Small businesses are the backbone of the American economy. They create two out of every three jobs in this country and account for half of all private sector employment.
Unfortunately, many small businesses don’t have access to the capital they need to grow and expand. This is often because they have bad credit.
Fortunately, there are a number of small business loans for such startups:
1. Microloan Programs
A microloan is a small loan typically given to entrepreneurs and small businesses. The loans are usually between $500 and $50,000.
Microloans can offer several benefits to businesses with bad credit. They can provide the capital needed to start or grow a business, which can, in turn, create jobs and boost the local economy. In addition, microloans can help businesses build credit history and improve their chances of qualifying for traditional loans in the future.
However, if a business is unable to repay the loan, it may damage its credit score, or even the lender could sue for repayment. For this reason, businesses should research and carefully consider whether taking out a microloan is the right decision for them.
2. Merchant Cash Advance
A merchant cash advance is a type of financing that allows businesses to borrow money based on their future sales. The repayment terms are typically structured as a percentage of daily or weekly credit card receipts, making it easy for businesses to repay the loan without having to make a large lump-sum payment.
Merchant cash advances can be an attractive financing option for businesses that have difficulty qualifying for traditional bank loans. They can be used for various purposes, including working capital, inventory financing, and equipment purchases.
However, merchant cash advances also come with risks, including high interest rates and fees. They are also not secured by collateral. As a result, businesses should carefully consider the costs and benefits of taking out a merchant cash advance before signing on the dotted line.
3. Invoice Factoring
When businesses have trouble getting loans from banks because of bad credit, they may turn to invoice factoring. This is when a business sells its unpaid invoices to a third party at a discount. The third party then collects the money from the business’s customers.
Invoice factoring can be a good option for businesses with bad credit because it doesn’t require a credit check. It can also provide businesses with the cash they need to keep operating.
However, there are some risks associated with invoice factoring. For example, if customers don’t pay their invoices on time, businesses may end up paying more than they would have if they had taken out a loan.
Also, businesses may have to give up some control over their accounts receivable department.
4. Line of Credit
A line of credit is a type of loan that allows businesses to borrow money up to a certain limit.
Unlike a traditional loan, businesses only need to pay interest on the amount of money they actually borrow, making lines of credit an attractive option for businesses that need financial flexibility. Lines of credit can also be used to cover business expenses, such as inventory or equipment purchases.
However, lines of credit might have high interest rates and late payment fees. To avoid these pitfalls, businesses should carefully consider their need for a line of credit and compare offers from multiple lenders before signing any agreements.
5. 504 Loans
A 504 loan is a type of financing typically used to help small businesses purchase equipment or real estate. The loan is named after the section of the Small Business Act that created the program.
The 504 loan program offers long-term fixed-rate financing for companies that need money to buy equipment or expand. 504 loans are available through participating lenders and are guaranteed by the SBA. This guarantee assures lenders that they will receive a portion of their loan even if the borrower defaults. As a result, 504 loans typically have lower interest rates and longer terms than conventional bank loans. Even better, it doesn’t require any credit score.
6. Equipment Financing
Equipment financing is a type of lending that provides businesses with the capital they need to purchase new machinery, vehicles, or other equipment. The key benefit of this type of financing is that it allows businesses to maintain a healthy cash flow by spreading the cost of the equipment over time.
Additionally, equipment financing can provide tax advantages by allowing businesses to write off the interest payments as a business expense.
One of its issues is the potential for the equipment to become outdated or obsolete before the loan is paid off. Also, if a business experiences financial difficulties, it may be forced to default on its loan payments, leading to repossession of the equipment.
Bad credit can make it difficult for businesses to get the financing they need to grow and succeed. However, there are a number of options available for businesses with bad credit, including small business loans, lines of credit, and equipment financing. By carefully considering their needs and comparing offers from multiple lenders, businesses can find the right financial solution for their unique situation.