A Detailed Analysis of Bad Credit Business Loans and Alternative Lending

The small business lending industry has experienced a significant change over the last few years following the financial crisis. As banks began to shy away from providing commercial loans due to stricter lending requirements many alternative lenders stepped in to supply the growing demand. These privately held and nonbank lending companies, which are mainly online entities without brick and mortar walk-in locations, implemented a dramatically different lending process that did not adhere to the traditional credit requirements that exist for banks.

Alternative Lending Companies

Alternative lenders do not have the all-or-none credit approach to approving loans and as a result small business loans that were almost impossible to obtain at one time are now readily available. The more familiar name for this new financial product is a bad credit business loan and it has redefined the traditional understanding of small business lending.

In order to understand exactly what bad credit business loans are, it is essential to clarify business loans based on good credit.

Good Credit Business Loans

Any bank business loan whether it is SBA backed or a standard commercial loan from a bank is a good credit business loan. The borrower receives a loan amount with an interest rate and term, usually at a rate slightly above the prime lending rate, and makes a monthly payment for a set amount of time. There are some other institutions such as credit unions and SBA affiliated financial institutions that offer good credit loans, but the bulk of SBA backed business loans are provided through banks.

The reason they are categorized as good credit is because it is extremely unlikely that a business owner can obtain this type of funding without excellent credit. According to many experts in the industry you are likely to require a FICO score close to 800 to receive business funding from a bank. It is also important to highlight that a good credit loan is likely to require collateral as most banking institutions do not provide loans without substantial collateral pledged. Applying and receiving a good credit loan requires one or more visits to your local branch. These are the basic features of a good credit business loan.

Bad Credit Business Loans

A bad credit business loan is a loan for a business where the borrower’s credit score does not meet a bank’s lending criteria. There is an estimated payback period, and there is no interest. This type of business loan is always unsecured and it can only be obtained from alternative lending companies. There are no credit requirements so even individuals with a FICO score below 500 are eligible. The entire application and approval process is completed online. These are the basic features of a bad credit business loan but we will explore it further as it is not as straightforward as a bank loan.

The term is a bit of a misnomer as bad credit business loans are not actually business loans in a technical or regulatory sense, they are actually contracts for a purchase and a sale of monthly revenues in advance of those revenues.

The typical contract features a borrowing business owner selling a specified amount of future revenue at a discount. As an example, a business owner would agree to sell $100,000 of future revenues for $85,000 to be paid upon the signing of the contract. The alternative lending company then establishes an estimated payback period, usually 6 to 18 months, based on approximate daily or weekly payments. Also, in order to ensure the payments and reduce the risk involved, the lender sets up automatic payments to be deducted from either the borrowing company’s credit card processor or business bank account.

Peer-to-Peer Lending

It is important to note that alternative lenders are not peer to peer lending companies, another common type of online loan provider. The main difference between the two is that peer lenders generally require relatively good credit scores to obtain funding because their loans are personal and can be used by the borrower for their business. Alternative lending companies are the only true source for bad credit business loans.

For years, business owners have relied on banks for small business loans. However, following the financial crisis borrowing from banks became more and more difficult. It was always understood that in order to be approved for a loan the borrower would have to possess excellent credit, but bank loan officers took this credit requirement to the extreme following the nation’s economic disaster and more and more small business owners were being denied loans. As banks continued with this position demand for funding grew and privately held funding companies known as alternative lenders began to satisfy the demand. These lenders not only provided small businesses with loans, they customized an approval process that allowed applicants with bad credit to receive funding. As a result, a new financial product widely known today as bad credit business loans was born and it has not only expanded the borrowing landscape, but it has completely redefined what business loans are and how they are approved today.

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