Opportunity often knocks on your door when you least expect it.  Isn’t that always true? Like, maybe you’ve dreamed about expanding your restaurant and suddenly the space next door becomes available. You’re prepping your retail wine & spirit inventory for the holidays, and a supplier offers you a bulk discount on the season’s hottest-selling brands. Maybe you have a chance to refinance those high-cost Merchant Cash Advances you took to create some breathing room for your business’s cash flow. 

Taking advantage of opportunities like these might require getting a business loan. But if you have bad credit, do you have to say “pass”, when opportunity knocks? Not anymore. Today, there are several strategies you can use to get small business loans even with bad, or what WE like to call, “challenged” credit. 

Hello everyone and welcome to Value Capital Funding’s podcast, “Insights Into Better Business Financing”.  My name is Jeff Kornfeld, and I’m one of the principals here at Value Capital Funding, a family-owned and operated, full-service commercial financing firm located in beautiful Boca Raton, Florida.  We’re here to bring you timely information and tips to help you navigate the vast, and sometimes confusing, world of small business finance.   Proven strategies and techniques that can be applied to your own unique situation, to enable you to secure the lowest cost, most affordable business financing that you can qualify for.  We operate under the theory that with good information, you WILL make better business financing decisions. 

We invite you to contact us to discuss your business’s financing needs.  You can reach us by phone at 800-944-6280 or on the web at www.valuecapitalfunding.com.  So, without further ado, let’s start today’s show…

One question we hear often is:

Do I Need a Business Credit Score to get a Small Business Loan?

If you’ve been in business for LESS than a year, you won’t have a business credit score, because credit reporting agencies don’t have enough information about how your business manages debt. Instead, lenders will look at your personal credit score to determine if you’re qualified for a loan. In general, traditional lenders, banks and credit unions, want to see a minimum personal credit score of 650 before approving you for a loan, and many require a score of 680 or higher.

If you’ve been in business MORE than a year, lenders will consider both your business credit score AND your personal credit score. Traditional lenders will weigh your business credit score more heavily, while alternative financing sources will focus on your personal credit score and financial indicators such as your business’s revenues or receivables.

If you have poor credit and need a business loan, follow these steps:

Know Your FICO Credit Score.  Knowing your credit score can help you determine the types of loans you’re most likely to qualify for.  Most lenders will only work with those who have credit scores above 500. But big blemishes, like tax liens or judgements, will also stop many lenders from working with you regardless of your credit score.  At Value Capital Funding, we specialize in working with borrowers in financial distress: even those with current tax liens & judgements. No open Bankruptcies, but any OTHER credit challenges CAN be handled under the right circumstances… which brings me to the next important point…

Provide Collateral:  There is no better way to qualify for a business loan if you have poor credit then by putting up collateral.  It’s not a guarantee that you’ll be approved, but this WILL improve your chances – BIG TIME.  The lender will look at the liquidation value of the collateral you pledge more so than yours or your business’s credit worthiness.  What do lenders consider acceptable forms of collateral?

First there’s:

Valuable Equipment: for example, construction equipment, manufacturing equipment, medical equipment, vehicle fleets or equipment used in the foodservice industry. These are all good examples of acceptable collateral.

The second kind of acceptable collateral is Real Estate:

Investment or Commercial Real Estate:is frequently used as collateral, and what’s great is that lenders in this niche will NOT require 1st position liens.  That means you can keep your existing mortgage in place, if you have one, and the new lender will come in behind your current lender in a second lien, or even 3rd or 4th lien position, as long as there is enough equity in the property to support the new lien position.   And unlike a traditional mortgage transaction, which can take several months to close, you can expect these transactions to close in about 14 business days, as they are simply specialty business loans using Real Estate as collateral. 

A note about raw land:  many lenders will not accept it, or will drastically discount the amount they will lend against it. Also, lenders will only accept a 1st lien position on raw land, unlike with other types of real estate where they will accept a 2nd, 3rd or even a 4th lien position.

Another type of real estate collateral acceptable to lenders is:

A Primary Home:  Many business owners use their primary residence as collateral for their business loan,  especially if the business owner has poor or challenged credit.  Oftentimes, it may very well be the difference between securing capital at all versus getting declined outright.   Here too, first lien positions are NOT required, meaning you can keep your current mortgage in place and avoid the headache of having to refinance your mortgage.  Plus, being able to use a 2nd, 3rd, or even 4th lien position to tap into available equity in your home, provides quick access to dormant or illiquid real estate equity that was previously inaccessible to you.  How about that for pulling working capital out of thin air?!

Now, what about if you don’t have enough equity in just one property or piece of valuable equipment for your business’s cash needs?

Well, we have a solution for that issue too.  It’s called a…

Combined “Collateral Pool”:  Frequently, when an applicant doesn’t have the available equity in just 1 piece of equipment or property to meet their working capital needs, they use multiple pieces of equipment or multiple properties to achieve their financing goal.  Combining multiple pieces of collateral into a single collateral pledge is known as creating a “collateral pool” and is a technique we use with our clients regularly. 

Now, let’s say you don’t have collateral: no valuable equipment, no real estate with available equity.

So, what types of small business loans canbusiness owners with poor credit and no collateral qualify for?

It’s difficult, if not impossible, to get a business loan from a traditional bank if you have poor credit. Fortunately, there are many other sources of financing you may be able to qualify for.

One type is…

Business Credit Cards: Business credit cards not only give you access to capital, but can also help improve your business credit score if you make your payments on time. As a result, a business credit card can not only be a good option for someone with challenged credit, but it is also a good financing option for newer businesses that need to build their credit history.  You’ll need to get a credit partner to qualify for this.  And, make sure to choose a business credit card that reports your payments to the major credit reporting agencies because not all of them do. Since business credit cards have higher interest rates than many other types of financing, they’re best for financing small amounts that you know you can pay off in full fairly quickly.

Then there are

Short-Term Loans: Both traditional and alternative lenders offer short-term loans, which generally have terms from 6 – 24 months. Instead of fixed monthly payments, some lenders auto debit payments from your business’s checking account either daily, weekly OR monthly.

Then there is

Invoice Factoring: Small businesses that have unpaid receivables can turn them into cash using factoring. Factoring companies buy your unpaid invoices from you for a percentage of their value… typically about 80% to 85%. The company you sell them to is called the FACTOR.  The factor then collects payment on the invoices from your customers and pays you the balance of the invoice minus the factoring fees. The value of your invoices, not your credit score, is the Factor’s primary consideration.

Next we have

Invoice Financing: Although similar to invoice factoring, this short-term financing method has some key differences. Instead of buying your invoices, the financing company advances you the value of the invoices. You’re responsible for collecting payment from your customers and paying back the loan and any related fees.

There is also

Equipment Financing: This type of loan is used to finance the purchase of equipment using the equipment itself as collateral. This helps keep interest rates relatively low, although those with poor credit will pay higher interest.

And, lastly there is the…

Merchant Cash Advance: It used to be that only businesses doing high volume credit card sales, like retailers or restaurants, could use this short-term funding method.  Now, any business owner in virtually any industry, especially those with poor credit, can use these.  Here, the lender advances you a lump sum against your business’s future sales and then collects either a percentage of those sales or a fixed dollar amount from your business every day. Just be aware that merchant cash advances have a high cost of funds, so most businesses should use them only as a last resort or for taking advantage of a revenue-generating opportunity. 

Truly, the world of lending has changed, and with it, the rules of engagement.  It’s up to you to know these rules and to work the system to your best advantage, for in this space, as in most, the old adage of buyer beware exists.  Because, just like in an airplane where the passenger next to you is flying to the same place at the same speed, but can be travelling for half the cost, the same is true in the world of lending.  You need to be sure you’re getting the lowest cost financing and the most affordable payback terms your business can qualify for. 

Thanks for listening to Value Capital Funding’s podcast, “Insights Into

Better Business Financing” with me, Jeff Kornfeld.  Today’s topic was How

To Get A Business Loan If You Have Poor Credit. We invite you to contact our dedicated group of professionals to discuss your business’s financing needs.  You can reach us by phone at 800-944-6280 or on the web at www.valuecapitalfunding.com.  

Value Capital Funding, where our mission is to help businesses like yours secure affordable financing simply and quickly!  Tune in again next time!  Bye now!