Now more than ever before, you have the ability as a business owner to acquire the capital your business needs with very little hassle.
What once served as gatekeepers and hurdles to acquiring business funding – major banks and your credit history most notable among those factors – have stepped aside in favor of more flexible and sensible lending criteria through alternative lending.
Even bad credit is now surmountable, with alternative lenders taking into account a wide variety of factors for approval, such as revenue and the debt-to-income (DTI) ratio of your business.
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But, just as with any financing method, there is an approval process, so you need to know what lenders are looking for to give yourself the greatest chance of approval for any type of bad-credit business loans.
1. Know what lenders are looking for.
First, you need to know what the average lender is looking for when they review your application. Keep in mind that every lender has their own slightly different approval methods and places weight on certain factors more or less than other lenders. However, there are criteria that all lenders use that you should be aware of and, ideally, get in order before applying to improve your chances of approval. This isn't always possible, but, at the very least, it's useful to know what lenders look for when reviewing your application.
- Debt: Lenders want to see that your debt is under control. It's OK to have it, but you should show a history of on-time payments and a good DTI ratio.
- Revenue: Lenders want to see that your revenue is high and growing consistently. Your revenue is what you'll use to pay them back, so they need to see that you have the ability to do that. Clear signs of growth are especially important.
- Cash flow: Cash flow needs to be two things: high and well managed. You can't have low cash flow but spend it well, or have high cash flow but consistently blow it all. Lenders want to see that you not only have it, but that you're smart with it once it's in your hand.
By having these three factors in place – low debt with a history of on-time payments, high revenue with consistent growth, and healthy cash flow that is well managed – your chances of approval for a business loan with bad credit are much higher than without them.
2. Make sure you meet the minimum borrowing requirements.
As with approval criteria, every lender has their own minimum qualification requirements for you to apply for a loan. These are most lenders' basic requirements:
- Time in business: You must have been in business for anywhere from six months to two years depending on the lender.
- Minimum monthly revenue: Many lenders require a minimum monthly revenue, often $10,000 or more.
- In good standing: Lenders won't want to work with you if you are behind on payments with another lender, are in collections, or have a history of nonpayment.
3. Get your documents in order.
Now that you have a better idea of what lenders look for when reviewing your funding application, it's time to gather the necessary documentation for approval.
Every application is different, so a lender may request a particular document from you that they won't from another applicant. It's useful to have all of the below documentation in order, just in case the lender requests it:
- Proof of ownership
- Personal and business tax returns
- Profit and loss statement
- Business licenses
- Voided check
- Property lease agreement
- Driver's license
- Bank statements
- Debt schedule
This has the added benefit of speeding up the approval process, which is especially useful if you need the funds expedited.
4. Review your bad-credit business loan options.
With everything now in order, all that's left to do is await your response from a lender. However, it's important to review your potential funding methods as well. By becoming more familiar with some of the more common loan products, you'll have a better idea of which is the best fit for your business and funding needs.
Here are some of the most notable alternative funding options for those with bad credit:
- Unsecured business loan: An unsecured business loan doesn't use traditional collateral to guarantee the loan, but interest is often higher. They go up to $2 million, depending on the lender and approval amount.
- Business line of credit: Like a credit card, a business line of credit gives you access to a revolving balance of credit. Limits are often lower than those of traditional loans, but the flexibility and convenience are unmatched.
- Term loan: A term loan is a standard loan, a lump sum that is paid back within a specified period. Thes are most useful for one-and-done purchases, such as an additional product for a busy season or new equipment.
- Split funding/merchant cash advance: This is great for businesses that have a regular flow of credit card sales. It takes a percentage of your daily sales to pay back the loan, which makes paying off the loan super convenient.
Ultimately, it's up to you to decide which funding option is best for your needs. However, your lender will typically walk you through the pros and cons of each, helping you make an informed decision depending on what you're approved for.
Take the time to make sure you have each of these elements in order, not only to maximize your chance of approval but to streamline the process, making it fast and painless. In fact, approval with most lenders takes no more than 24-48 hours with minimal paperwork – a far cry from the legions of signatures required for a traditional bank loan.
Lack of funding is one of the primary reasons for business failure. Bad credit doesn't have to hold you back from obtaining the capital your business needs to spur and maintain growth.