Traditional small business funding sources, such as banks and institutional lenders, tend to avoid small businesses to begin with. They deem them too high a risk to be worth their investment.
Only the cream of the crop, so to speak, can qualify for a small business loan from a traditional bank – meaning the vast majority of small business owners are left out in the cold.
But there is an alternative solution to a small business loan, that’s a lot more accessible, even with bad credit. It’s known as a merchant cash advance. Learn all about this type of small business funding in our guide below.
The Perils of Bad Credit for Small Businesses
Banks and traditional lenders are very risk-averse. This has only increased after the financial disaster of the late 2000s. The net result is that many small businesses find it hard to obtain small business funding from these sources.
High credit score requirements self-select only a small group of businesses as eligible to begin with. Even if you do quality with a bad credit score, it’s not smooth sailing. Usually, you’ll get stuck with a secured small business loan, meaning one that requires collateral.
This can be a highly risky proposition for a small business owner, putting your home, car, office, and other assets on the line in case the loan defaults.
At the same time, the kind of small business funding you’ll get from these institutions when you have bad credit is going to come with higher interest rates and stricter terms, that favor the bank rather than your business.
The net result is that many small businesses with limited or no credit history, or bad credit history or scores, cannot obtain the small business funding they need to grow, expand, and survive.
Around 40% of small business owners surveyed by Fortune magazine cited lack of access to working capital or necessary funding as a reason for their failure.
How to Get a Business Loan with Bad Credit?
Small business loans are not, however, the only game in town. Nor are banks and traditional lenders the only source of small business funding.
Alternative, non-bank lenders are not bound by the same restrictions and risk aversion, and can generally offer small business funding solutions to businesses that have poor credit. One of the best choices in these cases is a merchant cash advance.
It’s relatively low risk for the bank, low risk for the small business, and has numerous other advantages that make it quite appealing. As a result, it’s usually a lot easier to qualify for, even with bad credit, than a traditional secured or unsecured small business loan.
Merchant Cash Advances/Merchant Cash Advance Loans
A merchant cash advance or merchant cash advance loan provides benefits similar to a loan. You receive a certain amount of funding up-front as a lump sum payment.
This can be used as the business owner sees fit, for working capital, purchase order funding, personnel and payroll, purchasing property, plant, and equipment, or any other business expenses.
Where it differs from a small business loan is in terms of repayment. With a secured or unsecured small business loan, payments are made on a regular schedule over the life of the loan, based on the term or duration of the loan.
These payments are fixed to calendar dates, usually monthly (though sometimes weekly or quarterly), and encompass the principal and interest on the small business loan. Merchant cash advances, on the other hand, do not tie the repayment to a specific calendar date.
They also don’t have a set amount (principal plus interest) in any given period. Instead, merchant cash advance loans are repaid automatically, by deductions from your credit and debit card sales.
In effect, you are selling a percentage of your credit and debit card sales to the lender, who then deducts them as you make the sales, plus interest (known as a factor rate in the case of merchant cash advances).
This has several advantages for small business owners as compared to a small business loan. For one thing, you don’t need to worry about finding money to repay the loan on a certain calendar date, regardless of how business is going.
With a merchant cash advance, the repayment amount is a direct result of credit or debit card sales. So if sales are slow, repayment is slow. If sales are great, repayment is much faster.
It can help small business owners to ease some of the financial burden that is associated with many other kinds of small business funding.
One important note, though – this kind of small business funding isn’t suitable for every kind of small business. If your small business doesn’t do much by way of credit or debit card sales, then another kind of funding choice would be better suited to your business.
But for restaurants, shops, boutiques, salons, law offices, healthcare services, and many other types of small businesses, merchant cash advances can be a great option, especially when bad credit limits your small business funding choices.
Like unsecured small business loans, there are no collateral requirements with a merchant cash advance either. The guarantee of repayment comes from the credit card sales your business will make in the future. This reduces the risk of asset loss for the small business owner.
Interest (factor) rates tend to be a bit higher as a result of all these benefits for the small business owner.
But the tradeoff is you gain access to the capital you need, at low financial risk to yourself, with repayment that is based on the performance of your business – even if you have bad credit or limited credit history. That’s a win for many small business owners.
Business Funding with Bad Credit is Available from BizFly Funding
If you are looking for business funding with bad credit, or even if you have good credit and just want competitive rates and multiple options, then consider BizFly Funding. BizFly Funding is a US-based non-bank lender that deals exclusively in small business funding.
They offer several different types of financial services, including merchant cash advances, lines of credit, small business loans, and more.
Their credit score requirements for many of these financial products are quite low, meaning many small businesses can qualify for a small business loan or other small business funding from BizFly Funding, even when they’ve been turned down by banks or traditional lenders.
