are not subject to the same regulations that guide banks. Many legitimate alternative lenders are backed by hedge funds and investors that are pressuring them for a good return on their investment. These lenders will do what they can to get the money they’re owed as quickly as possible while simultaneously hiding the real cost of financing in order to keep the skillet sizzling with new customers. This industry also has its fair share of fly by night scam operations, and in the middle of all this, are the lenders that technically may offer legitimate products but also engage in shady and unethical practices.
In order to protect yourself and your business, here are several things you should be mindful of:
1. Unreasonably high rates. It’s a fact that alternative lending will be more expensive than a bank loan, sometimes a lot more, with real annual percentage rates (APR) ranging from 20 to 200 percent and a typical amortization of 6 to 12 months. Unless you’re dealing with an extreme situation, try to find out how much the financing will cost you and plug all the information into a small business loan calculator to see what your APR will be. Don’t be afraid to shop around if the offer you’re getting seems too high. There may be cheaper, better options out there.
2. Hidden fees. Some alternative lenders may seem to be offering a good deal, but when the payments are due, you’ll find an assortment of additional expenses seemingly tacked on to the bill. Make sure you scour their terms and conditions to see if they mention or even hint to any fees.
3. Liens and personal guarantees. Many alternative lenders put a lot of emphasis on their unsecured financing. But, often this is just a marketing ploy. The reality is that many alternative lenders, business cash advance providers in particular, must file a UCC-1. A UCC-1 is a lien against your business; it’s the legal right of a lender to sell a borrower’s collateral property in the event that the borrower fails to meet the obligations of the loan contract. This means, if you are unable to repay your obligations, your alternative lender can seize your assets and either sell them or hold on to them until the outstanding debt has been settled. Any financing that requires a lien against your assets or your business is not unsecured. Therefore, before agreeing to any form of unsecured finance, you need to get a copy of the financing agreement and look for the words “lien” or “personal guarantee.”
4. High-handed collection practices. Try to find out how the lender deals with businesses that temporarily fall behind on payments. Some lenders are known to conduct arbitrary sweeps of business bank accounts, even those not directly connected to the lender, until the full amount owed is returned. This can lead to crippled cash flow as well as bounced checks and over-drawn accounts that can cause the business owner further headaches.
5. Bad reviews. Make sure you do some research about a company’s reputation before you even apply. I know for a fact that there are “lenders” out there who will request a significant amount of personal information from you only to reject your financing request and sell your data to third parties. It’s one of the dirty little secrets of this industry. You’ll suddenly find yourself being bombarded with offers from other alternative lenders seeking to capitalize on a desparate situation.
How to Find the Best Unsecured Business Loans for Poor Credit
If you choose the right alternative lender, then their bad credit business loans and other forms of financing can be tools you can use to recondition and rebuild business credit while simultaneously fueling your operation and growth. So how can you weed out the bad deals from the good ones? Here are five tips:
1. Take a good look at their website. You need to pay attention to how the lender represents itself online, and I’m not talking about how flashy or professional-looking it’s website looks or how many followers they’ve got on their social media accounts. There are other, more subtle clues to watch out for. For starters, are their any real people represented? Do they have pictures of themselves and their team and/or the full names, locations, and pictures of satisfied customers? If all you see are stock photos and testimonials from “Jim H” then it could be a sign that you should look somewhere else.
2. Find out what their customers are saying. Do you know any business that has received financing from this company? If you belong to any business communities, ask if anyone has been a customer and what the experience was like. If you don’t know of anyone, then look for customer reviews online, as I mentioned above. You could also ask the lender for references of previous customers. Just make sure you actually speak to them.
3. Speak to the lender directly. Don’t be shy about asking questions. Not only do you want all the details about the financing terms and conditions, such as what the requirements are, how much they fund, and how the money will be paid back, but you also want to pay attention to how the person on the other end answers your questions. If you sense that this person is running out of patience or is offering vague or off-target answers, then it’s a pretty good sign that you should be looking elsewhere.
4. Be clear about the costs. One thing that you should do particularly in a situation where the payment cycle is less than a year is to insist that the alternative lender provide a projected APR for your loan. If the lender refuses, then get as much information as you can and calculate that rate yourself. Many lenders are quite adept at hiding the real cost of their financing, so even if they answer you, you should still make it a point to read the fine print of their terms and conditions.
5. Bottom line… trust your gut. Above all, pay attention to the overall feeling you have about this particular lender. If alarms are going off that something seems wrong, then don’t just proceed because you think you don’t have any other choice. In pretty much every situation there are good, responsible options. You just have to make the effort to find them and maybe be willing to have some flexibility.
A Word About Loan Advisors….
If all of the above seems a bit complicated, it’s because it is, and it is one of the reasons why many small business owners choose to work with a loan advisor instead of trying to navigate the sea of alternative lending on their own.
I know that some people claim that turning to a broker in search of an alternative business loan will only drive up the cost of your financing. It’s simply not true. While there are certainly exceptions to the rule, the good brokers will work hard to find the best deal for their clients. Because of their industry knowledge and their experience working with various lenders, they know who the best, most affordable providers are as well as who to stay away from. For borrowers dealing with bad credit, and thus are more prone to predatory lenders, this one point by itself is extremely important.
Moreover, at Sunovis Financial we also act as advisors offering borrowers valuable business consulting over the short-term and the long-term. We are both a direct lender and a broker to a core group of trusted outside lenders. We’ve worked with these companies, we know for a fact that they are offering good solutions, and we know how to package everything together. We are focused on the long-term success of our business borrowers, not in making a short-term sale. These are all key differences that make working with a loan advisor something to consider.
In short, if you are in search of bad credit business loans, navigating the sea of alternative lenders can be overwhelming if you don’t know what to look out for and where to go in order to get it. But armed with the right knowledge, you totally change your situation around for the better. You can end up with the financing you need and build your business up in the process.
I believe that investing in relationships is a win-win strategy. At my company, Sunovis Financial, you’ll find people who care about your long-term success… people who will go the extra mile to make sure you get the right products… and people ready with good advice as the needs of your business develop and grow. You can find me on LinkedIn and Google+