Financing With Poor Credit

Sadie Keljikian and David Estrakh, Express Trade Capital

Let’s say your business needs financing, but has bad credit, meaning your FICO score is somewhere between 300 and 629. You may think that there aren’t any financing options that will allow your business to grow. However, alternative lenders can offer your business options of which you may not be aware.

Most traditional lenders require good credit and years of robust positive returns. Basically, they’re highly useful once you have a track record of sustained success on the books but are virtually non-existent on your way there. To fill this gap, alternative lenders have developed more flexible formulas and creative means for funding businesses. This means that although your credit may be too depleted to secure a traditional-style loan, you still have alternatives to enhance your capital and cash flow.

Here is a quick overview of your options from traditional lending to alternative lenders:

Bank Loans

Although they may seem like most straightforward resource, banks aren’t always the most practical options for business financing, particularly if your credit is poor or you don’t have much history. As regulated entities banks have rigid underwriting standards and procedures and offer inflexible terms, which will leave you with little recourse if you need flexibility or higher loan amounts down the road.

SBA

New businesses can take advantage of loans from the Small Business Administration. SBA loans are federally guaranteed and offer a variety of loan options and payment terms. Available lending structures include traditional-style loans with more generous payment terms, loans against commercial real estate or other valuable property, fixed or revolving lines of credit, export loans, microloans, and disaster loans.

To the SBA’s credit, interest on these loans is typically low and repayment terms are longer than other lenders can generally offer. However, as with bank loans, the terms of an SBA loan are usually inflexible because the SBA is a heavily regulated government agency.

Collateralized Loans – Invoices

When banks aren’t an option, but you’ve got open invoices with your customers, you can generally get cash advances against those invoices. Stagnant or inconsistent cash flow is a common problem among wholesalers who sell on open terms, so receivables factoring was created as a way to bridge the cash flow gap from when an invoice is first created to when it is finally paid by the customer.

Collateralized Loans – Purchase Order Funding

Some lenders will lay out funds to pay for cost of goods, shipping and related expenses required to fulfill the demands of a customer purchase order. Although purchase order funding loans are essentially loans backed by inventory, there are a few differences: (a) PO funding loans are made before the client has purchased inventory; (b) goods are presold to credit-approved retailers before purchase; and (c) the end customer who issued the PO will typically repay the lender directly rather than repayment by the PO funding client-borrower, as is the case with most loans.

Collateralized Loans – Inventory

Depending on your industry and sales volumes, you may be able to secure financing against inventory that you’ve yet to sell. Generally, lenders can offer cash lines secured by inventory only if their clients meet certain minimum sales volumes or revenues. They use your sales the same way other lenders would use your credit score: to confirm that you are likely to repay the loan, in this case, by asking you to demonstrate sufficient velocity of inventory sales which will generate enough revenue to repay the obligation.

Collateralized Loans – Equipment

If you operate a manufacturing facility or other processing facility and own (or plan to buy) your own equipment, you may be able to finance your business by using your equipment as collateral. The loan operates much like one against a car or other piece of valuable property. Provided that you make your payments on time, your equipment will be undisturbed, allowing you full use of the equipment while giving you access to the cash you had to freeze to purchase that equipment in the first place.

Collateralized Loans – Property

A number of bank and non-bank institutions will lend against existing equity in property or finance the cost of property acquisition in exchange for equity in the property once acquired. Such loans are typically lower interest rate due to the perception that property is a relatively stable asset. Formulas like loan to value ratios (LTVs) are created to account for possible price fluctuation. For example, if a lender has a 70% LTV, they will only lend 70% of the value of the property and the remaining 30% provides a cushion in case of price fluctuation, so as long as the value of the property doesn’t drop by more than 30% the lender can be compensated by selling off the asset.

Merchant Cash Advances (“MCAs”)

MCA’s are essentially loans extended to businesses in exchange for a percentage of the businesses’ daily or weekly credit card revenues. MCAs loans are typically repaid either directly by the credit processor who agrees to send a portion of the funds to MCA provider according to the terms of the MCA contract or from the bank account which receives proceeds from the credit card processor.

While MCA loans are expensive and often exceed state usury limits when viewed as loans, the MCA loan structure has some major advantages over that of conventional loans. First, payments to the MCA company fluctuate with the borrower’s sales volumes, giving them more flexibility to manage cash flow while repaying the loan, particularly during slow sales seasons. In addition, MCA loan approval process is substantially quicker than typical loans, allowing faster access to funds.

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To discuss any of the above options further and get more specific details, please contact one of our financial specialists at Express Trade Capital.