How do Bad Credit Business Loans Work?
If it is your first time approaching an alternative lender for a bad credit business loan you might feel uncertain and wonder how the loans work. Alternative lenders have only been around for roughly ten years or so, and while they have quickly grown to meet the needs of small business owners, not everyone knows what they are or how the bad credit business funding process works.
The good news is that a bad credit business loan works much like a traditional loan, with an application, underwriting, and funds disbursed. The even better news is that alternative lenders follow all these traditional lending steps much faster than a bank.
To learn how bad credit business loans work it is important to gain an understanding of why alternative lenders exist, where they get their funds, and the benefits of applying with one.
What are Alternative Lenders?
Alternative lenders came into existence to fill a small business lending gap in the marketplace. After the crash in 2008, banks became so cautious in their lending practices and so risk-adverse that it is almost as if they will only lend when there is no risk at all. New underwriting practices made it virtually impossible for otherwise-qualified borrowers who had one small issue to obtain capital.
And that is where alternative lenders stepped in. Those in fintech had the agility to streamline the loan approval process and cut literally months from application to disbursement of funds. They’ve captured an increasingly larger part of the marketplace by lending to those overlooked by banks but still keeping losses to a minimum through their superior ability to adjust covenants and restrictions on loans.
Forbes applauds the growth of alternative lenders, and views the competition they offer to traditional banks as good for the consumer.
Where do Bad Credit Lenders Get Their Funds?
Alternative lenders raise funds from private equity investors, investment companies, and personal sources. Their sources of funds give them more flexibility in lending with private business loans as they do not have to adhere to bank regulatory guidelines.
When a bank borrows from the Federal Reserve in order to turn around and lend that money to a small business owner they must report that loan to the Fed. The loan’s credit-quality impacts how much money they must put on deposit with the Fed to cover possible defaults. If the borrower does not have great credit, or the loan is riskier, the Fed may require more reserves. This, in turn, means that the bank may not be able lend those funds.
While alternative lenders answer to private equity and investors, they do not have the same restrictions. The individuals or companies that have given them funds to lend have done so because they want the lender to take on more risk. They want a higher return from their capital than they could get in the stock market or through other investments and they know that the lender must take more risk in order to give it to them.
What this means for you, the borrower, is that alternative lenders do charge higher interest rates than those charged by a bank. Banks base the rate they charge you off the Fed Funds Rate, or what they pay the Federal Reserve to borrow from them, and your perceived risk. Alternative lenders base their rates off risk and the investors’ desired return.
Because alternative lenders do work with less credit-worthy borrowers, they offset this risk in their interest rates or fees depending on the loan product. An interest rate or fee of 9 to 45% may look high to you, but it could be lower than a small business credit card or other forms of capital depending on the duration of funding.
How do I apply with an Alternative Lender?
Unlike traditional brick-and-mortar banks, alternative lenders do not require that you come into a banker’s office and sit there for hours discussing your loan and filling out paperwork. The majority of alternative lenders allow you to apply online or by picking up the phone. Small business owners generally appreciate not having to take time out of their day to visit an office.
Because they have fewer qualifications, it takes much less time to apply for a bad credit business loan. This is one of the reasons that even individuals with good to great credit prefer to borrow from an alternative lender. Unless you are borrowing as part of a long-range plan, taking weeks to even complete an application wastes valuable time.
What will I need to Apply for a Bad Credit Business Loan?
When applying for a loan through a bank, be prepared to supply a lot of documentation. At a minimum, they could request two years of tax returns, financial statements, and bank statements. They might also want to see a detailed business plan, including plans that address how you intend to use the capital you’re borrowing, and the resumes of top executives.
If you decide to borrow from an alternative lender you can breathe a sigh of relief. Most lend on the basis of monthly revenues, requiring a minimum of $8,000 a month, so you will have to supply proof that your business is generating this cash flow. Shield Funding often requests two to four months of recent company receipts.
Other than that, they will lend even if you have only been in business for two months, which is one of the reasons that community banks have seen their share of startup lending drop to less than 30%. Most traditional lenders require that you have been in business for at least two years.
If your monthly revenues support a decision to lend, and you have a credit score above 500, that could be all that you need to apply for a bad credit business loan.
What is the Underwriting Process and How Long will it Take?
The underwriter is the individual who examines all the documentation you supplied with your application to evaluate your credit-worthiness. They will make the decision on lending. Underwriters at banks can take months to approve a small business loan. If they find anything questionable in your application they could request more information.
In contrast, the underwriter at an alternative lender can turn around a lending decision in as little as 24 hours or less. According to Inc, alternative lenders have more complex, data-driven technologies and algorithms than big banks, which help them reach a decision much faster.
After applying with an alternative lender you won’t have to wait months to hear from your loan officer. What is more, you have better odds of being approved for a loan. Alternative lenders have surpassed both large and smaller banks in the percent of loans that they approve. 76% of small business owners who apply with an alternative lender hear a “yes.”
How quickly will a Bad Credit Business Loan Pay Out?
Even the best-laid plans can go awry, and you may need cash in a hurry. The funds from a bad credit business loan could be deposited into your account within a few days and sometimes as fast as the same day you apply. Forget waiting months to even find out if you will be approved or get money, alternative lenders work quickly and efficiently.
Flexible repayment terms are another perk when you borrow from an alternative lender. Banks typically set up a monthly payment which may or may not align with your cash flow. Alternative lenders focus on giving small business owners the flexibility that they need to succeed. You can set up daily, weekly, bi-weekly, or monthly repayments to be automatically withdrawn from your bank account.
Do Alternative Lenders Offer Other Types of Loans?
Yes! As their business has grown, alternative lenders have branched out into other forms of lending. They now offer working capital loans to help you meet the funding requirements of your day-to-day operations, though you will need a higher credit score and higher monthly revenues to qualify. You can also get a merchant cash advance or a short-term business loan through an alternative lender.
Alternative lenders are beating out small and large banks in the small business lending world because they offer the convenience and flexibility that today’s small business owners need. If you need capital, pick up the phone or fill out an online application and get in touch with Shield Funding today.