Wednesday, September 20, 2017

The Best Business Loan Options Depending on Your Credit Score

If you have a business in need of financing you might be wondering: based off my credit score, what kind of loan do I qualify for?

It’s a tricky question. Unfortunately, there are no hard and fast rules when it comes to who qualifies for a loan. Many different factors contribute to your ability to borrow, and it’s not just your credit score. It’s important to understand all loan application processes before you apply to see what’s required of you and what the borrower might ask of you.

The best thing you can do for your business when applying for a loan is to be thoroughly prepared in every way possible. Different lenders require different things, but most will inquire about your business’s annual revenue, reserves, profitability, cash flow, existing debt, and debt history.

That said, some credit scores are better suited to qualify for certain types of loans than others. See our breakdown below.

If You Have Good Credit  

700+: If you have a 700 or above credit score, you’re in a good position to qualify for a business loan with most lenders, including banks. You might even qualify for a coveted long-term loan, which will give you more time to pay off the debt.

However, note that it’s never a done deal. A great credit score will certainly help you, but it’s not a guarantee. Like any financing option, it’s important to understand the business loan application process thoroughly and highlight your business’s other strengths to ensure you can secure the long-term financing.

Term Loan

A term loan is a form of debt that is paid off over an extended time frame that usually exceeds five years. Obtaining a long-term loan provides a business with working capital that they can use to purchase assets, inventory, or equipment that can then be used to create additional income for the business.

650+: If you have a credit score over 650, you might still be able to qualify for long-term business loans, but it will be trickier. Other aspects of your business—such as revenue and growth—will need to also be stellar. The good news is, at a 650 credit score, you might also still qualify for an SBA loan.

SBA Loan

The 7(a) Loan Program is the Small Business Adminstration’s program to help small businesses secure financing for general business purposes. The SBA does not make loans itself but rather guarantees loans for program participants made by participating lending institutions. Taxpayer funds are used in the event of borrower default, which reduces the risk to the lender, thus creating more leniency in the application process in terms of credit scores.

Note that this does not reduce any risk to the borrower, who remains responsible for the full debt, even in the event of default.

If You Have Average Credit

620+: If you have a credit score over 620, you could qualify for a medium-term loan.

Medium-term Loan

Medium-term loans work the same as long-term loans, only with slightly less time to pay off the debt—usually between one to five years. Interest rates will be higher, but you’ll pay off the debt faster.

550+: If you have a credit score between 550 and 620, you could qualify for a short-term loan or potentially a medium-term loan if your business is in a good financial position in other areas.

500+: If you have a credit score between 500 and 550, you’ll have trouble qualifying for long or medium-term loans. However, if your business is doing really well, your low credit score might get canceled out by some other financials. You might want to consider a short-term loan or some of the alternative lending options listed below.

Short-term Loan

A short-term loan is a loan scheduled to be repaid in less than a year. When your business doesn’t qualify for a long or medium-term loan from a bank, you might still have success in obtaining money from them in the form of a one-time, short-term loan to finance your temporary cash needs.

If You Have Poor Credit

500 and below: If you have a poor credit score, you’ll have a very difficult time qualifying for most loans, particularly from banks. Again, if your business is doing extremely well, that might help you in some ways.

Regardless, you’re likely going to need to look to alternative, online lenders to secure financing. Getting financing from a bank unfortunately is highly unlikely—it’s even common for business owners with good credit to get rejected from banks.

But it’s not all bad news—you still have plenty of alternative lending options to consider. Even if you don’t have good credit, these options could be a good fit for your business depending on your needs.

Alternative Lending

Alternative lending is a broad term describing small business lending options available outside traditional banks. With alternative lending, small business owners—with a range of credit scores—can work with online lenders to access a variety of business financing—from those coveted term loans and lines of credit to invoice financing and short-term loans.

Whereas big banks have an approval rating between 13% and 20% over the past five years, alternative lenders have accepted on average between 61% and 64% of small business owners looking for funding. Benefits of alternative lenders include less paperwork, more flexibility, and faster funding, though these might come with slightly higher interest rates.

Business Line of Credit

A business line of credit is a financing option typically used for a business’s short-term cash needs, such as inventory purchases, project costs, or payroll. Lines of credit are primarily used to help even out your cash flow. You’ll want to be careful how much you are borrowing from a credit line, as interest rates tend to be higher, but it’s a great way to get fast cash when you need it.

Asset-based Loans

An asset-based loan is a form of funding that lets you use your company’s assets, such as outstanding invoices, inventory, and machinery, as collateral for a loan. Your assets will be appraised and the loan amount determined based on their worth. If you default on the loan, your assets will be seized by the lender.

Invoice Financing

Invoice financing is a type of asset-based lending that’s great for companies that have a lot of outstanding invoices in accounts receivable. These products allow companies to not have to wait on clients to pay their invoices in order to get the cash they need to run their business.

There are two ways to finance invoices. The first way is through a sale: invoices can be sold to a factoring company in exchange for an immediate payment. The factoring company then is responsible for seeking payment from the client. Factoring is pretty easy to obtain because you are technically selling an asset rather than getting a loan. 

The second route for invoice financing is to use your recurring, outstanding invoices to secure a revolving line of credit through an asset-based loan. The most important requirement to qualify is to have invoices from creditworthy commercial clients. As a result, factoring is available to small businesses that don’t have substantial assets or a long credit history. Both of these options can be obtained through online lenders.

Nonprofit Microloans

A nonprofit microloan is a small sum of money lent at low interest to a business via nonprofit or government organizations. The benefit of a nonprofit microloan is that profit is not the objective of the lender. Many microlenders are “mission-focused” or “mission-based,” meaning they strive to offer loans geared toward helping underserved or economically struggling communities.

Microloans can run up to $50,000 for startups or other small businesses. Plus, many organizations, such as The Small Business Administration or Aspen Institute’s FIELD program, provide pro bono consulting and training to help businesses succeed.

Just know that the application processes for these types of loans can be harrowing, with strict requirements and eligibility factors.

If You Have No Credit

If you’re just starting your business and have no credit associated with that business, you’ll have trouble securing most business related financing. But you still have options.

Personal Loan

It’s common for new small-business owners to access financing through personal loans, often through alternative, online lenders. But like credit cards, personal loans usually have high APRs—sometimes as high as 30%—especially for bad credit borrowers. You will likely need to have good personal credit score.

Consider this a last resort and only if your business just needs a small amount of money to get started—you don’t want any unforeseen business issues to negatively affect your personal credit score long term.

Grants

Grants from private foundations and government agencies are another way to raise startup funds for your small business. They’re not always easy to get, but free capital might be worth the hard work for some new businesses. Veterans, minorities, and women have access to specific grants carved out for those groups. You can search small business grants here to see if you’re eligible.

Crowdfunding

Crowdfunding can go a couple of ways. Well-known peer-to-peer crowdfunding sites such as Kickstarter or Indiegogo let you raise money through public, online campaigns by offering rewards for donations. It’s a great way to test the market for your business and receive feedback along the way. But you might also consider equity crowdfunding, such as First Democracy VC, in which you tap a pool of investors who agree to finance your company in exchange for equity in the business.

As shown, there are many options when it comes to securing financing depending on your credit score. If you have poor credit, there’s still hope. The best way to know if you qualify for any type of loan is simply to apply for it. As always, just be prepared!

The post The Best Business Loan Options Depending on Your Credit Score appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/business-loan-options

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