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7 Tips for Negotiating a Business Loan

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Taking out a small business loan isn’t ordinarily, a bad thing, especially for a small or startup business. The success of your startup or small business often depends on, among other things, access to funding. Often, though, when it comes to borrowing, business owners feel that they are at the mercy of the lender. You should understand that banks, financial institutions and alternative lenders are also competing for business—yours! In fact, in today’s competitive business environment, the ability to negotiate a loan successfully for your small business, even if your business have bad credit and you need a bad credit loan, can be the difference between success and failure. Bearing this in mind, if you are wondering how to get a business loan, we suggest that you do your homework and do not be afraid to ask for what you want.

Most startup business loans are flexible enough to be used for just about any small business needs. The loan payments are usually determined by four things: loan amount, interest rate, term, and security (or collateral). Before you approach a lender for funding, you should know the type of financing options available to you: short term loans, SBA loans, equipment financing, lines of credit, business credit cards, and more. You can also use a business loan calculator to figure out your monthly payment.

Then, with a business plan in hand, approach your lender(s) and, above all else, be ready to negotiate! It will more than likely take some give and take. And while in the past a lender used to hold all the cards, the fierce competition means that is no longer the case. If negotiations aren’t working with one, either change your tactics, accept what they offer, or go elsewhere. You are not limited, by any means. Remember, banks are in the business to make money and turning you down is not necessarily in their best interests. They have something to lose, too, if they fail to grant your small business loan request.

Having said that, let’s look at those tips which can help you when negotiating a business loan.

1.  Have a Comprehensive Business Plan

A business plan is a written document that describes in detail your objectives and strategies for achieving your business goals. This is the most important document a lender would like to review before inviting you to discuss possible funding of your business. Usually, business plans are submitted to the prospective lender prior to invitation to negotiate, so it very important that you are well prepared to defend your company’s objectives and strategies. At a minimum, a good business plan will include estimated startup costs, a pro forma analysis of profit and earnings, the number of employees expected to be to hired and applicable wages.

2. Be Familiar with Lending Terminology

Before you start your loan negotiations, it would be prudent to familiarize yourself with the lending terms and products which may be discussed. Below are just a few of the more common business loan terms likely to be brought up in the discussion (or else found in the loan application).

Loan Principal

The Loan Principal is the amount available to you to use as and when you see fit. Any part of this amount disbursed to you becomes principal outstanding, which means that this is the amount you have to repay to the lender. The principal amount may be different from the amount you applied for, as the approval review process will ultimately decide how much credit the bank is willing to offer. Note that certain lenders, depending on the type of loan (more often a business line of credit), will charge you a monthly commitment fee if you do not use the loan; as such, you should be ready to drawdown on the loan as soon as it has been approved.

Default

As part of the Loan Agreement, there is a specific clause stipulating conditions under which you will have defaulted on your loan. You should know that some of those conditions may not be under your control but you are still responsible. Essentially, default means a borrower is unable to pay back borrowed amounts during the stipulated period or else has failed to abide by one or more of the loan terms.

Equity

Most startup businesses use some form of equity, very often personal savings, or loans from family and friends, to start their business. Lenders will be interested to know how much equity you have invested in your business. This will give the lender a fairly good idea about your commitment to the success of the business, which could impact on the lending decision. In some instances, equity could also be a reference to the value of your collateral as applicable to a secured loan.

Security

This is the same as collateral. By definition, secure is the assets pledged by the borrower for the loan, which the lender will “secure,” generally in the form of a UCC-filing, lien or mortgage. If you default on the loan, the lender will take possession of the assets.

Negative Amortization

This situation occurs whenever a principal repayment amount for any period is less than the interest charged over that period. In that case, the outstanding balance of the loan will increase. It is important that you not pay less of your principal amount each time a payment is due.

3. Have a Negotiating Strategy

Usually, prospective entrepreneurs will have a negotiating strategy; often, however, it’s not a convincing one. To have a very effective and successful negotiation, it is important that you have your business plan well-rehearsed and, if needed, seek the assistance of experts. Know exactly what you want from the lender and what you are willing to compromise on. It is possible to ask for a pre-negotiation meeting during which you will find out exactly what the lender is looking for; this will help you to revise your negotiation strategy ahead of the final negotiation.

Here are examples of items you can effectively negotiate:

Payment Schedule

All lenders are required to provide the borrower with a loan repayment schedule. However, you can negotiate the terms, taking into account, your projected cashflow. Even after disbursement, you can go back to the lender to renegotiate the repayment terms. Be aware that some lenders do charge a fee for early or prepayment of an outstanding loan, which you should be made aware of in advance.

Upfront Costs

This isn’t a negotiable item to your loan contract, per se, as much as it is awareness and avoidance where possible. By law, lenders are not permitted to hide fees or surcharges. If there is an upfront fee for doing business with them, it would be in your best interest to take your loan request elsewhere.

Interest Rates

This is by far one of the most important items you can and should try to negotiate in your favor. A single percentage point reduction could potentially save thousands of dollars (or more) over the life of your loan. Of course, you will need to have a sound argument as to why your rate should be lower (or at a fixed rate of interest versus a variable one), so have evidence in hand which can support your assertions. Also, if initially unsuccessful, don’t hesitate to renegotiate the interest rate in the future, provided you have made all required payments and met the loan agreement terms appropriately.

Need For Security

Depending on the loan amount, you may be able to argue in favor of an unsecured loan. Moreover, any loan which is to be secured must have collateral of an adequate value relative to the loan amount. In the cases where the LTV (loan-to-value) is not sufficient, you may be required to put up some other form of collateral or else your Personal Guaranty of the loan.

4. Find a Mentor

While your business might be new to you, you certainly won’t be the first in the industry. It would be in your best interest to seek out a mentor in your field who can offer advice and guidance. Especially as it relates to obtaining funding, a mentor can give you the ins and the outs as to what a lender is looking for. Of course, someone who is local who can act as a mentor is preferred, but don’t discount the Internet either if you are unable to find a mentor near you.

5. Bring Your Poker Face

Some passionate entrepreneurs tend to get a little too emotional from the pressure of securing a loan. Yes, lenders want to see passion, but they are not looking for an emotional wreck. If you can portray yourself as a reliable, level-headed, steely-eyed business owner looking out for the best interests of his company and his employees, you will go a long way toward earning respect. Be forthright and honest; don’t oversell or over-promise. Recognize that the lender is taking all the risks and do your best to show that you and your business will be a worthwhile and profitable investment for  them.

6.  Create a Risk Profile on Yourself

This requires you to think like a lender, and assess the possible losses your lending partner may incur by lending you money. This will require you to compare your company’s vision and mission against limitations that they might face. Creating a risk profile does not mean you lack faith in your business; instead, it means you are being realistic with what is at hand.

7. Research the Lender

This is what is known as doing your homework; in lender parlance, it is “due diligence.” Learn where the lender’s interest lies; are they more inclined towards particular fields such as e-commerce or finance, or are they a broad-based lender?

If your business is part of a niche industry that a specific lender prefers, that’s a plus for you, and your negotiation may be easier as a result. If not, you may find yourself in an uphill battle trying to entice a lender who does not have experience in the industry or sector; then you will need even better negotiating skills to convince such lenders of your company’s capabilities and its ability to satisfy the debt.

Other Tips to Aid Negotiations

While the foregoing are the most important tips for successfully negotiating a loan, there are other considerations you should know.

For example, even if a business loan for your small business is in the somewhat distant future, you may wish to create a deeper relationship with your intended lending partner now so that you can foster a greater degree of trust. To that end, see which other bank services you can avail yourself of, either personally or professionally, to strengthen the bond between you. Even if you don’t use a traditional brick-and-mortar financial institution but rather an alternative lender, check out their other services and opt in where you can.

It is also in your best interest to be cognizant of the role of the credit score. The personal credit score informs your lender of your money management techniques. It is one of the most important factors for securing a loan. It is important that you know what your credit score is in case you have to defend it (say, if it is only fair). Because the credit score is nothing more than a number, a lender will want to know if there were extenuating circumstances which resulted in the score obtained.

A business credit score, on the other hand, informs your lender or your company’s ability to satisfactorily repay its outstanding debt. Of course, this is relevant only if your business has been in operation for a while, or if you had previously owned a business that had a score. Essentially, the business credit score is testament to your skill as a manager/owner of a business.

Final Thoughts

Negotiating for a business loan is not easy but, with the right skills and techniques, you can master the art. That said, it is helpful to recognize that negotiations can only go so far; other important factors can also shape the outcome of your loan application. Regardless of the lending decision, if you continue to be passionate about your business and can advocate well on its behalf, never give up on your quest.

If you loan was rejected, we recommend that you explore 11 Reasons Your Small Business Loan Application Was Rejected.

Thanks for reading. Feel free to share and add your questions or comments in the section provided below.

 

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11 Reasons Your Small Business Loan Application Was Rejected

“I need a loan but keep getting declined!” This is a typical lament of a frustrated business loan applicant and rightly so as there are more denials than approvals. In reality, though, getting a small business loan can be difficult or a breeze, depending on why and how much you need, how you are preparing and who you are approaching.

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All lenders try to assess your capability to repay the business loan. Based on the information you’ve provided; they try to draw a profile. Any discrepancy in the profile for a lack of information, misinformation, or a mismatch will result in a declination of the loan approval. Let’s find out why our loan applications get declined.

  1. You didn’t handle the process correctly

The papers you submit with the loan application provides basic information about you. Your balance sheets or profit and loss statements tell about the present state of your business and the business plan you are going to present will speak about the future of your business. Any missing information will render the profile incomplete and might result in dismissal of the application. 

  1. Bad (or no) credit

The credit score of your business shows how efficiently you have repaid past loans. If your business is new and has no credit score then your personal credit score will be taken into account. Poor credit history on the business as well as the personal front will lead to loan declination.

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  1. Time in business

The time over which your company is in the market is directly related to the recognition and goodwill it has generated. The lender will evaluate your market reputation and take it into account while processing your loan. You will find it more difficult though to get a loan if you are a new venture or a start-up. Having said that, even if you are just starting your business, and even if your start-up has bad credit, you can still get a start-up loan with bad credit. 

  1. Insufficient income

No lender would like to lend money to an underperformer because, if you don’t earn then repaying the loan will be difficult. Your business needs to earn a minimum annual revenue to be qualified for a loan. In most cases, this amount is set by the lender and will vary according to the lender and the loan type.  

  1. High debt-to-income ratio

The balance sheets of the company not only tell about the cash flow but also about the debt, and how they are being managed. The debt to income ratio is an important measure as it compares the debt to your earnings. Business concerns with a large amount of debt or high debt -to-income ratio are less likely to qualify for a loan. 

  1. Lack of collateral

Collateral is an asset against which you can raise a loan. Most lenders favour collateral as it offers them security, as failure to repay the loan would mean that the lender can acquire the collateral. If you have an asset, it will be easier to get a loan using it. 

  1. Poor cashflow

A poor cash flow would mean delayed or missed payments which in turn will affect the credit rating of the company. No lender would like to provide a loan to an applicant having a cash crunch. We encourage you to learn a few Cash flow Strategies for Your Struggling Small Business. 

  1. Risky Industry

Industries like accounting, agriculture, construction, media, etc. are considered risky by the lenders. This is because they have uncertain and inconsistent income and are influenced by many external factors like legislation, natural forces, technological breakthrough, etc.  Your lender will know the nature of your industry from your business licenses and registrations and if you’re in the risky category then you might not get a loan.

  1. Your Business Plan Is not impressive

You must explain to the lender the purpose of the loan through a proposal. An important part of this business proposal is the projected financial statements, that explains the increase in revenue in the proposed business plan. You need to impress or satisfy the lender with the projections to get your loan approved.

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  1. You applied for a loan that doesn’t match your business

Lenders don’t allow using the funds for other purposes than stated in the application. There are different types of loans catering to different needs and lenders don’t approve a mismatch in the loan type and the purpose. For example, you cannot apply for a business term loan intended for acquiring real estate to pay off your debts on existing loans. Similarly, lenders would disqualify an application for a business line of credit if you project to buy equipment with it.

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  1. Negative event or error on the credit report

The lenders verify the information submitted along with the loan application. Any error, suppression of facts, or any unexplained negative event in your credit report may lead to the cancellation of your loan application. 

What to Do If Your Small Business Loan Application Is Declined?

If your small business loan application gets declined, don’t lose hope. Here are some points that will help you to review your application, make the necessary changes, and reapply.

Assess your debt and income

A careful assessment of your debt and earnings will not only help you to know how much money is there at hand but also to calculate the exact amount of loan you’ll need.  

Examine your credit reports

Reviewing your credit report will help you to find out hidden errors that might affect your score. Also, check if the report is up to date before submitting it. Remember your credit report is vital to the lenders. 

Fix errors in your credit reports

You can fix errors in your credit report. Consider the following steps –

  1. Keep a record of all your business dealings in written communication.
  2. Get a reputed agency to get your credit report other than the lender.
  3. Look for errors however small it might be.
  4. In case of multiple errors don’t address all of them in one letter.
  5. Gather as much evidence as you can in your favor and send them with your dispute letter. 

Talk to Your Lender

It always pays to talk to your lender in case of a dispute. Remember though that pointing out an error or accepting it won’t improve your score but correcting it on the report will. 

Build credit

If you are new in business or a startup, then go for loans like a business line of credit. You might have to settle for smaller amounts or a shorter-term but it will get you in the habit of repaying regularly and in the process crank up your credit rating. This will be profitable in the long run. An easy way to build credit is to purchase from vendors that report to commercial credit agencies. These vendors paly a big role when you are applying for business financing. Vendor credit is when vendors allow you to “buy now, pay later”, and if you pay on time these vendors will help you to build your company’s credit score.   

Use collateral

Identify assets that you can use as collateral. Getting a loan against collateral is much easier. You also can use collateral to get loans on terms favorable to your business.   

Increase income

An increase in the earnings will levitate your application to the lender. Take a deep look at your existing business and look for ways to earn more. A definite way is to streamline and curtail the costs.  

Pay down debt

Lenders don’t like debt and it is also bad for your earnings. You need to pay off your debt or at least have a solid plan on how to pay them off when you apply for a loan. 

Get a co-signer

If your credit score is low then you can bring in a partner with a high credit rating. This might help you get the loan you need but it also might mean that you have to compromise with your position and hold over the company.

Apply elsewhere

Shop around for your loan. You also need to look beyond banks, Government organizations, and other traditional lenders for a loan.  There’s a whole new breed of ‘online lenders’ who are offering a variety of finance options for all your needs. They offer more customization, online and faster processing of applications, and more convenience in loan disbursal than traditional lenders. You can also avail of a loan with minimal credit rating with these lenders.  Talk to them and share your requirement – you might get more than what you are looking for.

Final Thoughts

Getting approval for a loan is not tough, but at the same time, people get declined. It all depends on planning and following the proper steps. Assess yourself thoroughly, review your papers and information, shop around, and apply to the lender who you think might be right for you.

FAQ

What do I do if my SBA loan is denied?

Remember that SBA requires meticulous paperwork and stringent norms. They also have a longer processing time. You can reorganize and reapply. You can also look at other alternatives like online lenders.

Why do banks reject loan applications?

Banks have been the traditional lenders for years and want to make sure that the applicant will be able to repay the loan. For this, they have strict criteria regarding credit rating, annual income, collateral, and other points and reject applications that don’t match up to their criteria.

What should you do if your lender rejects your loan application?

You can reassess your requirements, review your credit report, and reapply for the loan. Shop around and also look at alternate

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The Best Options to Score a Loan Even if Your Small Business has Bad Credit

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Big banks can be reluctant in lending money, particularly to people and businesses with bad credit. If you need to get a start-up business loan with bad credit or if you think you need additional funding for your business expansion, and your credit score is not that good, then you will have to check out other options that do not involve bank loans.

Generally, a bad credit is anything that goes below 620. Bad credits are a result of debt collections, late payments, unpaid dues, and even foreclosure, repossession and other public records. Your credit score will get a negative impact with the negative information on your credit report. And your business can possibly suffer because of this.

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Good thing there are some other options for loan if you have bad credit. While these aren’t as good as bank financing, these are great options when bank loans are not available. Just keep in mind that they have higher interest rates, which make the cost of borrowing higher than usual.

When applying for these types of loan, you have to get your documents ready. Think about the ways on how you can demonstrate your ability to repay the loan. While this is mostly unnecessary with these loan types, it can help to have a proof of consistent business cash flow or something that you can offer as a collateral. Some options for business loan for bad credit may have a minimum business operation requirement and annual revenue amount.

With the vast number of lending choices to choose from, it can be very difficult to choose what type of loans are best for your situation. Here are 6 great loan options for small businesses with bad credit:

Bad credit loans

If your company has bad credit or you personally have a low credit score, you might have trouble securing a loan to help your business grow. You’re probably worried about building your business, and doubly worried about finding funding. Don’t despair – there are many reliable funders who will provide bad credit business loans.

Microloan

Shopping for microloans offers a big advantage when you need quick financing despite a bad credit score. These are generally short-term loans with small amounts, typically no higher than $50,000, making them easier to get. There are various microlenders, but you can get one from the US Small Business Administration, if you can prove that you can use the funds for inventory purchases or working capital. You cannot use SBA’s microloans for other expenses such as repayment of existing debts or purchase of real estate. Many non-profit organizations and credit unions offer microloans as well, but like the SBA, they have restrictions on how the released funds can be used. If you qualify, microloans can be considered as one of the lowest-priced options.

The Risks and Rewards of Getting a Microloan

Microloans were facilitated due to the rise of connectivity among people because of the Internet. People who are seeking for things where they can put their savings to good use and at the same time earn are the ones offering these loans, while those who are looking for funds to borrow are at the other end. These transactions are often done online.

The borrower’s credit rating is gathered through an online questionnaire, but there can also be a background and credit check, as well as a check in repayment history for those who have already availed microloans such as this. Microloans have higher interest rates and even if you have high credit score, expect to pay a higher interest rate than traditional loans. Because of the higher interests, lenders have better earnings compared to when they keep their savings at the bank or invest them on other things.

Since microloans are often unsecured or not backed by collateral, the lender has nothing to expect in case the borrower defaults. It is a high-risk lending, hence, the higher interest rates. Because the risk of microlending is undeniably inherent, lenders often offer only a small amount per approved loan, but this doesn’t mean that they do not offer a portfolio of microloans. Any microloan can be funded by multiple financers, each contributing a small amount. This allows them to minimize the risks involved and lenders can make sure that even if a couple of borrowers default, they will still have enough funds to sort things out.

Peer-to-Peer Lending

This is a lending type in which multiple investors utilize an online marketplace to offer a loan. With this type of loan, your application and profile will be reviewed by the investors, who will then decide whether or not they will contribute to the loan. You will only have a single loan and one loan account even if the loan is funded my a number of investors.

With peer-to-peer lending, the application process is much quicker compared to a traditional loan. Moreover, you get access to the funds faster once the loan is approved. This type of loan may require your personal guaranty, but this may put your personal finances to a greater risk in case your business won’t be able to repay the loan. And since it can be obtained even with bad credit, expect a higher interest rate.

Peer-to-peer lending is highly controversial in the world of loans. Many experts see it as very similar to the subprime mortgage lending system that is known to be the cause of the financial crisis in 2008. They say that as these lending “companies” expand their reach, their standards begin to loosen, hence, the higher default rates.

Merchant Cash Advance

A merchant cash advance is a good financing option if you need immediate short-term access to funds. With this type of loan, the lender offers a loan amount that is dependent on the borrower’s anticipated sales. The borrower can repay the loan in two ways. First, you can choose to have the loan repaid using your future card (credit and debit) sales. The second one is to repay the loan with periodic bank account transfers.

When applying for a merchant cash advance, check the interest rates closely and stay away from lenders than have too high interest rates. With this type of loan, there is no benefit in paying them early. But you can have the following advantages:

  • Application process is straightforward. Like with other types of alternative small business loans, the application process for a merchant cash advance is straightforward and can be done online. You fill up necessary online forms and upload supporting documents like business tax returns, credit card processing statements, and bank account statements in a few minutes.
  • Quick funding. Merchant cash advance is popular because it generally offers fast approval and quick access to funds. Applicants can get answers within hours and the funds are available in a matter of days. That is definitely an advantage particularly if the borrower needs the money immediately to cover unexpected expenses like payroll or equipment.
  • It is not required to have a perfect credit. Most business loans will require you to have good credit score on either your personal or business accounts, but with merchant cash advance, credit score is not a main concern. The approval for a merchant cash advance greatly depends on how long you have been operating as a business and the consistency of your business sales. Nevertheless, you must keep in mind that most merchant cash advance providers do not report to credit bureaus, so it won’t help you with your credit score even if your payment is updated.
  • Doesn’t require collateral. Generally, bank loans require you to provide collateral to secure your loan. It is the bank’s security in case you do not repay your debts. Merchant cash advances, on the contrary, are not secured, thus, you do not have to put any of your personal or company assets in order to get a loan.
  • Flexible payment terms. Unlike small business loans with fixed interest rates that require you to pay the same amount of interest each month, merchant cash advances are more flexible since payments depend on the percentage of your total card sales. So, if you have a slow or lean month, you can expect your payments to be lower. Your payments are basically proportionate to what you earn.
  • High cash loan limits. Unlike other types of alternative funding, merchant cash advance has high borrowing limits. While it is possible for a business to get low-amount loans, you can extend the limits up to $2,000,000. This can be even higher than what a traditional bank is willing to offer if you do not have adequate collateral or an excellent credit score.

Invoice Financing

This type of loan allows you to get funds from your unpaid invoices. With invoice financing, the lender buys your unpaid invoices and gives you an advance payment of the amount owed to your company. The process starts by checking the history of your customer payment, which allows the lender to determine if you are capable of repaying your loan through incoming payments. The lender will set the rates.

Depending on your credit and the payment timing of your customers, interest rates may vary. Until the loan is repaid fully, weekly fees can accumulate.

Understanding Invoice Financing

When a business sells products or services to big customers like retailers and wholesalers, transactions are often done on credit. This only means that payment is not immediate and funds can be delayed. The purchasing company only issues an invoice with the total amount due plus the due date. This can be good for business, as you are inviting more clients to buy from you. However, credits also mean that funds are tied up instead of having them for business growth and investments. There can also be emergency expenses like immediate need to purchase equipment, etc. If this happens, businesses can opt to sell their invoices.

Invoice financing is a type of short-term financing based on unpaid invoices.Through invoice financing, the company can sell its accounts receivable, improving its working capital and providing the company with immediate funds, which can be used for its expenses.

Invoice financing is structured in a variety of ways, but mostly, this is through discounting or factoring. In case of factoring, the lender buys the company’s outstanding invoices, paying the company as much as 85% up front of the invoice amount. Once the lender gets full invoice payments, it will give the remaining percentage of the total amount of invoices to the business. The business will then be charged for interest or fees for the factoring service. The customers of the business will be aware of this setup since the lender will be the one collecting payments from them. This may put the business in a bad light.

The business can use invoice discounting as an alternative to factoring. The only difference is with discounting, the business and not the lender, will be the one collecting payments from the customers. This way, the customers will not be aware of the arrangement. In the case of invoice discounting, the business will be given up to 95% of the total invoice amount. Once the invoices are paid by the clients, the business pays the lender, of course, with additional fees or interest.

Ask family and friends for funds

Depending on the amount of money you need, you may borrow the needed funds from your trusted family and friends. While this can be an advantage, since you get to personally know whom you are borrowing from, there can be a huge drawback. Apart from having a lot of loans to repay (if you are borrowing from multiple individuals), you are also risking your relationships in case you are not able to repay them.

When borrowing from family or friends, it is best to have everything in writing. Write down a loan agreement and let them discuss this with a tax professional or lawyer about the impacts of giving you a loan.

Summing Up

With these 6 options of getting a loan with bad credit, you can surely get enough resources to fund your small business. Keep in mind that you have to weigh your options first and consider the pros and cons before choosing one or more of these options. Discussing this with your business partners or lawyers, if there are any, can also help you decide which type of small business funding to use.

Always keep in mind that your business credit scores have a major impact on your ability to get funding. Once you have started to build your credit score, it will be much easier for you to obtain a loan or a business line of credit.

 

 

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How to get a start-up business loan with bad credit?

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Did you know that about 10 percent of start-ups fail within the first year? And, 29 percent of them fail due to lack of sufficient funds and poor cash-flow.

Yes, you heard it correct!

You need sufficient funds not just to start your business, but enough funds to cover all expenses and continue operations through the first few years.

If you are starting a new business you might wonder, how to get a start-up business loan with bad credit?

The younger the start-up, lenders are increasingly unsure of investing their money. If somehow they form an opinion that the business will be doomed before the loan is recovered, then all the more reason for them to back off.  The risks Is much higher if there is a lower credit score involved.

Now the question is how to get a start-up loan with bad credit.

Well, you’ll have to look beyond traditional options. Obviously, you cannot stick to one type of funding to secure all the money for your start-up.

Let’s dig deeper to understand the various bad credit start-up business loans:

Bad Credit Business LoanAlternative online lenders

Online lenders are famous low eligibility requirements. The below lenders may provide quick access to funding to your start-up as well as opaque terms and conditions that may result start-up business loan with bad credit and no collateral.

Kabbage – Need flexible access to working funds to reach your start-up goals? This organization provides direct funding to small business owners and consumers through its highly effective automated lending platform. Unlike traditional loan processing firms, this financial data and technology company has established its credibility by leveraging business data of consumers to process their loan requests.

[element-for-review-cta id=1393 text=”Small business funding options that fit your business. Qualify in 10 minutes for up to $250,000 line of credit”]

 

Lendio – You can explore your start-up funding options with one of the leading business loan marketplace in the USA. If you want quick approval and access to a working capital and plenty of loan options to work with, then Lendio is probably your best bet. They boast of having a very streamlined application process that connects you to multiple lenders across the country in a jiffy. With a history of $8 billion in PPP loan approvals and $73,000 being an average size of a PPP loan funded through them, they are surely doing it right.

Ondeck – This New York-based financial technology company is known to exclusively support small businesses. Ondeck is a good match for you if you want short term loans, want to take out multiple short term loans, and you have a strong revenue but not a good credit rating. With an A+ rating with the Better Business Bureau, $13 billion delivered to businesses across the globe, and a super impressive rating of 4.9/5 on Trustpilot, this lending organization has a lot to offer when you are starting a business with no money and bad credit.

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Bluevine – Wondering how to get money to start a small business with bad credit and prefer to have flexibility in your choice of loans as well? Try out Bluevine. This lending organization understands that one size doesn’t fit all and hence it has funding options tailored for every start-up needs. What makes partnering with Bluevine a cakewalk is its quick and painless application process, flexible design, and dedicated advisors who will help you secure your start-up loan for small business. With $6.5 billion funds already delivered, 125,000 customers, and an A+ rating with the Better Business Bureau, you know who you are signing up with.

Credibly – Need fast and flexible financing for your business? Then, Credibly will be your best bet. This organization offers a host of small business financing options, for example, working capital loan of up to $400,000 for a 6 to 18-month term, merchant cash advances of up to $400,000 for an anticipated duration of 6 to 18-months, business expansion loans of up to $250,000 for various terms, among others. With an A+ rating with the Better Business Bureau, 4.9/5 on LendingTree Reviews, and $1 billion in small business financing, Credibly has already served more than 325 industries across the USA. With Credibly at your services, you can count on its highly experienced and dedicated team of professionals to create the next start-up success story.

Friends and relatives

You can check with your friends and relatives if they are interested to invest in your business. Most certainly, being your family and loved ones, they believe in you and will be willing to invest. But do not take it for granted and ensure you make them aware of the risks involved in the funding process.

Merchant cash advance

First things first, please do not mistake merchant cash advance or MCA for start-up business loans. In fact a merchant cash advance serves the purpose of immediate access to a working capital in exchange for your future income or a share of your sales. These loans are growing in popularity because they accommodate requests of starting a business with bad credit, especially those who venture into retail, restaurant or service businesses. The interest rates of an MCA can be as high as 38%, so you can only consider them as a short-term solution.

Crowdfunding

This has gradually become a popular choice for many entrepreneurs who are keen to launch their product or service.

If you are considering this option for bad credit start-up business loans, then there are a few types of crowdfunding you need to know:

  • Reward-based – This type of crowdfunding doesn’t involve any kind of reward or incentive for the person or group that is backing your business. Usually, this type is reserved for non-profits or some kind of community projects.
  • Donation-based – In this type of crowdfunding, a reward or incentive is involved for contributing to your business. It could be in the form of a product or service you offer, or a special gift.
  • Equity-based/ Securities – This type of crowdfunding allows backers to become partners in your business. It could be any form of financial reward that they must receive for making an investment in your company.

Microloans

This is yet another option you can consider if you come from a minority or a disadvantaged background. You can get microloans or any financial assistance from a non-profit organization. Usually, this kind of assistance does not come with a clause of having a strong financial background, hence, having a bad credit will not necessarily serve as a hindrance in getting the required financial aid. The backers are not usually involved for any financial gains, they want to help struggling communities strengthen their financial positions and achieve their dreams.

Business Credit CardBusiness credit cards

If you have a bad credit rating, and you are afraid that you will not be able to secure a traditional small business startup loan, then you might want to consider a business credit card. Most people usually overlook this aspect of a business credit card as a viable funding option, but it can actually be a good means of securing the credit to start a new business. The issuing authorities of a business card usually consider the applicant’s personal credit rating and not the credentials of a business.

While this may sound too good to be true for a new business owner who is just starting out, business credit cards are much more accessible than traditional modes of funding for a start-up.

Business grants

Have you considered small business grants? Unlike start-up loans, you do not need to worry about repaying back the invested sum. Qualifying for a small business grant can be a little more difficult than you imagine but definitely not impossible.

Consider approaching the federal or state governments who usually offer these grants to small businesses to kick start their venture and develop it into a full-fledged business. Though they are typically reserved for specific causes like medical or scientific research and conservation efforts, and industries that the government considers worth investing in, you may want to check if your start-up falls into any of those categories.

Financial technology companies

All thanks to mobile technology and boom in the fintech industry, you are now able to access these innovative funding organizations that work to make your start-up dreams come to reality.

Final thoughts 

The million dollar question remains whether getting a start-up business loan is possible with a bad credit. To state upfront, the answer may be a no.

But if you are a little creative in your ways, you will definitely figure out options to secure capital to start your venture.

If you cannot secure a traditional start-up loan without a credit check, establishing a credit score while making purchases from vendors that will help you build business credit,  or opting for a micro loan or using financial help from family or friends can definitely pave a smooth way to access funding for your business.

Let us know in the comments section below which option did you opt for to get funding for your start-up.

 

 

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Market Reopening Small Business Survey (June 2020) – The Real Impact on SMB Owners

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The COVID-19 outbreak changed the entire business landscape. Small business owners who face stress, financial pain, and challenges of the long road ahead are now facing uncertainty.

With this in mind, the Bizit research team approached small business owners, founders and managers and asked questions about the state of their business, clients, and what their problems and strategies are, in order to support their small business after 3 months of COVID-19 pandemic.

We surveyed 1,876 small business owners (owners, founders, managers or chief executives) across all 50 states to understand how they’re adapting to the COVID-19 pandemic, what they find challenging and what’s working well.

We want to share with you the key insights and learnings we gathered.

The Impact of COVID-19 Pandemic on Small Business From March to-Date

63% of the participants responded that the pandemic had a negative impact on their small business which resulted decrease in demand.

The impact of COVID19 on SMB

Of small business that experienced decrease in revenue, 48% report revenue losses of 10%-35%, 39% of small business owners report revenue losses of above 35% and 13% reported that they lost their entire revenue.

SMB Loss of Revenue following COVID-19

What adjustments have you had to make to adapt your operations to business conditions?

Of the nearly 2,000 small business owners we surveyed between May25-29, 44% of small business owners reported that they had to close their physical location and work remotely as a result of the COVID-19 pandemic. 12% reported that they reformatted their physical space or retrained employees to meet social distancing guidelines. 11% ceased operations temporarily and 7% invested to take advantage of new business opportunities that lie ahead.

Business adjustments following COVID-19

Among those who responded that employees worked from home, large part of the participants noted that productivity and communication took a hit when employees are new to working from home. Daily check-ins and proactive video calls worked to get all the business messages across and have everyone aligned. Those who’ve been working from home for over a month reported that the they have found tools and strategies to boost collaboration and work satisfaction.

What financial adjustments have you made to navigate your current business conditions?

According to the survey, 70% of small business applied for PPP loan. 50% of the small business owners indicated that they re-negotiated terms or delayed paying suppliers/vendors.

Financial adjustments taken by SMB following COVID-19

How many weeks of expenses do you currently have cash on hand for?

12% of the participants responded that they have enough cash to keep the business going for up to 4 weeks.  19% responded that they have enough cash to run the business between 1-3 months and 20% responded that they can keep the business running for additional 6 months without making any changes.

SMB Cash on hand during COVID-19

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Financial Needs

We’ve asked small business owners what are their key financing needs at this time?

The majority of the responses (62%) highlighted that funding fixed costs is the most crucial factor they fact while keeping the business running during the pandemic.

SMB financial needs during COVID-19

Searching for Working Capital

While searching for working capital, 68% of SMB managers responded that the speed to receive the funds is the most important  factor for their decision. Interest rates are the 2nd factor that business managers take into consideration and past relationship with the lender is the less important factor.

SMB decision mapping during COVID-19

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SBA Loan through the Paycheck Protection Program

We’ve asked the small business owners and mangers if they are familiar with the SBA Loan through the Paycheck Protection Program (PPP).

72% responded that they were familiar with the Paycheck Protection Program and 28% responded that they are not familiar with the PPP.

We’ve also asked the small business owners and managers if they were approved for an SBA Loan through the Paycheck Protection Program (PPP), what is the funding amount that they were approved for?

The table below reflect the loan amount that the responding small business applied for through the Paycheck Protection Program (PPP)

SMB PPP loan amount

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Our final question with respect to PPP loans was – If you received PPP funding, how are you planning to manage the eligibility requirements for PPP loan forgiveness?

49% of the respondents replied that they meet the requirements and plan to apply for loan forgiveness

Planning for Re-opening and the Future

SMB PPP loan forgiveness

How Long Will it Take to Recover?

We’ve asked the participants – For the next 2 months, what is their revenue outlook relative to pre-pandemic levels?

8% responded that they foresee the same level of revenue. 54% responded that they believe that revenue will increase. 28% responded that revenue will be up to 25% lower and 6% believe that it will be up to 50% lower.

SMB revenue outlook following COVID-19

We asked the participants how long do they expect it will take for business to return to normal?

8% of the small busines owners and managers responded that they believe that it will take up to 1 month. 24% responded that it will take 1-3 months to return to normal, 28% responded that it will take 3-6 months and 40% believe that it will take more than 6 months.

SMB busienss forecast following COVID-19

Another interesting thing that is related to reopening the business reflect the changes that small business owners plan to take.

Inventory:

Currently nobody can predict with confidence how the COVID-19 crisis will unfold. The financial crisis 2008/2009 has shown, companies that deployed sustainable cost reduction programs significantly outperformed the competition. During the past 2 months most manufacturing firms have reacted remarkably quickly and adjusted to the new levels of demand. 71% of the small business owners say that they will keep inventory at the same levels.

SMB inventory changes following COVID-19

Staffing levels:

The COVID-19 pandemic is having a catastrophic effect on staffing. Large reductions are foreseen globally. 59% of the small business owners who took the survey reported that they laid of employees.

SMB staffing changes following COVID-19

Advertising spend:

According to our survey, the pandemic has led to an immediate drop in advertising spending and ad spends are down 12% on average. 72% of the respondents said that they plan to maintain advertising spend levels as pre pandemic level and 6% said that they plan to increase this spend.

SMB advertising changes following COVID-19

Fixed costs:

While managers and small business owners can navigate the ship and reduce the variable costs, it seems that most of them find it hard to adjust to the new situation and reduce the fixed costs. According to our survey, 83% plan to keep the fixed costs.

SMB fixed costs changes following COVID-19

Adoption of Technology Tools:

The coronavirus pandemic is accelerating some market trends that had already taken root before the outbreak. The tech industry is already a major driver of economic growth. The telco fore example seen more Americans use collaboration apps on their phones, with Zoom, Webex and Microsoft Teams  experiencing spike. 18% of small business owners plan to increase the adoption of technology tools as result of the pandemic.

Which of these services do you feel is most crucial to help your business succeed in the foreseeable future?

63% of the small business owners who responded to the survey stated that tracking expenses and cash flow is the most important aspect to help their business success in the near future. 38% responded that setting aside savings for a rainy day is one of the biggest lessons that they took from this challenging period.

SMB strategic planning following COVID-19

 

We’ve also asked the small business owners – If your physical location has been closed, when do you expect to be able to reopen?

According to our survey 54% already opened their business and 14% plan to re-open by July 1st.

SMB reopen forecast following COVID-19

In assessing what comes next for your business, what sources of information have you relied on?

SMB sources of information during COVID-19

Final thoughts

The COVID-19 pandemic caught the entire world unprepared. Small-business owners have been struggling through trying to keep their business alive and kicking despite the drop in revenue. According to our survey, if the COVID-19 crisis continues, 12 percent said their businesses could not last another month and 39 percent said they might fold within six months. We hope that the government will continue to support small business and that we will not see fewer mom-and-pop shops in the future.

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How To Increase The Value Of Your Small Business For Sale

Most small business owners never think for a second about what their small business is actually worth until it’s time to think about what it’s actually worth. This article will explain the biggest factors that contribute the most to your company valuations.

By the time most business owners get around to thinking what their small business worth, it’s usually when they want to sell and it’s too late to actually change things and fix what needs fixing. In many cases either investors are put off or the owner sells for way less than they wanted to. Or even worse, they’re stuck with a business they hate.

You Don’t Want to Be Dependent on Anyone

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While most business consultants will focus on the need to diversify the customer base, there are three main factors to this.

First is you have to be independent of customers. You need a good diversification of your customers. If 70% of your small business is coming from one customer, then as an investor I’ll look at your business in a cheaper way right from the get go.

Second is about employees: you can’t rely on any one employee to manage a large part of your small business. Investors want to know that if anything happens to that employee, they can easily replace them.

Thirdly, you can’t be dependent on one supplier. That’s a big no for any potential investor, and scares investors away.

The key idea is diversification – Customers, Employees and Suppliers. As the business owner, you need to ensure you have diversification on all three of those.

When a potential investor is about to buy your small business and he see you are dependent on any one of those three, your business will be pretty much worthless – your business will be worth much if you had those three aspects diversified.

The most valuable companies are structured this way, they aren’t dependent on one individual. Diversification is actually part of their “DNA”.

In order to secure your financial freedom you should ask yourself what can you do today to reduce your reliance on one thing in each of those three areas and increase the value of your business.

Focus on Your Small Business Financial Performance: Your Top Line Revenue, and Your Bottom Line Profit

In the paragraph above we said that most business owners don’t think for a second on what their small businesses are actually worth, and when they do think about it it’s usually too late to fix or change things, and they end up stuck with a business that’s draining them mentally and physically.

It doesn’t have to be that way and this is the reason you are reading this article.

Top line revenue and bottom line profit aren’t the only numbers that are relevant when valuing your small business. But those are really important to begin with, and the QUALITY of the reports of those numbers really matter, almost just as much.

In order to drive up your valuation, don’t just focus on good financial performance, but also consider investing in an audit to show that your numbers are legit. We recommend that you get a 3rd party to check your financials. That will add a lot of value.

Again, three things, like in the paragraph above: your overall revenue, profit margin, and the
quality of your bookkeeping. Make sure that you get these three right.

We would like to emphasize one thing about your revenue – the bigger your business is, the more you’ll get offered…Because size matters! The smaller you are, you’ll get lower multiples, because it looks like the business is even more dependent on the owner.

The things you want to focus on to increase valuation is first to increase revenue as much as possible, then increase your profit margin and make sure that you have legit, clean, ideally audited financials from a third party company.

Make sure that you focus on daily basis to increase both revenue and profit. It’s not enough to focus on just one of those. If all you focus on is to increase revenue at the expense of your profit margin then a potential buyer will look at that and see your gross margin is dropping as your revenue is increasing. That makes it look like your best days are behind you, and you were able to grow only by dropping your price.

Ask yourself – What are you going to do today to focus on those three areas to improve your valuation – your overall revenue, profit margin, and quality of your bookkeeping.

Improve the Way Cash Moves Through Your Business

Worrying if you’ll get a payment from a customer tomorrow to have the cash to pay an invoice that’s just come in is no fun. When the arteries of your small business are blocked like that, everyone and everything gets paid late – Suppliers, employees, product development costs and more.

And if you want to sell your small business…That’s a huge red flag to a potential buyer. You want to remember when someone is buying a company they’re making two deposits: One is to YOU to buy the business. The second is to finance your working capital. That’s the money your business needs to operate day to day operations.

The more cash your company needs to operate, the less a potential buyer will be excited to buy your small business because that’s more money out of his business.

So how can you improve the way cash moves through your company?

The first, and pretty obvious answer, is to make sure your business is generating cash.

So how do you do that?

First – Get paid faster. if you’re in a business where you send invoices, is it possible to send those invoices and collect money more quickly? Can you reduce a 30 day payment to 15 days? Or charge a bigger deposit, increase it from 5% to 30%? That will help your cash situation a LOT because the money your small business generates will be in your hand faster and for longer. Another way you can get paid faster is by factoring your invoices.

Second – Pay your bills slower. You need to manage your payables better. Let’s assume that suppliers ask you to pay in 30 days, can you stretch it to 45 days? Are you using
credit cards effectively? 10-15 days of float…are you using that?

Money coming in faster, money going out slower – Equals more cash IN your small business at any given moment. You might think 5 days here or 10 days there doesn’t matter much, but it creates an overall difference when you pay your bills slower and get paid faster.

Improved cash flow will drive the value of your company a lot. because a buyer looking at the cashflow of your small business will know they won’t have to immediately inject a ton of cash to get it working properly.

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Ask yourself what can you do today to get paid faster and pay your bills slower? You can also sit down with your employees and ask them about it.

Use Small Business Loans to Boost Your Performance

Small business loans are usually used to cover urgent expenses such as salaries or unexpected expenses, such as paying for office or vehicle repairs and adding inventory during a seasonal spike in demand.

However, you can also use small business loans improve your overall business performance. One example is to buy more from suppliers and vendors and translate it into increased leverage to negotiate better terms, such as bigger discounts and more time to pay your invoices.

You can also use small business loans to hire new talents and compete with the your top peers when it comes to onboarding and retaining top talent employees.

Another way that small business loan can be utilized to increase the performance of your small business is by extending existing lines of products. This is an effective way for businesses to diversify revenue streams and enter into new markets. Taking out a small business loan provides the leverage your business needs to modify and evolve its suite of offerings, which is essential for growth and stability, and put your small business in position to succeed over the long-term.

Small Business Loan Terms – What to Know

Reflect the Growth potential of your Small Business

We’ve been covering how to increase the value of your small business for sale, because business owners don’t think about this until they have to…and then it’s too late and they sell for cheap.

In the first paragraph we’ve covered diversification in three key areas.

In the second we’ve covered 3 fundamentals of your financials to get straight.

We’ll be continuing to cover the few factors that contribute the most to the valuation of your small business when you’re looking to sell.

Many small business owners want to value their business based on what they’ve done in the past. That’s a normal valuation strategy, and it works great.

But if you want to get the most out of your business selling price, try to position it to your buyer based on the FUTURE growth potential of your business. It’s the FUTURE of your business that investors buy. They only care about the future.

Ignore this and all you have is a past that no one cares about.

So do some reverse engineering. Think about where they’re coming from. For you, the seller, selling your small business is the finish line. But for the investor, it’s the start line.

it is crucial that you make the case for your small business potential and present things like – How it will operate in a different market, If your business have been successful in a market A, can it be scaled to market C or D?. Make sure that you present cross selling opportunities and any way you can scale the business up. If you can demonstrate the potential in these things, you can ask for a much higher selling price.

How strong you can make this case? that’s what’s going to drive up the value of your business. If you can show you can scale much more quickly, you can get much larger multiples.

For example, let’s say you woke up tomorrow, and you had ten times more customers to serve. How easy would it be for you to handle that demand? If your answer is impossible, its really hard to get larger multiples as opposed to companies that can answer that easily.

The more you can demonstrate future growth, the more valuable it’s going to be. Investors saw Uber had crazy potential. As a result of their quick growth, they got a valuation of 50 billion dollars. All based on their growth potential. Investors buy that growth story.

If you want to get higher multiples for your business, you should ask yourself how can you craft a compelling growth story? And how are you going to demonstrate to potential buyers that you have no growth limits?

Make Sure Your Small Business Is Stable and Enjoy a Recurring Revenue Stream

We’ve been through a few reasons on what affects your business value when you’re about to sell it.

  • Diversification
  • Financials
  • Growth potential
  • Get paid faster, pay slower

The focus in this paragraph is the BIG question on a buyers mind: how will the business keep working when the owner is out?

If a large part of the business depends on you, that’s a no-go zone for a potential buyer. One of the elegant ways to reassure a buyer is through recurring revenue. The more recurring revenue you can have, the more valuable your small business will be (because it’s less dependent on you).

A few examples of recurring revenue are: long term contracts with clients or renewal plans and subscribers.

You want to think about how you can convert one-time purchases to subscription models.
The more clients you have like this, the more valuable your business will be. You always want to think about how can you add a product that’s more than a one time transaction and can repeat itself.

The more recurring revenue your business generate, the higher the valuation will be.
Let’s say you have a company that’s generated good money but as a one time thing. If your competitor makes this same amount of money with recurring revenue, then that business will be worth 2-3 times more than yours.

Recurring revenue might skyrocket your business value like nothing else. You might think that your customers won’t be interested in subscriptions in your industry. You need to give it a thought and look at ways to incorporate this into your business. Maybe it’s by offering subscriptions on existing products and incentivizing your existing customers to sign up by giving them a recurring discount. Or maybe it’s thinking of products related to your existing products that your customers will need over and over again.

By setting up these payments that will continue to come in whether you’re still part of the business or not, your small business will immediately become more attractive to potential buyers, and you’ll have leverage to ask for a higher price!

So ask yourself, what can I do to change my one time product into recurring purchases?

Final Thoughts

As a small business owner you must discover the value gaps in your business. If you want to list your business for sale, you should ramp up your marketing and sales and make sure you have a solid plan for growth. Buyers pay more for growing businesses than ones that are stagnant.

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10 Best Options For Startup Business Loans

As an entrepreneur, you have so many opportunities and so much potential ahead of you. Cash, or as a matter of fact, the lack of it, is one of the main obstacles that most startup business owners who dream of turning their idea into a huge success have to overcome.

This article will show you the best startup funding options available out there and how your small business can qualify for it.

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What is a Startup Business Loan?

Startups with little to no business history, have limited access to traditional financing and business loans. You need an investment to start your business. It can be for a thousand different reasons – from leasing office space to buying machinery or equipment or hiring staff or just to cover monthly expenses. If you are looking for funding then the easiest option is to take a startup business loan, which is a kind of financing that is aimed specifically towards startups. If you have the money for your business then also you might consider a small business loan as there are many unexpected and hidden costs that can get you stressed and if you don’t have a financial cushion then it can be a big issue in realizing your dreams. If you are wondering how to get funding, here are some points to find the right funding for your startup. 

How can a startup loan accelerate your small business?

Your startup is your vision and dream and you might not want to share the control with anyone else. A small business loan can be helpful in empowering you as you need not share equity with other investors.  You also can select the funding most suitable for your needs or that component of your business which needs funding and have greater control by not splurging or overspending in other areas.

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How much loan can a startup business get?

Typically, a small business can get loans from $5,000 to $5million. The actual requirement would be based on your business plan and its assessment by the lender.

Small Business Loan

What is the best small business loan to get?

Here are ten different small business loan ideas. You can assess the best loan suitable for you from them –

  1. Term Loan –This is the most common form of loan where you receive an amount that has to be repaid with interest after the term. This is recommended in a situation where you know exactly about your requirements, for example, you need funds to buy more goods for a confirmed order. They are not recommended as working capital since many things might defer the repayment and you will have to pay more interest. Term loans can be secured with collateral and or other assets as a guarantee to the lending institution that you will pay off the borrowed funds. An unsecured loan Is faster to obtain but you must be prepared to pay more.
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  1. Business Line of Credit –They are great if you are looking for flexibility and a sizable amount. They operate as a credit card by revolving lines of credit so you can keep afloat or repay at your convenience. The major difference is that the credit limit is much larger than normal cards.
  2. Rollover for Business Startups (ROBS) –They are actually not a loan but a transaction where funds from your 401(k) or IRA (individual Retirement Amount) are rolled over to your startup. You are not incurring debt in this case nor will you pay taxes or penalties if you fail as it is your money, but on the other hand, you are putting your retirement fund at risk, as you jeopardize your retirement if your business fails.
  3. SBA and microloans from non-profits –Small Business Administration (SBA) offers loans for small businesses. The downside is that these loans are really small and might not be useful to you. Moreover, these loans are hard to get as they require collateral or a physical asset that can be sold when you default. They also take a long time to be processed and issued.

Many non-profit organizations provide microloan for special situations. You might avail them if you belong to a minority or an economically struggling community or a traditionally disadvantaged small business owner.

  1. Business credit card –A Business Credit Card will provide you with a revolving line of credit easily. The credit limit is usually set and just like a consumer credit card, a business credit card carries an interest charge if the balance is not paid in full each billing cycle. They can be useful if you have a good credit score as the issuers determine your annual percentage rate on your personal credit score. It is recommended that you use them in an emergency situation and not use them for financing your business.
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  1. Equipment Finance Loan –This is helpful if you have to purchase, lease, or borrow any equipment for your startup. There are different varieties of these loans catering to specific business and equipment. They differ from a term loan as they are financing a piece of equipment that serves as collateral. If you default then the lender can only repossess that equipment and your other assets or business are not in jeopardy. Thus, they offer a more cost-effective and low-risk way to acquire equipment or other physical assets.
  2. Invoice Financing – if you have customers who are billable, Invoice financing,also known as invoice factoring, can be a good option. This type of funding allows a startup to borrow money against the amounts due from its customers. Invoice financing looks into the credit history of the customers and it is possible for a start-up or new business to get funding if it has a good reputable customer line. Another advantage of this kind of funding is that you retain complete equity.
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  1. Business Loan for Bad Credits – You arrange some funds and start off your business but then the reality strikes and you are out of funds. If you have poor or no credit history then also you can avail of these loans. You have to prove that you have a good business plan with solid cash flow projections to prove that you can repay your loans to avail of these loans though.
  2. Business loans for women-owned startups – If you think that being a woman entrepreneur is difficult, then there are lenders with specific programs to fund women business owners. The range comprises of a variety of options to suit your requirement and with lucrative and generous offers and discounts.
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  1. Startup Consultants – A startup consultant can mentor you on your way to success and can successfully connect you to the right funding. In the process, they also check your viability for funding and can provide additional services like provide services like creating or fine tuning your business plan, insurance and check if you are covered with all basic business requirements. They charge a premium and if you are seeing this as an extra cost then think again as a wrong step with something as vital as financing can jeopardize your business very early.

Crowdfunding

What are the other sources to fund your startup?

 If you don’t like the idea of taking a loan, there are several other ways to raise funds for your startup, here are some more avenues to raise funds.

  1. Friends and Family– This is the most common way how most startups begin their journey. It is the easiest, quickest and the most informal way to acquire funds. However, you have to be careful when you are pulling in resources from your near ones. Explain your business plan in detail and spell out the investments and the risks for everyone. You also need to legally set in place the responsibility, amount, equity or repayment terms, collaterals, and other aspects of the investment. Remember that you are putting your personal relationships at risk too and if your business fails for some reason, it won’t be easy to repair the relations.
  2. Venture Capitalism – If you can project a solid business plan or prospect in your startup then you can approach and attract investors who have the capital to invest in your business. There are certain advantages to venture capital investments. They normally lookout for and focus on high growth areas. They are more willing to take greater risk than traditional financing but this might be in exchange for higher returns. They also have a bigger scope of investment but they also come at a cost. Most venture capitalists invest in exchange of equity so you might have to give up some of the controls of your startup.
  3. Crowdfunding – Crowdfunding is exactly what the name suggests – raising funds for your startup from a crowd. These people, called crowdfunders contribute financially but are not technically investing in your business as they don’t receive any equity or financial return. Instead, they get a gift which commonly is the product you plan to produce. This works well if you are producing something physical e.g. a bag, or a mention in the credits of a creative product, like a film. Crowdfunding presents a low-risk situation as you are under no obligation to repay your funders while retaining full control of your business. There are a number of crowdfunding platforms and you need to check the rules in detail before using them.
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  1. Grants – Business grants are free funding where you don’t have to pay interest or fees. But this free funding or grant comes with quite a few riders. Grants come easy if you have access to and could impress the select group offering the grant. The process is generally long as you have to build access or network, go through lengthy application processes, and pitch your idea repeatedly to different audiences. It usually takes time to align the people offering grants to align their vision with your plan. This is not for you if you need quick funding. However, if you are a woman entrepreneur or belong to a minority or underrepresented group this is easier as the competition there is less.

What are the requirements for a startup loan?

Apart from your personal information, here are the other common documents lenders ask for with startup business loans.

  • Personal credit score – Lenders always check the personal credit score of the owner so the credit score tier information is essential.
  • Cash flow and income – The debt-to-income ratio of a business becomes important when lenders are assessing its risk. Businesses with higher cash flow and income have a better chance of securing a loan. Bank statements, balance sheets, and tax returns also reveal the present debt of your business and its earnings.
  • Age of the business – The number of years in business matters so keep your business license ready.
  • Collateral – If you have fixed assets it may be easier to get a loan or a low-interest rate. List all you can present as collateral.
  • Industry – The lenders assess the industry you plan to work in or cater to for risk assessment. Keep your business plan ready.

Which banks offer startup business loans?

You can also turn to banks and credit unions for small-business loans. Here is a list of well-known banks that offer startup business loans.

  • Wells Fargo
  • JPMorgan Chase
  • Bank Of America
  • Capital One
  • US Bank
  • Huntington National Bank
  • Live Oak Bank
  • TD Bank
  • Celtic Bank 

Who are the best loan providers for startups, apart from banks?

BlueVine

BlueVine If your business plan requires invoice financing then BlueVine can be your best choice. BlueVine has streamlined processes which have simplified the invoice factoring in terms of fees, confounding and restricting contracts, and inconvenient termination clauses. Now you have more control over your products or you can choose which products need to be financed without the limiting long-term contracts and high fees.

[element-for-review-cta id=1424 text=”$5,000 – $5M fast funding for your business. Apply online and get approved in as fast as 20 minutes”]

 

The services are transparent, easy to apply for, and get approved and are appreciated by cash strapped business owners. They can offer up to $5million in invoice financing which is way above the average. They also offer a variety of term loans and lines of credit for most users and requirements. BlueVine also has a special resource center for women entrepreneurs and applies relatively lower application requirements for them. Apart from women-owned businesses, BlueVine has the experience, expertise, and money to finance your big project whatever it may be.

For Against
  • Simplified, fast and transparent process
  • Best in the market for Invoice financing
  • Relatively lower credit score requirements especially for women
  • Can fund big projects with a variety of options

 

  • Limited national presence
  • Not suitable for small business
  • Steep fees

 

Kabbage

If you prefer convenience and versatility then you should place Kabbage on top of your list. It is actually possible to apply to Kabbage online and get approval within minutes and the funds within the same day. It also has very straight and simple eligibility requirements for its business line of credit: you have to be one year in business with $50K annual revenue to be eligible for a credit up to $100,000.

[element-for-review-cta id=1393 text=”Small business funding options that fit your business. Qualify in 10 minutes for up to $250,000 line of credit”]

 

They don’t need a minimum credit score and are a fantastic option for entrepreneurs with low personal credit. Kabbage looks into your business’s revenue and cash flow, so business owners with a high revenue model will get easy approval. Kabbage also offers unmatched convenience and you can have the money in your PayPal account, bank account, or a Kabbage card. The ease, convenience, low credit score, and speed of approval also makes Kabbage one of the favorites for the woman entrepreneur.

For Against
  • Fast, automated approval
  • Fast funding
  • Convenient and multiple ways to access funds
  • No personal credit score
  • Assessment of business strength

 

  • High Annual percentage rate

 

OnDeck

OnDeck offers both term loans and business lines of credit. It is good for you if you may be a good fit for your business if you need fast cash. Online or phone applications take a few minutes and get the funds within 24 hours of approval for a term loan and instantly for a line of credit with withdrawals between $1K -$10K. They also require looser qualification and credit scores for approval.

[element-for-review-cta id=1431 text=”A+ rating with BBB, 9.8/10 customer ratings at TrustPilot. Relaxed eligibility requirements and transparent Information for fast financing solutions”]

 

Unlike typical banks, OnDeck doesn’t requite collaterals and offers discounts for repeat borrowers.  However, you also have to look out as their loans can be expensive with a high APR.  they also have a fixed repayment plan and early repayment also don’t get any benefits. It might not be the best for startups but definitely, a good option if your business has constant sales and you are looking for expansion.

For Against
  • Funds are available within minutes or a day
  • Low minimum personal credit score required
  • Fast application and processing
  • Fixed repayment structure and no saving of interest on early repayment
  • Fixed daily or weekly repayment
  • For term loans need a personal guarantee and business lien

Lendio

Lendio serves as a lending market, where the entrepreneurs and lenders with their offers come on a common platform. You can apply really quickly as it is really just a click away. Your application will be scrutinized and requirements matched with the available loans, lenders, and offers and you can choose the plan best suited for your business. The team at Lendio will guide you with their expertise to complete the loan application and get approved. The typical time to get the funds after approval is 2-4 weeks.

The best part of Lendio is the availability of a huge number of small-business loans and lenders. Also, Lendio can match you with other funding agencies too if you are not happy with their offers. With loans starting as low as $500, longer loan term, and short funding period, they offer the best startup loans overall, especially for small business owners. They also offer some of the best plans for women entrepreneurs or business owners.

For Against
  • One-click application
  • Fast scrutiny and processing of the application
  • A huge number of loans, lenders, and offers
  • Personalized supervision and guidance by experts
  • Steep interest rates in some areas or offers
  • Basic qualifications or paperwork required
  • Inquiry in your credit score

Fundbox

If you are worried about getting funding for your business with low or bad credit, then Fundbox might be your answer. Getting finance from Fundbox requires a personal credit score as low as 500. Moreover, Fundbox doesn’t need collateral or a personal guarantee for business lines of credit under $50,000. The precesses in Fundbox are really fast – you can apply online and will get an assessment of your business. You can receive the funds in your account within the next few days. The simplified and automated process along with low personal credit scores and easy availability of funds have made Fundbox one of the most popular startup lenders., They also are favored by women entrepreneurs as generally they are denied loans in most cases due to lower credit scores. If you need business funding don’t hesitate to apply to Fundbox, even if you have bad credit.

For Against
  • Simplified processes with automated loan application
  • Fast processing, approval, and funding
  • Low personal credit score requirements with soft checks
  • Decent support system
  • Lower fees than competitors
  • The maximum loan amount is lower than the average
  • Higher Annual percentage rate than competitors

Final Thoughts

As a startup business owner, you have plenty of financing options. We hope that this article will help you to find the one that fits your small business needs, in order for your startup to get that funding and turn it into a huge success.

 

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FICO Scores vs Credit Scores: What’s the Difference?

If you have ever rented an apartment or applied for a credit card, mortgage or personal loan, then you already know that having a good credit score is important. For the small business owner, especially one who may, now or in the future, have a need for working capital support, a good credit score is critical to your company’s future success.

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Your credit score represents your creditworthiness; that is, the likelihood that you will be able to repay your financial obligations. It takes into account different factors in your credit history, but the higher your score is, the more attractive you are to financial institutions.

The credit score you earn (as a result of how well you manage and repay those financial obligations) is used by banks, credit card companies, and other lenders to assess the risk of lending money to you. The score not only affects whether or not you are approved, but also the terms and the interest rates you will be offered on your small business loan.

If you’ve ever had questions about credit scores, you’ve come to the right place. This article discusses the different credit scoring models, how FICO® scores differ from other credit scores, which scores matter, how they are calculated, and how you can find your own scores.

About Credit Scores

Because you may have heard individuals discussing their FICO score, you may mistakenly have assumed that a person has only one credit score. That is not true; the FICO score is simply the most common. Moreover, the computation of credit scores is, in fact, a lot more complicated than most people presume.

It is important to note that whenever you borrow money, lenders report your repayment history (whether you pay on time, or pay an amount over what is due, etc.) to the three major credit reporting bureaus, namely Equifax, Experian, and TransUnion. Because each lender can report to any (or all) of these bureaus, the analysis of the information that each credit agency has about you may be different. As such, your credit score at Equifax may be different from that at Experian or TransUnion.

FICO Scores

But what about that FICO score you keep hearing about? FICO (formerly known as the Fair Isaac Corporation, named after the company’s two founders, Bill Fair and Earl Isaac) is a major analytics software company that provides products and services to consumers and businesses. It is best known for producing the most widely used consumer credit scores that financial institutions use when deciding whether to lend money or issue credit.

Because the FICO score has been around the longest and because it is used by most lenders, many consumers assume that “credit score” and “FICO score” are one and the same. It’s not quite as simple as that, however. What makes things even more complicated is that there is no single FICO credit score. FICO itself has multiple scoring models, and lenders use different industry-specific versions for different credit products. For example, there is a required score for mortgages, another for credit cards, personal loans, installment loans and auto loans.

Equifax, Experian, and TransUnion may each have a different record for the same person, even if the three credit reporting agencies use the same FICO model. As such, an individual may have a different FICO credit score and that will depend, ultimately, on which agency the lender uses.

Moreover, the FICO scoring models change as FICO occasionally updates its model. Currently, there are four generations of “active” FICO models; namely, FICO 98, FICO 04, FICO 8 (the most widely used version), and the most recent release, FICO 9.

In 2016, FICO released the FICO Score XD. Unlike the other FICO models, Score XD uses alternative data to calculate the credit score. Alternative data refers to non-financial information that can be used to gauge the creditworthiness of a person. This alternative data can include rental payments, payments of utility and telecom bills, and electronic money transfers. Public records, such as personal property titles, property deeds and mortgages, tax or bank liens, licensing data, and tax records, may also be used.

The base FICO scores range from 300 to 850. Industry-specific scores, meanwhile, such as the FICO Auto Score 8 and FICO Bankcard Score 8, range from 250 to 900. Mortgage lenders typically use the older FICO versions (FICO 2, 4, and 5, depending on which credit reporting bureau they use).

Another notable FICO score is the FICO Small Business Scoring Service (SBSS) score, which is used when evaluating credit applications of small businesses. This score considers both the personal credit report of the business owner, as well as the business credit report and financial information of the company itself. The FICO SBSS score ranges from 0 to 300, with a higher score indicating less risk. Applications for SBA 7(a) loans not exceeding $350,000, for example, are pre-screened using this score.

Fico score

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Non-FICO Credit Scores

While some people use the terms “FICO score” and “credit score” interchangeably, FICO score is only one brand of credit scores. About 90% of lenders use FICO credit scores; the other 10% use other credit scoring models, generally those below listed.

VantageScore Credit Scores

In 2006, Experian, Equifax, and TransUnion introduced VantageScore as a joint venture. VantageScore is viewed as FICO’s biggest competitor; it is used by more than 2,200 financial entities (or approximately 6% of lenders). Just like FICO, VantageScore has updated its scoring model several times since its release. Its earlier generations (VantageScore 1.0 and VantageScore 2.0) produced scores that ranged from 501 to 990, but the newer generations (VantageScore 3.0 and VantageScore 4.0) both use a range of 300 to 850.

Generally, any consumer with a credit history will have a credit score. For the FICO score, an individual will need to have had one or more credit accounts opened for at least 6 months, and at least one of those accounts needed to have been reported to a credit reporting agency within the last 6 months. In contrast, VantageScore only requires a single month worth of data and an account reported within the last 24 months.

CE Score

A CE (Community Empower) credit score is a free score that used to be provided by Quizzle.com through their partnership with CE analytics. It was the first completely free credit score on the market. The scores are calculated on data found on an individual’s Experian credit report. The score will range from 350 and 850; the higher the score the more “worthy” an individual is of credit. CE scores are usually on the lower side than other scores, with a score of 720+ being considered creditworthy.

Educational credit scores

Some credit scores were developed simply as a way to help consumers better understand and improve their own credit scores. Most were introduced before FICO began sharing more information about their model and encouraging lending institutions to share scores with consumers. To that end, many banks and lenders will show your FICO score on your online account, with notifications whenever the score has changed.

It should be noted that these so-called educational scores may be significantly less accurate than the actual FICO score and are, therefore, not often used by lenders when assessing a credit application.

An example is CreditXpert’s simulation score, which ranges from 350 to 850. Experian, Equifax, and TransUnion also offer individual credit scores, which are considered educational scores. Experian has the PLUS Score (which ranges from 330 to 830) and National Equivalence Score (which ranges from 360 to 480). Equifax has the Equifax Credit Score (which ranges from 280 to 850) and TransUnion has the TransUnion New Account Score 2.0 (which ranges from 300 and 850).

Other credit scores

Lenders may use alternative data instead of or as a supplement to FICO scores in order to have a better insight on consumers, especially those who are “hard” to score, such as individuals who have non-existent or insufficient conventional credit history.

Research suggests that including alternative data does not have a significant impact on consumers who are already scorable, but can make credit available to those who could not previously access it due to their limited credit profile. Alternative data also makes loans “smarter,” as the increase in data tends to decrease the number of bad loans that a bank or lender will have on its books.

Examples of credit scores that consider alternative data include:

  • SageStream’s Credit Optics Score; uses machine learning modeling methods on a mix of conventional and alternative data.
  • LexisNexis RiskView score; is based on a wide variety of public record information.
  • CoreLogic Credco’s Anthem Credit Score; reports on publicly available property records.
  • PRBC alternative credit score; allows consumers to report their own non-debt payment transactions.
  • ChexSystems score; for verifying financial accounts.
  • L2C (Link2Credit) score
  • Scorelogix LLC’s JSS Credit Score; evaluates credit risk based on income, job history, and the impact of economy.
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How are credit scores computed?

The formulas used to calculate credit scores are generally a “trade secret,” but the different companies and models look at similar factors when generating the credit score.

The classic FICO model considers the following data points:

  1. Payment history (35%) — A credit profile that shows you consistently make timely payments on your debt, as well as vendor credit, is a good thing. On the other hand, liens, bankruptcies, late payments, foreclosures, and repossessions can negatively impact your score.
  2. Amounts owed relative to credit limits (30%) — While it is fine to have several active credit accounts, using a large part of your available credit may suggest a cash flow problem and higher risk of defaulting.
  3. Length of credit history (15%) — A longer credit history raises your credit score, in general. Your score is affected by how long you’ve had your credit accounts (including the ages of your oldest and newest accounts and the average age of all your accounts), how long certain accounts have been established, and how long ago you’ve used certain accounts.
  4. New credit (10%) — Opening or attempting to open multiple credit accounts within a short period suggests a greater risk, especially for those who don’t have much credit history yet. It is prudent to avoid opening too many accounts soon after each other.
  5. Credit mix (10%) — The mix of credit cards, installment loans, finance company accounts, retail accounts, and mortgage loans. You don’t need to have all of them but it is an advantage if your record shows you can effectively manage different kinds of credit.

It is important to note that the weight of each category is not fixed for all consumers. If, for example, you don’t yet have a credit history, your score will be calculated differently compared to someone who has a longer, well-established credit history.

There are also other special factors that can affect the FICO score, such as money owed due to a tax lien or court judgment, especially if it is recent.

VantageScore, meanwhile, considers the following factors:

  • Payment history: extremely important
  • Type and age of credit: highly important
  • Percentage of credit limit used: highly important
  • Total balances and debt: moderately important
  • Recent credit behavior and inquiries: less important
  • Available credit: less important

FICO Scores vs Credit Scores

What do the scores mean?

Are you wondering whether your credit score is good or bad?

This is how FICO rates the FICO Score 8 credit scores:

Excellent: 800+

Very good: 740 to 799

Good: 670 to 739

Fair: 580 to 669

Poor: 579 and below

Meanwhile, here’s what the VantageScore 3.0 credit scores mean:

Excellent: 750 to 850

Good: 700 to 749

Fair: 640 to 699

Needs work: 300 to 639

What’s a Good Credit Score Range?

Data from September 2019 show that the average U.S. FICO® Score now sits at 706.

FICO score in the range of 690-719 is considered to be “good”. 720 and up is considered “excellent” and can give you access to the lowest interest rates offered. According to the recent data, less than 20% of scores fell below 600; 21.8% were between 600 and 699, and 22.3% were 800 or above.

What is a credit report and how is it used?

The overwhelming majority of lenders use FICO credit scores when evaluating whether to approve credit applications and what terms and interest rates to offer. Which specific FICO score matters will depend on the purpose of the credit. For example, if you’re applying for a car loan, the lender will be looking at your FICO Auto Score, but if you’re applying for a credit card, your FICO Bankcard Score will be considered.

Also note that the mathematical formulas used by other credit score providers differ from the ones used by FICO, so your non-FICO credit scores may differ by several points (even up to 100 points) from your FICO score. This can lead you to overestimate or underestimate your odds of getting approved, or incorrectly gauge the affordability of the interest rate you may be offered.

It is a good idea to regularly check your FICO credit score and do what you can now to boost it if it needs improvement or to fix any errors that have been reported.

Each year, every US consumer is legally entitled to one free credit report from each of the three major credit reporting agencies (visit the website AnnualCreditReport.com to request your report). Experts recommend that you request one report at a time, over the course of the year (say at a four month interval) so that you can see how the data has changed or if your requested corrections have been made. Consumers are permitted to request a review of a report if they believe it contains an error; for example, if a tax lien is still showing as active which has been repaid, or you can address an issue if late payments on a loan are due to extenuating circumstances. It is important that you follow the instructions for correcting the report which may be different, depending on the credit reporting agency.

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What’s included in your credit reports?

There are three major credit reporting agencies and there is no uniform formatting for credit reports. Nevertheless, each report include the same types of information about you and your credit history.

In most cases, your credit report will include the following information:

  • Personal Identification Information – personal information such as Name / Date of birth / Social Security number / Current and previous addresses and phone numbers / Current and previous employer / Other identifying information required in order to associate your identity with your credit.
  • Tradelines and Collections – all accounts you currently have open with banks, credit card companies, and any other lenders, as well as accounts you have closed in recent years (as long as the lenders reported those accounts to the bureau). Closed accounts remain on your credit reports for a period of time (usually up to seven years for negative accounts and ten years for positive ones). Each account has a “Status” field that shows whether the account is open or closed, and the current payment status or the status when the account was closed.
  • Bankruptcies – if there are negative public records available about you and your credit history, such as bankruptcies, tax liens and civil judgments, you will find it in this part of the report.
  • Credit Inquiries – This section of the credit report lists all the inquiries from companies checking your reports in the last two years. Here you will see details of all the lenders and creditors that received copies of your credit report from that bureau.
  • Consumer Statements/Alerts/Disputes – This section includes any consumer statements, fraud alerts, or credit report disputes you’ve made. You may not see any of these sections if you don’t have any of the relevant information on your reports.

The Bottom Line

Each US consumer will have multiple credit scores. Which one the lender uses will depend on several factors, such as the credit bureau providing the report, the purpose of the borrowed money (e.g. credit card application or car loan), and whether the lender uses the industry standard FICO scoring model or something else.

About 9 out of 10 lenders use FICO scores when evaluating loan and credit applications. A VantageScore credit score, however, is faster to generate; a consumer can have a VantageScore score after just a month of data while a FICO score requires at least six months’ worth of data.

Whether or not you have a need for financial support for yourself or your business, now or in the future, it is important that you be absolutely certain that your credit scores accurately reflect your creditworthiness. Because you are able to obtain a free copy of your credit history each year, it is important that you take the initiative to request it and scrutinize it. Understand, too, that it takes times to correct reporting errors, and that could be time you may not have if a financial emergency arises. Don’t presume the truth is being reported about you, especially when it comes to the “alternative data;” if something is incorrectly reported, make the effort to request a correction.

FAQ

1. How are credit scores computed?

The classic FICO model considers the following data points:

  • Payment history (35%)
  • Amounts owed relative to credit limits (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

2. What’s included in your credit reports?

In most cases, your credit report will include the following information: Personal Identification Information, Tradelines and Collections, Bankruptcies, Credit Inquiries, Consumer Statements/Alerts/Disputes

3. What is a credit report and how is it used?

In most cases, your credit report will include the following information: Personal Identification Information, Tradelines and Collections, Bankruptcies, Credit Inquiries, Consumer Statements/Alerts/Disputes

4. What do banks see when they do a credit check?

FICO score in the range of 690-719 is considered to be “good”. 720 and up is considered “excellent” and can give you access to the lowest interest rates offered.

 

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Small Business Loan Terms – What to Know

‘Terms’ as used in the world of finance, is known as the span of time your loan payment may continue, which could be short or long term. However, this discussion focuses on terminologies used in the field as related to loans and finances.  So, as a prospective borrower, getting acquainted with the common jargon of the financial world would go a long way in tilting the balance in your favour.

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Without much ado here are the loan terms you are likely to encounter.

 APR: fully called the Annual Percentage Rate, it is a financial concept that relates your loan amount, the time it was received and fees/payables that comes with it. It is often misinterpreted as a measure of your interest ratio, but it’s not.

Amortization: This is a loans-payment structure that compels the borrower to pay off the borrowed sum in specified fractions and at given intervals until both principal and interests are paid off. While amortization is mostly common to term loans, assets can also be amortized as payment for intangible goods broken into several units.

Assets: these are valuables owned by the borrower which could serve as collateral for loan categories that require them. Most traditional term loans and some SBA loans often ask for this form of collateral as a guarantee of your ability to pay back. Lenders that don’t consider the value of your assets before agreeing to fund you, find other means to ensure your ability to pay back.

ACH Payments: fully called Automatic Clearance House payments, it’s a US-established database for managing electronic payments on debit and credit transactions. The common version is the ACH debit transfer that grants a third party (which may be a Merchant, vendor or lender) direct access to your business accounts and withdraw funds you might have consented to.

Balloon Payments: this is a payment attached to a particular loan type. The loan type lacks full amortization, hence the Balloon payment covers all outstanding payments. The name was coined from the usually large size of the sum.

Cash Flow: this describes the day-to-day movement of funds in and out of your business. It’s a measure of how well the business runs its finances and how profitable the venture becomes at the end of the day. Poor cash flow management is the #1 reason small business fail.

Cash flow is one of the major factors lenders will consider before agreeing to lend funds to an already established business, while some businesses with poor cash flow are outrightly declined, others may be allowed to tender other strong points as reasons to be considered.

Collateral: These are valuable assets you may offer as security for the loans requested, it is usually commensurate with the size of the loan and withheld if the borrower fails to pay back the borrowed sum. When applying for a small business term loan, there is a lot of information that your lender will need prior to the final approval of your loan.

Credit Score: this is a numerical expression of a borrower’s creditworthiness, it is calculated based on the correctness of the borrower’s financial decisions in the past. There are different methods to calculate the score and there is a difference between credit score and FICO score.

A credit score is split into a business credit score and personal credit score as related to business and personal finances respectively.

A good credit score is usually around 750 and above while a poor credit score is less than 500. The high credit score has the potential of securing you a loan with no collateral and as well reducing the interest rate stacked against you.

Default: this is the financial term used to describe an inability to return monies borrowed, wholly, in parts, or as frequently as the lending institution had determined. It is often met with a penalty, an increased interest or result in a poor credit score.

Debt Financing

It’s a source of business funding that requires you to pay back a principal amount and the interests that accrue. In general terms, it’s another word for taking small business term loans for your business needs.  It is often regarded only as the traditional loans given by banks, while all other loans are addressed by the name of their respective funding types, for example, loans from credit unions are called credit union loans.

Equity: this is the value of business shares you offer a lender in exchange for some particular amounts. It’s often not accompanied by the need for collateral because the equity in its self may serve that purpose.

Fixed Assets: this is sizable property or equipment that may be accepted as collateral for secured loans. It is not consumable or convertible into cash, it is rather used to generate income.

Fixed Interest Rates: it is an ‘interest’ plan that has a uniform value throughout the payment period. The benefit is that it allows you an accurate prediction of your future payments. its alternate version is the variable interest rate

Grace Period: this is the amount of time you will be allowed to remain free of a penalty after the actual term of repayment elapses.

Interest: in this field, interest is a regular deposit made as a result of a delay in paying off the borrowed amount.

Insolvency: this is the term used to describe a business’ or lender’s inability to pay back the borrowed sum.

Liability: this concept refers to monetary obligations or debts you may pay back periodically.

Lines Of Credit (LOC): this is a funding cycle that allows you to withdraw up to a certain amount, pay back and withdraw up to that amount again. Depending on how well you adhere to the systems requirements, your line of credit and withdrawal limits may get increased

Long Term: any debt you are allowed to clear up with at least up to a year of delay is said to be in the long term.  It is often taken from Banks and alternative lenders.

Lien: The concept of Lien allows you to offer your ownership of some valuable item as security to obtaining a loan

Liquidity: this refers to the availability of payable funds or assets in a business’s financial structure.

Maturity: this is a stage of completion of all forms of payment that build-up on a loan, that is; principal and interest.

Merchant cash advance (MCA): this is a funding option that allows a business to pay back in fractions with the cash values of your daily credit card entries.

Mortgage: it is a particular loan type used to acquire a house or any other such property. In principle, what is done here is that the Bank purchases the property in your name and you gradually pay off the bill and interest. The property under these circumstances also serves as security for the loan.

Net Profit/Income: this is used to describe the total amount you are entitled to, after removing all forms of payments and charges encountered.

Overdraft: This is the act of withdrawing more funds than you currently have in an account. It’s also a business financing choice based on the trust granted to you as an account holder of the bank.

Principal: this is the actual amount you have borrowed, exclusive of interests and other charges.

Profit And Loss Statement: also called an income statement, a P & l statement is a record that contains the data on your business profit and loss within a time frame. Most traditional lenders (banks especially), requires this document before granting your business loan requests.

Prime Rate: this is an average interest rate a lender places on candidates with the best credit score. It is like a standard with which borrowers with lower credit scores may calculate their most probable interest rates, based on certain factors.

Refinancing: debt refinancing is the use of a new and larger loan to pay off existing debt. With this, you could circumvent the accumulated interest on the old debt and start paying a more acceptable amount as interest for the new loan.

Security: in the finance sphere, ‘security’ refers to an asset that is used to stand as a guarantee for the repayment of a borrowed sum. It’s another word for ‘collateral’, however, the meaning has recently been expanded beyond this basic description.

SBA: small business Administration is an arm of the government that offers small and medium businesses a loan.

The system guarantees a qualified lender of up to 90 percent of the loaned amount provided the candidate has a reliable credit score (business and personal).

Term Loan: this is a loan option that allows you pay in pieces, over a specific time frame, depending on both the lender and type of loan sought. Small business term loans can be categorized according to the time period you need the funds for – Short term, Medium-term and Long-term.

An example of a term loan is a loan to a small business to buy equipment or assets that are required to the ongoing operations of the business, such as a specific machine or even a factory. We encourage you to read more to find in-depth information about small business terms loans.

Unsecured Loans

These are loan types that depend on other relevant factors apart from an asset to serve as security in case you default. Other factors that could be used to secure your unsecured loan are business invoices, credit score, and the likes, depending on your lender’s preferences.

Whttps://bizit.com/blog/best-unsecured-business-loans-9-options-to-secure-your-loan/e encourage you to read more to find in-depth information about the difference between secured and unsecured small business loans.

Variable Interest Rate: also known as adjustable interest rate; it is an interest that fluctuates according to factors like delayed payment of the previous amount and as well delaying the principal beyond the allowed term.

Of course, you are very likely to come across other loans-related terms as you go deeper into a request or expand your business’ monetary needs beyond regular loans. But a good knowledge of those written above would go a long way in putting you at an advantaged spot with lenders.

This would not only present you as a properly educated candidate but also protect you from lenders that are likely to overcharge, and as well give you bargaining points as you try to find a way to reduce the size of interest you have been burdened with.

Thanks for reading.

FAQ

What is term loan and types of term loan?

this is a loan option that allows you pay in pieces, over a specific time frame, depending on both the lender and type of loan sought. Small business term loans can be categorized according to the time period you need the funds for – Short term, Medium-term and Long-term.

What is Term Loan example?

An example of a term loan is a loan to a small business to buy equipment or assets that are required to the ongoing operations of the business, such as a specific machine or even a factory.

What is OD limit?

This is the act of withdrawing more funds than you currently have in an account. It’s also a business financing choice based on the trust granted to you as an account holder of the bank.

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The Financial Impact of COVID-19 On U.S.-BASED Small Businesses

Around the world, the  impact of the COVID-19 outbreak (aka the coronavirus) has necessitated governments to implement some sort of financial rescue plan for those sectors that have been adversely affected.

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In the United States, small and medium size businesses have been very hard hit, especially because these small businesses have not been adequately resourced by the federal and state governments’ bailouts programs during periods of financial difficulties. That inadequacy ultimately led to outsourcing of jobs and high employment. It is interesting to note that, according to available data, 60% of economic growth and employment in the United States is generated by the small and medium business sector.

The impact of the coronavirus on economic growth and unemployment in the United States naturally caught the attention of lawmakers in Washington. It has become abundantly clear that small and medium-sized businesses that are facing—and will continue to face—unprecedented financial difficulties urgently need to have short- to long-term financial assistance from the federal government. If your small business has been adversely affected, help may be on the way, but it will be up to you to reach for it.

The CARES Act

In March 2020, U.S. President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security (or CARES) Act, a bi-partisan stimulus package which was hastily drawn up to address the urgent need to provide financial help to small businesses in the United States. Among other things, the stimulus package contains $376 billion in relief for small businesses and American workers. This relief loan program is to be administered by the Small Business Administration (SBA) and funds will be made available to eligible small businesses through participating banks/lenders.

If you are a small business owner with fewer than 500 employees (though there are some exceptions), no doubt you will find this article very helpful. It is very important for every small business owner to fully understand all aspects of the government’s debt relief program and exactly what the qualifying criteria are.

Note that, while the SBA generally defines a small business as an entity with 500 employees or less, there are specific size standards which will be dependent on the type of business you own. If you are in any doubt, it will be a good idea to look up your specific NAICS code (North American Industry Classification System) before you apply for SBA debt relief.

WHO IS ELIGIBLE

Briefly, small businesses that may be eligible for the federal government’s debt relief plan include:

  • Businesses with fewer than 500 employees
  • Businesses that begin with NAICS code #72 (accommodations/food services) which have fewer than 500 employees at each physical location
  • Businesses that commenced operations on or before February 15, 2020
  • Businesses that meet the SBA’s industry-based size standard or annual receipts.
  • Not-for-profit entities or agencies (except those which receive Medicaid funds)
  • Veterans organizations and tribal concerns
  • Independent contractors, self-employed individuals and sole proprietors
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FUNDING OPTIONS

Provided your small business meets the qualifying criteria and is eligible for assistance, there are a few funding options that may be available to you:

Paycheck Protection Program 

The Paycheck Protection Program option is intended to help small business owners assist their own employees during the COVID-19 crisis by ensuring that they continue to receive a paycheck during this emergency.

The unique aspect of this option is that the SBA will forgive the loan (i.e. repayment of the loan will not be required) if the business owner ensures that all of the company’s employees are retained for a minimum of eight weeks and that the majority of the proceeds of the loan (with a minimum of 75% of the funds) were used for payroll. The remaining loan proceeds may be used by the small business owner for business-related expenses such as rent, mortgage, interest payments and/or utilities.

In order to qualify for loan forgiveness, the employer must also maintain or quickly rehire employees and must maintain salary levels. The amount of the loan forgiveness will be reduced if wages or salaries decrease or if the headcount of full time employees declines.

In the event the full amount of the loan is not forgiven, the loan will have a maturity of two years and will accrue interest at the fixed rate of 1% per year. The SBA will not require collateral or a personal guarantee for loans granted under this provision.

Borrowers can apply for a loan of up to $10 million from an SBA participatory lender. The loan amount will be based on previously documented payroll and other business expenses.

Businesses that are cyclical or seasonal in nature and which would typically operate in the period between April and June are also eligible for relief. The business owner will be required to provide the SBA lender with evidence of work over an 8-week period from the previous calendar year (from February 15, 2019 through June 30, 2019).

Applications for relief are already being accepted. Small business owners should be aware that this option will be available only through June 30, 2020. However, given that the COVID-19 situation continues to evolve, this date may be extended. It is recommended that you visit the SBA website for any additional updates or changes.

Economic Injury Disaster Loan Emergency Advance

The SBA’s Economic Injury Disaster Loan Emergency Advance can provide much needed economic support to small business owners to help overcome the temporary loss of revenue they they may be experiencing as a result of the coronavirus.

This program is intended for any small business with fewer than 500 employees (including sole proprietorships, independent contractors and individuals who are self-employed), private non-profit organizations or 501(c)(19) veterans organizations or tribal entities that are affected by COVID-19. Faith-based organizations are also generally eligible to apply for the EIDL. Businesses in certain industries that have more than 500 employees may also be eligible if they meet the SBA’s size standards for those industries (for example, food services and industries that provide accommodations).

Under the EIDL, funds can be advanced to a small business owner in an amount up to $10,000. Typically, funds are available within days of acceptance of the application. The Economic Injury Disaster Loan is, for all intents and purposes, a misnomer; essentially, it is a grant which does not need to be repaid. Even if your small business is denied a loan, your company can still apply for this grant.

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Expanded Access to EIDL

The SBA is also providing expanded access to its Economic Injury Disaster Loans. The SBA, under the program, can provide eligible small business owners and other entities with up to $2 million in working capital funding.

The interest rates applicable under the loans will depend on the borrower type. A working capital loan to a non-profit entity will accrue interest at 2.75% per annum, while a loan to a small business will accrue at the rate of 3.75%. The repayment terms can extend to 30 years but will generally vary and are are dependent on the borrower type and applicant. Payments may be deferred up to 48 months. Small businesses with fewer than 500 employees will generally qualify for this program. Loans under $200,000 will not require a personal guarantee.

The Financial Impact of COVID-19

SBA Express Bridge Loans

The SBA’s express bridge loan facility allows a small business owner who already has an established business relationship with an SBA Express Lender to quickly access up to $25,000 in funds. These funds are intended to provide vital economic support to small business owners to help them overcome the temporary loss of revenue. Essentially, under the Express Bridge Loan, the proceeds can be used in either of two ways. First, they may be used to bridge the gap (while they await a decision and disbursement on the application for the SBA Economic Injury Disaster loan); second, the proceeds can be used as a traditional term loan. Regardless of the ultimate use of the proceeds, this loan will ultimately be repaid (in full or part) by the loan proceeds from the EIDL.

SBA Debt Relief for Existing Borrowers

The SBA is also providing debt relief to existing borrowers. To that end, the SBA has announced that, effective immediately:

  • For a period of six months, the SBA will automatically make principal, interest, and fee payments of existing 7(a) and 504 loans, as well as microloans.
  • For a period of six months, the SBA will automatically make principal, interest and fee payments on new loans including 7(a) and 504 loans, as well as microloans that are issued prior to September 27, 2020.
  • For existing SBA Serviced Disaster (Home and Business) Loans, the SBA will provide an automatic deferment (provided the disaster loan was considered in “regular servicing status” as of March 1, 2020).

Borrowers of an SBA loan should understand that interest continues to accrue on the existing loan even if it is automatically deferred. Payment notices will still be mailed out though the notice will clearly state that no payment is due as the loan has been deferred.

Of note, it is the borrower’s responsibility to ensure that any pre-authorized debits or recurring payments are canceled on a loan that the SBA has deferred. Borrowers may still make payments on the loan, at their discretion. Once the deferment period has ended, the borrower will be required to resume making payments. If necessary, it is the borrower’s responsibility to re-establish recurring payments or pre-authorized debits.

There may be additional debt relief for small business owners and it is recommended that you contact the SBA or your SBA lenders for more information.

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Where to Find Help

Your first target must be the Small Business Administration website. From there, you can get information on the SBA’s efforts in the wake of the COVID-19 pandemic. Generally, any application for assistance can be started online, though supporting documentation will need to be mailed in to the SBA’s Processing and Disbursement center in Texas. If you have questions, the SBA’s Disaster Assistance Customer Service center can be reached by phone or by email.

Another good source of information would be the Small Business Administration district office in your state. While most offices are closed to the general public, customer service via phone or email is generally still an option.

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In Summary

Because there is still no clarity as to duration of this economic emergency, the information contained within this article should be considered fluid. As a small business owner, it will be in your best interest to go directly to the SBA website for up-to-date information, or reach out to the SBA lender which services your loans.

Furthermore, understand that the SBA, in conjunction with the SBA approved lenders, is still working out the kinks as to how best and expeditiously to provide assistance. As one might imagine, the incredibly high number of applications and the limited human resources of the SBA and its banking partners mean that small business owners may need to exercise a great deal of patience as they work through this process. Lastly, when you do finally reach someone, remember that that person on the other side of the phone is as frazzled and worried as you, so be kind, be patient, be understanding; it is together, as a cohesive unit, that we can all get through this.