If you’ve been searching for a bad credit business loan, you have probably come across multiple sites that make it seem as if they’ll approve practically anyone for financing. Their offer sounds enticing, usually something like:
Bad Credit OK… No Collateral Required… Quick Online Application… No Business Plan Necessary…
So, you quickly fill in the online application, send in the required information, sometimes exchange a few emails or speak with a “specialist” on the phone, only to either get rejected outright or receive an extremely disappointing offer. What happened?
Are these companies taking you for a ride? Are they scammers just trying to glean personal information?
The truth is that many small business owners are unaware of the process that most alternative lenders go through when deciding who and how much to fund. Extending a bad credit business loan involves a great deal of risk, and a low FICO score could be a signal that something is fundamentally wrong with the business.
In order to keep the risk to a minimum, alternative lenders have a strict set of criteria that they use that helps them determine how healthy a business is and thus how much risk will be involved in financing it. If your business does not fulfill their criteria and goes past their “risk threshold,” then you’ll be rejected. It’s a simple as that.
10 Factors Alternative Lenders Consider in a Bad Credit Business Loan Application
The problem is the vast majority of small business owners applying for a bad credit business loan have no idea what these criteria are, let alone know that they even exist. That said, here are 10 main factors that lenders may look at when a business applies for bad credit financing. Though different lenders may weigh each factor differently and they may consider additional factors not on this list, these ten items are definitely a good place to start:
1. Cash flow. How much money your business is generating is a very important factor that lenders will consider, especially since most short-term loans are repaid via daily ACH withdrawals. If you are lacking significant cash flow, due to low sales or significant debt, then you’ll present more of a risk to the lender, and you’ll have a hard time getting approved for financing.
2. Time in businesses. Another important factor is how long your business has been in operation. While there are some lenders out there, such as many merchant cash advance providers, that only require a few months of prior activity, the longer you’ve been in business, the more stable your business seems, and the more options you’ll have for bad credit business loans.
3. Type of industry. Even if your business is performing well, some industries are inherently more risky to fund then others. Risky industries include: retail operations, restaurants and bars, salon services, and online businesses. If you operate in a risky industry, you may have a harder time securing financing since some lenders may have stricter requirements for your industry or may refuse to fund your industry outright.
4. Credit card deposits. If you are applying for a merchant cash advance, which is often based on future credit card sales, then your history of credit card deposits will be an important factor for approval. But, even if you are applying for a other forms of short-term financing, your credit card deposits may still be considered since being able to receive credit card payments and processing a significant amount of monthly receipts could be a supportive sign of business stability.
5. High deposit volume. If you are consistently generating a lot of sales, resulting in large bank deposits, then lenders will be more likely the fund your business and offer desirable terms. As mentioned above, many lenders are paid back via daily ACH withdrawals. If they see that a significant amount of money is going into the business’ account, they are more assured of the business’ ability to fully pay off the debt (or their ability to pull out the money)- even if other unexpected expenses or circumstances crop up.
6. Existing loans. It almost goes without saying, but high revenues won’t help you too much if most of the money is just going into other existing loans and forms of debt. If your business has a large amount of outstanding debt, then you will have a harder time getting approved for financing.
7. Liens. On the heels of the point above is that fact that many lenders will file a UCC-1 lien on the businesses that they fund. If you have a series of outstanding liens on your business, you will also have a harder time getting financed. A lien against your business represents the legal right of the lender to sell a business 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 lender then has the ability to seize your assets and either sell them or hold on to them until the outstanding debt has been settled. UCC-1 files are public records that can be searched by prospective lenders and used to make funding decisions.
8. Bank account history. Do you know that the way you manage your business’ bank account can significantly affect your ability to be funded? A business bank account that’s in good standing is a very big plus for your business. On the other hand, if you have been bouncing checks and are missing payments to vendors due to insufficient funds, then getting approved for a bad credit business loan will be nearly impossible.
9. Litigation. Are there any outstanding lawsuits against your business or do you have a history of attracting them from customers or vendors? You’ll have a very hard time getting approved for financing.
10. Social profiles. The final factor that many lenders will look at in a funding decision is the business’ online social presence. This includes the business’ social media profiles, activity, and popularity. Yes, this means if your business has generated many likes on its Facebook page and you regularly make updates, it can actually help you get financing! But, this also includes customer reviews on sites such as Yelp, Google My Business, and Angie’s List.
Bottom line, even if a lender seems to promise that you can get a bad credit business loan with relative ease, it’s often not always that simple. Most lenders have a complex underwriting process that weeds out the businesses that present too much potential risk. Given this, the best thing you can do for your business is to keep all of the above factors in mind before you start searching for financing. Clean up what you can, and make informed decisions.
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+