Small businesses across the United States are increasingly turning to alternative lenders for access to expedient working capital. With the rise of fintech, creditors in the alternative sphere now offer more options to small business owners who need fast cash than ever before.
From merchant cash advances and invoice financing to online business loans and lines of credit, you’ll encounter a wide range of funding options available to small business owners who need quick access to working capital.
So, are working capital loans a good idea? This post will attempt to answer this question by highlighting the various options that small business owners have for accessing fast working capital in the emergent alternative lending market.
We’ll also cover key considerations for small business owners considering taking out a loan from an alternative lender. By the end of the article, you will have a better understanding of the different funding options available and the potential benefits and drawbacks of each.
The challenges of attaining bad credit loans for business
The economic crisis of 2008 had a devastating impact on the global banking sector, making it difficult for businesses to secure the capital they need to continue driving revenue and growth. At the time, banks were forced to tighten their lending standards, and struggling companies had to look for alternative sources of capital.
The traditional business lending model has always been to turn to brick-and-mortar-style community banks for loans. However, since 2008, banks have been much more selective about who they lend to, making it difficult for businesses to access conventional financing. The credit crunch in the late-2000’s made it that much more difficult for companies like yours to qualify for loans. And even if they do, the terms are often less favorable than they were before ’08.
Fortunately, alternative lending solutions have emerged to fill this active void. These solutions provide businesses with a range of options that allow them to access the capital they need without the same stringent requirements seen in traditional banking.
Several alternative funding options exist, such as invoice financing, fixed loans, lines of credit, and merchant cash advances. These solutions are often faster and more convenient than conventional financing, and they provide businesses with the flexibility they need to meet their financial goals.
Alternative lending solutions have become increasingly popular since 2008. They offer businesses a viable alternative to conventional financing. These solutions give companies access to capital that is often more convenient and less expensive than conventional business loans, helping ensure their long-term financial success.
Does your personal FICO score matter in business lending?
As a business owner, you may be unaware of the full impact your personal Fair Isaac Corporation (FICO) score can have on your ability secure business funding.
Many banks and other lenders use the five C’s of credit, which include character, capacity, capital, conditions, and collateral, to assess the overall risk of a loan and determine their risk-based loan pricing. Much of this information is displayed in your personal credit profile.
Creditors look at personal FICO scores to assess the creditworthiness of borrowers, while business credit scores are used to evaluate a company’s ability to repay. Business credit scores are typically derived from an agency’s overall financial performance and credit history, while personal FICO scores are based on an individual’s credit history, payment history, and total debt load.
Business credit scores are usually rated by Dun & Bradstreet, Experian, and Equifax. Each agency has its own rating system, with scores ranging from 0 to 100 depending on the agency’s criteria.
Your personal FICO score ranges from 300 to 850 and can be divided into five categories:
- Exceptional (800-850)
- Very Good (740-799)
- Good (670-739)
- Fair (580-669)
- Poor (300-579)
Conventional lenders generally characterize scores between 300 to 629 as “bad credit.”
Traditional banks frequently reject small business loan financing due to a low personal score. However, most alternative lenders are more likely to provide bad credit business loans based on a business’s potential rather than the owner’s personal credit profile.
Most banks regard your personal FICO score as a key element of the character portion of the five C’s of credit discussed above. It is an indication of your financial responsibility and provides some insight into your creditworthiness and risk as a borrower. A higher FICO score can signal to lenders that you are a reliable borrower, while a lower FICO score usually flags you as a higher-risk liability more likely to default on your loan.
In addition to the FICO score, lenders will also consider other aspects of your character when determining whether to extend a loan. This often includes looking at your payment history, business accounts, and other financial obligations. Alternative lenders similarly want to know your industry experience and background in management along with any additional evidence of your financial and professional stability.
Business creditors need a guarantee they are taking on the least possible risk when approving your loan. Your personal FICO score is an important component in the evaluation process, and it should not be overlooked. Taking the appropriate steps now to establish a good credit score and keeping a clean financial history can go a long way in helping you access the business funding you need.
Applying for alternative low-credit business financing
Applying for a low-credit business loan from an alternative business financier can be strenuous, especially if you need quick access to funds. It is, therefore, critical that you understand the application process to ensure your loan isn’t rejected.
The first step toward applying is comprehending the prospective loan’s requirements. Most alternative business financiers will have specific conditions before dispersing the funding, such as the loan amount, repayment terms, and credit score. You should also carefully research any unique stipulations for your loan, such as the necessary type of collateral or security.
The second step is to fill out an application. Expect the application to include questions about the business, the loan amount, and other financial information. Be prepared to provide details about your business and its finances. Make sure to answer every question accurately and honestly. This increases the odds of a fast approval.
The final step is to submit the loan application and anticipate a response. An alternative business funding underwriter will review the application and determine if the loan is approved or declined. Also be ready to supply additional documentation or proof of business healthy operations, if requested by the lender. Once your application is approved, the funds should be available within a few days.
Applying for a low-credit business loan from an alternative business financier is a relatively straightforward process. Understanding the requirements, filling out the loan application correctly, and submitting the necessary documents for underwriting review gives you the best chances of an easy loan approval.
What are the options for securing a bad credit business loan?
Obtaining a business loan for bad credit during unstable economic times can be challenging, especially when trying to get your business off the ground. There are, however, a few practical strategies for improving your chances of success.
The first option is to put up collateral as a pledge for the loan. This could include residential or commercial real estate, stock or bond portfolios, or even a luxury boat or vehicle. The assets serve as a guarantee to the lender, indicating that you’ll repay the loan. This is a common practice for business owners with challenged credit.
Equipment financing is another proven approach. This option is ideal for businesses that need extra capital for new equipment purchases. Your equipment serves as financial collateral, ensuring you pay the loan off fully, usually after a few years.
Invoice financing is another reliable solution for businesses with bad credit. The borrower sells their unpaid invoices to the lender, who will then advance funds to cover the cost of the loan.
Finally, you can always enlist the help of a co-signer, typically a person with a good credit score and proven track record of paying off debt. The co-signer is ultimately responsible for repaying the loan if your business cannot.
By considering the above funding options, and finding the right alternative lending solutions, low-credit business owners can start taking the necessary steps toward increasing improving their credit profiles to access less expensive financing in the future.
What are the different alternative business funding loan types?
Businesses of all sizes need access to capital to finance their operations. Traditional bank loans can give companies the funds they need, but they’re hardly the only option. Alternative lending solutions provide businesses with the capital they need to succeed while allowing them to remain flexible and agile at the same time.
One type of alternative funding is the working capital loan. This loan enables businesses to access funds to cover their day-to-day operations, such as payroll and inventory. Businesses can use these funds to bridge gaps in their cash flow.
Another form of alternative financing is invoice factoring. This loan allows businesses to access funds based on the value of their invoices. You can use the cash generated from these loans to cover operational costs, such as payroll and inventory.
Business lines of credit and short-term collateralized loans are also two types of alternative lending options. Business lines of credit give you access to a revolving trade line usable for any purpose. On the other hand, short-term collateralized loans require businesses to stake collateral in exchange for funds and are often dispersed in one lump sum.
Alternative lending solutions are one reliable way for businesses to access capital quickly and avoid costly operation disruptions and stifled growth. Non-traditional financing enhances your flexibility and agility, making it easier to achieve your long-term strategic growth objectives. As such, businesses should consider the available options and determine which one is best suited to their needs.
Working capital loan vs line of credit: how do they compare?
Business lines of credit and working capital loans are each popular financing options for businesses in their own right. They both have advantages and disadvantages to consider before making a final decision.
So, what is a working capital line of credit? Business lines of credit provide short-term access to funds when businesses need them. They are typically easier to acquire than a loan, and may not require collateral.
The repayment terms are also more flexible, allowing companies to draw against their lines whenever they need additional funds. On the downside, they tend to have higher interest rates and variable repayment terms that can quickly become a challenge if the loan is mismanaged.
Working capital loans are always a reliable option for businesses that need a considerable sum of money upfront. They usually provide access to more funds than lines of credit and have lower interest rates.
The repayment period is most often fixed, and the loan is usually repaid over a longer time. However, it can be difficult to obtain a working capital loan, since most lenders require you to stake a portion of your assets before approving an application.
Businesses should carefully consider the pros and cons of each option before making any decision to accept funding. A business line of credit can be a great way to access capital quickly and when you need them, but the higher interest rates are often costly.
Working capital loans tend to be the better option for businesses that need to make large upfront investments. Remember that lenders may still require collateral, even if your credit score is high. Weighing the advantages and disadvantages of each option before accepting a loan offer is no less important than ensuring you get into the right business loan product.
Competitive alternative financing solutions from New Bridge Merchant Capital
The bottom line is that exploring alternative and creative business financing options can be a great way to secure the necessary funds you need to grow your business. Whether it’s investing in new technology or expanding into another market, your company can profit from a bevy of alternative business financing solutions.
For those looking to expand their business or acquire additional assets, New Bridge Merchant Capital can help you encounter the right financing option that aligns with your long-term objectives.
Don’t let a lack of conventional funding options limit your potential. Take the first step now by applying online or contacting a senior New Bridge Merchant Capital business lending consultant at 844-228-0593 to see what you qualify for.
