With COVID-19 changing the economic landscape, small businesses are feeling the heat and looking for sustainability options. If you’re a business owner with poor credit, lending can seem complicated or impossible. But with online lending, and a greater variety of programs available, small business owners actually have more lending options than ever that will get them money quickly -- and won’t leave them strapped for cash.
So what exactly counts as poor credit? Most lenders consider anything under a credit score of 600 as “poor,” which flags the borrower as an investment risk to lenders who need to assess how likely you are able to pay back your debts. Things that can contribute to your credit score include outstanding debts, repayment history, and credit history.
The good news is that there are plenty of options for small business owners with iffy credit to get funding quickly.
In this post:
🐣What Funding Options Are Available?
🐣Working Capital Loans and Lines of Credit
What Funding Options are Available?
Small business owners with poor credit shouldn’t feel too frustrated, as online lending has opened the field for financial companies to compete for your favor. When looking at how to fund your business right now here’s an array of options to consider:
Payment Protection Program (PPP)
Hatch has covered this government program extensively, but for those who are interested in what the CARES Act can do for them, PPP is a great option for funding if you’re trying to pay employees, and the loan forgiveness deadline is likely to be extended. However, 75% of the funding must be for payroll to qualify for loan forgiveness- at least currently. There’s some confusion about the forgiveness rate of these loans, but we’ve built an easy to use calculator to help you calculate the PPP loan and forgiveness amounts that you may be eligible to apply for.
To qualify for forgiveness, PPP funds must be mainly used for payroll costs for up to 8-weeks after the loan has been granted. If layoffs happen after those eight weeks, PPP loan forgiveness amounts will be reduced. Though it’s worth noting work is being done to allow funding to be used for masks, sneeze guards, and other sanitary expenses now that businesses are reopening in parts of the country, so keep an eye on this program as it broadens its use for small businesses, LLC, and sole proprietors.
Even without forgiveness, the PPP is still a great loan program with favorable terms for businesses that have been affected by COVID-19. PPP loans have a two year term with a 1% fixed interest rate for the first 24 months, with the first 6 months of payments deferred Funds are delivered within ten days of approval (however some delays have been reported, so you’ll want to plan accordingly). The PPP loan covers up to 250% of your monthly payroll expenses, without your credit being a factor, and no collateral or personal guarantees required.
As an example, on a $10,000 PPP loan, you’d pay about $150 of interest at the end of 2-years, which means if you end up not needing the loan, you’ll be out $150, which is a great deal when compared to other lending options.
Working Capital Loans and Lines of Credit
The good ol’ fashioned loan is still a great option for small business owners, especially if you lean toward having poor credit.
Banks, startup lenders and credit unions offer different types of loans and lines of credit with some innovative repayment options.
Small-business Lines of Credit (LOCs)
For immediate funding, LOC’s are great, and owners can expect faster approval and flexible financing. This is great for everyday, recurring expenses like stockroom supplies and bills. Borrow what you need up to your credit limit, repay what you borrow, and then borrow again, similar to personal credit. Depending on what lenders you work with, interest rates can be as low as 1.25% (if you get a loan through the Small Business Association - SBA). Rates hover in the 7% range if you work with a more traditional bank lender such as Bank of American or Chase, etc., and from 13.99% - 90% if working with online lenders such as Kabbage or Square. Generally, funds can be available within 10 days of approval and credit scores can be as low as 300 to qualify, but be sure to check with your lender, as processes and terms will vary greatly between lenders and credit products. Finally, it’s also worth noting that depending on what types of loan or LOC products you’re interested in, there may be different requirements to securitize the loan with collateral or a personal guarantee. Be sure to ask about this before signing.
Small-business Working Capital Loans:
A working capital loan could give you the boost in your finances to help pay for immediate expenses like building leases or payroll. You’ll have to use your business assets as collateral, but working capital loans serve as a lifeline for maintaining inventory, building upkeep, payroll, or weathering seasonal lulls. Borrowers can expect funds within days of application approval. These loans offer some of the lowest annual percentage rates if processed through a bank, but your credit will need to be strong. Online lenders will take applications for those with credit in the 550 range or below, but the interest rates can vary from 11% to over 90%--so be sure to double check before you sign.
Unlike microloans or advances, term loans are offered by traditional banks, credit unions, and online lenders, and are great for one-time investments for your business. If you’re looking for funds for equipment or upgrades to infrastructure, term loans are a great option. However, many term loans have credit requirements, and while some go as low as 500 on their credit score preferences, if you’re towards the 300 credit score mark, a term loan may not be possible for you.
Term loans also can take 30-90 days to get funds into your pocket, which can be very hard on a small business timeline. However the interest rates are better, the repayment options more flexible, and the amounts available more substantial. If you can wait, and need to make a big purchase, this is a great option.
Small Business Payday Loans
A business payday loan – or business cash advance — is a type of short term financing available to small businesses who need cash fast. While the PPP is designed primarily for payroll, small business payday loans provide funds that can be used completely at the discretion of the small business owner. Pre-approval can be done within an hour or two with a minimal amount of personal and business financial documentation, and funds are available quickly, usually deposited within days. There are short and long term loan options, and both are deposited very quickly.
The major drawback of a payday loan is the expense, the payback amount can be up to 150% more than the borrowed amount, and that doesn’t include any merchant fees that may be charged. Repayment generally starts quickly, stretching from 4-18 months, and often repayments are expected daily, which can strain the cash flow of your business.
Microfinancing, also called microlending or microcredit, is a great option for business owners with poor credit or no credit, and is popular for startup financing. Most lenders don’t have strict limits on borrower credit scores, and unlike a payday cash advance, these loans are privately funded by individual lenders, so the interest rates are much more feasible. And if you’re specifically looking to improve your credit, once you repay your microloan, your score can get a boost.
But microlending has some drawbacks. The amounts available for lending are generally lower than traditional business loans (typically < $50,000 dollars), and you’ll likely pay higher interest rates (about 22%) than you would for a secured small business loan. Microloans are often administered by non-profits or organizations with particular missions and focus, generally prioritized to women and minority business owners.
However, applications are straightforward (you might need references), approval can be as fast as a few days and the funds are deposited quickly after.
Small business borrowers have a lot to consider when finding the right loan for their business. Different options work better for different people, and factors like price, additional fees, and short versus long term needs are important things to consider before moving forward with borrowing. There’s so much available for small business owners, but make sure you’re reading loan information thoroughly so you know any requirements for fund use, the application process length, and requirements for security and personal guarantees. Go into the process hopeful but through - no one wants to be held back by debt and every loan taken should be carefully planned. Finding the balance between interest and immediacy is key.
At Hatch, we offer small business owners something that no other lending company does: a fresh start and the benefit of the doubt. We extend a line of credit (up to $5,000) to business owners, without requiring a previous business history or a great credit score. Learn more about how the Hatch Card can help grow your business here.