By Ricky Nila
When the Great Recession hit in 2007-2008 traditional banks and credit unions changed their lending standards.
They made it very difficult for small business owners to get funding.
Alternative lenders stepped in to fill the void. They helped small business owners when the banks would not. We took a look at the 4 factors alternative lenders use to provide small business owners with the funding.
1. Credit Score
As a small business owner it is important to keep your personal credit score as high as possible. Small business loans take into consideration the personal credit score of any business owner with 20 percent or more interest in the company. With todays alternative lenders, a borrower can get a loan with a credit score as low as 500. The best rates will be given to borrowers who have a credit score of 720 or higher.
Borrowers with high credit scores can typically go into their local bank and qualify for a loan. Many still choose to use an alternative lender. This is due to the ease and speed of funding. Before alternative lenders became prevalent in the market place, small business owners without high credit were unable to get funding for their business. Today the same business owners can find funds.
Loans for low credit borrowers are usually in the form of an Automated Clearing House (ACH) or Merchant Cash Advance (MCA). The loans are based on the monthly revenue of the business bank account or merchant processing account. These types of loans tend to come at a high cost to the borrower. With rates has high as 80 percent APR.
Keep in mind when taking an ACH or Merchant Cash advance no matter how good your credit is you will still be paying a high rate. These types of funding should only be used as a last resort or if funds are needed immediately (within 24 to 72 hours) due to there flexibility and can be paid back quickly.
2. Time in Business
A business that has been operating for less then two years is considered a start-up. Start-ups generally are not eligible for a traditional bank loan. Banks typically require businesses to be operational a minimum of two years before they will lend to them.
The alternative lending market place has changed the standard. Businesses that have been operating for at least three to four months can now get funding. The amount of money provided is based off the businesses monthly revenue.
The longer your business has been operating the more loan options available to them. A business that has been operational for more than two years will have the best chance at getting funding. These funds can be at a lower cost. After the two-year mark businesses will be eligible for more traditional structured term loans.
Businesses that have been operating less then two years will pay a higher APR. These small businesses are considered high risk and have limited options to choose from. Ideally you do not want to have to borrow money in your first two years of business. This will help you avoid paying a premium for any money borrowed.
If you must borrow funds, make sure the high cost will not hinder your operations from low monthly cash flow due to paying back the funds.