In the lull between the holiday season and when things pick back up, your business could run into financial difficulty. Perhaps holiday sales or credit transactions have not settled yet, but a supplier is demanding payment. Or, you failed to set aside money from previous months to cover a slight dip in revenue.
For whatever reason, you need a business loan. But one of the most common lending requirements is a completed and filed business tax return. While lenders will work with an older tax return, they prefer the most current year. Can you still get a business loan without a tax return?
Given that a business loan application often requires bank statements, and more, you might wonder why lenders also want to see current tax returns. It can feel like overkill, but the lender’s goal is to protect themselves from fraud.
Lenders compare the income reported on your tax returns and compare it with your bank statements to ensure that they align. This additional check protects them from fraud or misrepresented income, which is also why lenders ask you to sign a form so they can request your returns directly from the IRS.
While your bank statements could show money coming in, it is not necessarily income. You could have borrowed or transferred money outside of the business to increase your odds of being approved for a business loan. From a bank’s perspective, this is fraud, and your tax return helps them identify private loans falsely identified as income.
Tax returns also show income line by line, and possibly even show if a business is profitable. If you receive any type of additional funds other than revenue in your business bank account, your tax returns serve as verification.
If you have incomplete or missing tax returns, lenders will accept other documents in a loan application. Lenders have a reason for requesting each piece of supporting documentation – they want proof that your business can repay the loan. Without a current tax return, the banks are just going to tighten their lending criteria which will make approvals much more difficult.
They might ask to see any or all of the following; further proof of income sources, tax returns from prior years, a robust business plan, bank statements from the past three months, or audited financial statements. Businesses that own significant fixed assets could be asked to produce estimates of their value and pledge them as collateral. The bank will want to see all loan documents related to outstanding debt if you owe anyone else and will be reluctant to take a secondary position business loan.
Whereas with a tax return, a bank might accept a current ratio of 2:1, now they might want your current assets to cover your current liabilities at 2.5 or higher. If your cash reserves have run low after the holidays, the bank may reject your loan application. Many of the reasons that you need capital before your taxes are done could, ironically, disqualify you from borrowing with a traditional lender.
At this point, you might be tempted to reach for your business credit card. But is that a wise move?
Business credit cards help many small business owners cover cash flow gaps. There is nothing inherently wrong in charging a business expense – as long as you can pay your bill in full before it is due. The average interest rate for business credit cards averages 15.37%, but cash advance rates can be much higher.
Not all vendors accept credit card payment, and would have to take a cash advance to pay their bills. A cash advance fee most likely will come with much higher percentage rates, on top of additional flat fees and other hidden fees.
With cash advances, you incur this fee even if you pay off the balance before the due date. While your limit could be $25,000 or more, cash advance limits can be much lower than your overall limit. Small business owners who need access to a larger sum could find that a cash advance does not fulfill their needs.
Lastly, missing a payment can be costly, as rates jump considerably to close to 30% or even higher in some cases. It is never a good idea to take on debt if you have doubts about your ability to make on-time payments, but missing or making late payments on a credit card have a particularly negative impact. Covering interest and penalties, plus taking the hit to your credit score, could harm your business in the long term.
If you have not already opened a business credit card, now might not be the time to apply. While credit card companies do not typically request tax returns during the application process, they will pull your credit score and could ask for income verification. Just like when you apply for a loan, the business reasons driving your need for capital could prevent you from getting approved.
Without a tax return, it is harder but not impossible to access capital; you just need to know where to look. Alternative lenders exist to fill the needs of non-traditional borrowers, whether it is businesses experiencing a temporary cash flow crunch or a new business with only two months of operations. There are three types of business loans that a business owner could apply for without a tax return.
Bad credit business loans are both the easiest and quickest forms of capital for you to access. Alternative lenders offer these loans to borrowers unable to qualify for a traditional bank loan, whether due to credit score, time in business, or other factors. Loans can be approved in as little as 24 hours and funded in 1 to 2 days.
When making a lending decision for a bad credit business loan, lenders look at your monthly revenues rather than your tax returns. If your business generates a minimum of $8,000 in monthly revenues, you can qualify for a loan from $5,000 to $1 million. You must have a credit score above 500, however.
Another plus to a bad credit business loan is that alternative lenders are willing to work with borrowers who only have two months of business history. You may not have a tax return to show a lender yet because you simply have not been in business a full year. Because these loans represent higher risk, rates range from 12% to 45% or more depending on the length of time of repayment, but they offer much more working capital or cash on hand compared to credit cards.
Businesses that do a large volume in credit card sales could borrow against them in the form of a merchant cash advance. If you take out a merchant cash advance, the lender advances a sum of money, up to $250,000, based upon past credit card sales. They then collect repayment by taking a percentage of future credit card sales, so a percentage of all your sales after accepting the advance will go to the lender.
An MCA does not require a tax return, instead, you will have to show proof of credit card sales and minimum monthly revenues of $8,000. Lenders will work with borrowers who have a credit score as low as 500, making it easy for most small business owners to qualify.
The downside to an MCA is both the interest rate and the uncertain repayment period. Rates range from 24% to 49% or higher, rising to the higher end if it is taking too long for the lender to recoup their money. As well, without a fixed weekly or monthly payment, it can be hard to budget your payments and, therefore, difficult to predict how the MCA will affect your cash flow.
Businesses with a large balance of past due invoices should investigate invoice factoring. With invoice factoring or financing, you pledge or sell your past due invoices to a lender. In return, they either lend you a percentage or pay you a flat percentage of those invoices. If you have struggled with bill collection, working with an invoice factoring lender could help you quickly convert those invoices into cash.
In both cases, you will not receive the full amount of the past due balances. That is because of the risk that your customers will never pay. You are essentially selling them at a discount or pledging them to secure a loan.
There are several drawbacks to this funding source. If you have not worked with the invoice factoring lender before, they may lend a smaller percentage on your past due invoices. They could want additional guarantees or charge a higher interest rate. As well, it is not uncommon for them to want to verify the creditworthiness of some of your largest debtors.
In that case, getting approved for an advance against your invoices, or selling them directly, could take far longer than applying for a bad credit business loan.
If you need working capital before you have filed your taxes, you can get a loan, but it probably will not be with a bank. When deciding where to apply, consider your business needs – such as set repayment schedule – and how long you will need to use the money. If you have questions, pick up the phone and talk to an experienced lender such as Shield Funding.
