For many business owners, applying for a loan can seem invasive and a headache. The paperwork required is often intensive, and the loan approval process can be long drawn out with the chance of still being declined. This process is tedious for even stable companies in stable industries. However, for a company in a newer industry or a startup company, one can only imagine the difficulties of getting approved.
How Risky is Your Business?
When an underwriter and lending consultant review the merits of a company when deciding if they should approve the loan, the main thing they are looking for is whether or not the business owner will pay back the loan. Each lender has its list of qualifications, but for the most part, they are looking to see if the business is profitable, what the projections are, and if they have cash flow and cash reserves. For these reasons, it’s harder for startups and unstable industries to get loans as all of the data that is typically required is not available to approve the loan. In addition, lenders are in the business of gaining a profit based on the money that they lend, so if your company defaults on a loan, then the lender loses money.
Here are a few examples of Risky Industries that are deemed less desirable:
- Auto sales
- Gun shops
- Real-estate sales
- Travel agencies
- Law firms
- Financial services
In addition to riskier industries, other factors make your business less desirable to loan too.
Owner with Bad Credit Scores
For most of the loans I am involved with, we check the credit score of any owner with at least 20% ownership. A credit score shows the spending habits and discipline of the central core of people responsible for the loan. If the owners’ credit score is good, lenders feel more comfortable loaning out money because the lendee has shown a history of being financially responsible.
Startup companies are some of the most challenging loans to get approved because lenders understand the overall success rate. For example, 20% of businesses fail within the first year, and within five years, almost half of companies are no longer in operation. These statistics cause lenders to prefer enterprises with at least one year of experience; As a startup business, business owners usually finance their company with friends and family, crowdsourcing, and personal loans.
Business with Low Revenue
One of the most significant challenges with many of the businesses we see is low or inconsistent revenue. The main concern of a lender is whether or not they will get their money back. Suppose a company is struggling with producing enough income or consistent revenue. In that case, this will give lenders the reason to questions if a business owner will be able to service the loan and eventually pay back the debts. If you are a niche seller, seasonal seller, or both, these loans are considered risky, and many traditional lenders will stay away from them.
While you may fall into one of the categories above, which will make you not a good fit for a traditional loan, you still have many options to fund your dream.
Merchant Cash Advances (MCA)
If you rely on credit card sales and in-store transactions like retail stores, Merchant Cash Advances could be an excellent resource for you. Here is how it works: Lenders act as if they are your customers, and they pay for customers’ products upfront, which you pay back with interest. MCA loans easy to obtain, but they come at a higher cost that will impact growth if your company does not have high-profit margins.
If a company has outstanding invoices that clients will pay later, Invoice factoring can be very. Similar to Merchant Cash Advances, lenders prepay a company’s unpaid invoices. Lenders who offer invoice factoring allow the company to have working capital while waiting for their clients to pay. There are three types of factoring:
Whole turnover: Companies sell all their invoices to a lending firm, but typically they must agree to sell all their invoices for an extended period. At the same time, turnovers have the lowest rate.
Selective invoice factoring: Companies can decide what invoices to factor in, but this option is more expensive than whole turnovers.
Spot factoring: Companies sell individual invoices in a one-time deal, but this option is costly.
Since Equipment loans are collateral-based loans, out of all the riskier loans, this is one of the most likely to be approved loans. This loan typically requires a down payment of 10% or higher.
Small Business Administration Loans (SBA)
Small Business Administration loans can be an option as well. If a business owner can get an SBA loan, this is typically the way to go as the interested rates are lower, and the terms can be more favorable since the government backs the loans.
The challenge with SBA loans is that they are tough to obtain. The paperwork is intensive; they consider factors that other alternative lenders do not, such as criminal records. However, if a business can qualify for an SBA loan, the pain involved can be worth it. In addition, the terms and interest rates are some of the best. Still, to qualify for these loans, you typically need low-risk businesses generating profitability with an owner with a strong credit history. Due to this, High-risk industries and startups usually have a more challenging time getting SBA loans funded.
Improve your chance to Qualify?
The best way to qualify is to work with a lending consultant to walk you through the process and create a plan for where you are today to where you need to be, but here are a few tips to have you increase your chances of being approved on your own.
- Pay off or show a track record of paying down your previous debt before acquiring more debt.
- Offer collateral as a way to show you are vested as well.
- Have a business plan to show your company’s projections and potential growth.
- Find a lender willing to work with you; some lenders specialize in loans with your business makeup and industry that fit your needs. These lenders will give you the best chance of approval.
If you would like to talk to a loan consultant, please call us at (877) 360-7387 or https://www.jascott.org/loans
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