Developing and growing your business without outside funding is extremely difficult in this economy. You need to hire new employees, invest in new equipment, develop your marketing web to increase sales and ultimately increase your company’s profit. But what if you don’t yet have enough profit to finance an expansion?
This is where business loans come in, that have been gaining tons of interest recently. However, the 2008 recession sent banks into a tailspin. The government bailed most of them out, but then also implemented stricter regulatory rules and restrictions in an effort to protect us from future recessions. Sure, our economy has bounced back since then – but it’s been much harder for small business owners like you to get business loans, especially if you happen to have bad credit history.
What does having bad credit mean?
Whenever you use any type of credit account, the activity on that account is reported to at least one of the three major credit bureaus: Equifax, Experian, and TransUnion. These businesses track and store about ten years’ worth of your credit account details in their massive consumer credit information databases.
If you always keep your credit card balances low, pay your credit card and loan bills on time every month, and make at least the minimum payment, you are building a good credit history. But if you carry large revolving debt balances, miss payment due dates, and ignore your accounts, your credit score will drop quickly.
All of this credit activity goes onto your credit report and is used to calculate your credit score, a number between 300 and 850 that tells lenders how likely you are to pay back your loans. A credit score below 580 is considered “poor”. If you have this type of a credit score, you will most likely not get your desired business loan from a traditional vendor.
There are three ways you can get a business loan. First way is the traditional one – applying for a business loan in a bank. However, you’ll need excellent business and personal credit to qualify for a bank business loan. The U.S. Small Business Administration provides general small business loans through bank. According to NerdWallet, the average bank business loan size is $371,000, although amounts can vary between $5,000 and $5 million. To qualify, you’ll need to provide:
1. Your credit score: Most banks require it to be at least 680.
2. Business duration: Most bank loans require at least two years of continuous operations.
3. Minimum annual revenue: Many banks have a minimum annual revenue threshold, ranging between $50,000 and $150,000. Know your annual revenue and confirm you meet the lender’s threshold before applying.
4. Proof of ability to pay: banks want to be sure you are going to be able to make the loan payment on time each month. You’ll need to present detailed financial statements showing that your income is at least 1.25 times your operating expenses, including the new repayment amount.
It’s important to note, however, that small businesses usually have to wait 2 – 3 months to hear the bank’s final decision about whether the loan is granted. The worst part is that about 80 % of businesses get their small business loan applications declined. And even if the bank grants you the business loan, you will have to wait up to 90 days to actually receive the funds. With all that being said, if you are an owner of a small business, it might be best to direct your efforts for getting a fast business loan elsewhere.
If your business does not qualify for a business loan from a bank, or you simply can’t wait for 3 months to receive your business loan, another good option is looking into what microlenders have to offer. Microlenders are non-profits that typically lend short-term loans of less than $35,000. While they also have a much higher APR than bank loans, it may be useful by helping you bridge a temporary cash-flow gap. Microlenders require detailed business plans and financial statements, so be prepared for some serious paperwork, however the process of receiving a small business loan from a microlender is much faster than getting a business loan from a bank
Online lenders are basically other people or small businesses who want to help you get a fast business loan without the hassle of going through a 3 month long application process through a bank. These online lenders are also not limited to $35,000, like microlenders. There are plenty of websites online that allow you to find the best online lender suitable for your needs. The downside of online lenders is the fact that the average APR for online loans can be as high as 108 percent, making it difficult for small businesses to pay the money off before the debt balloons.
Approval rates, here, however, are high, and funds are distributed quickly, sometimes within 24 hours. If you decide to apply through an online lender, stick to an aggressive repayment schedule so you don’t find your business saddled with serious debt.
A small-business loan can be the spark allowing your business to expand. But if your business goes south, the loan could also end up casting a very large debt shadow that your company can’t get out from under.
Before taking on a loan, carefully consider alternative funding options, like raising capital from local investors. Finally, be sure you’re expanding your business for the right reasons. Growing a company just for the sake of being bigger is not always better. So, don’t be afraid to take a step back and ask for third-party guidance.