Are you having trouble getting a small business loan? It’s hard to secure small business loans with bad credit but, even though it is more difficult, it is not impossible because there are a number of alternative lenders who offer funding solutions for individuals with bad credit history.
Getting a small business loan with these lenders is possible because they focus on more than your credit history to make a decision. They consider your operating history, the strength of your business, revenue, potential and other operational parameters in your loan application.
Know Your Use Case When Applying for a Loan
Credit scores are simple: higher is always better. When it comes to small business loans, however, more is not always better. Many have staggered under the weight of small business loans they can’t repay. As a small business owner, you need to figure you exactly how much money you need as well as how much you can afford. Working with an accountant before applying for a small business loan can help you get accurate estimates of both amounts.
Make Your Request Specific
Making your request as specific as possible helps you even more than it helps lenders assess your small business loan application. Know exactly what you’re asking for and why.
An excellent way to show you understand your business is to build out a budget for the funds you’d get from a small business loan. Estimate what you want to use them for and how much that will cost. If you need to buy an expensive piece of equipment, cite the market price of that piece and any associated costs. Project how much revenue owning that machine will bring into your business. These numbers don’t need to be precise; just use whatever information you have to back up your request for a small business loan.
It’s easy to justify needing money, but when you know your needs inside out, you’re more likely to receive a small business loan offer for that amount.
Study Your Financial Statements
Like credit scores, financial statements say a lot about your business at a glance. Take a look at your financials from the last few years. Ask your accountant to help prepare the following statements in preparation for your small business loan application:
- Income Statement (also known as a Profit and Loss Statement)
- Balance Sheet
- Cash Flow Statement (optional but helpful)
Use these statements to figure out what’s been going on from a top-line (revenue) and bottom-line (profit) perspective. (Because we’re cash flow lenders, at Bond Street we care most about your business’ profit/net income.)
Once you have your financial statements in front of you, you can answer these important questions, which affect your small business loan application:
- Where are you making money?
- What are your primary costs?
- Are you profitable?
If the answer to #3 is no, you need to have a plan for how to get there. Where is the operating leverage in your business going to come from? Perhaps it’s opening another store. If you’re a retail brand, perhaps it’s from securing better rates from your suppliers once you start ordering in bigger quantities. Understand how you’re going to improve your profits, and you’ll have a stronger case for getting a small business loan.
Prepare Your Documentation
You’ve analyzed your credit, your use case, and your financials. You are now mentally prepared for applying to a small business loan! With this knowledge, preparing mere paperwork will be a breeze, especially if you use our simple small business loan application.
While you’ll need to understand the specific requirements of each lender, most will ask for the following documents:
- Financial Statements: Of course, lenders will need your income statement and balance sheet for at least two years of business operations.
- Tax Returns: Lenders also like to see at least one year of your business’ tax returns. Many require two years.
- Accounts Payable and Receivable: With your accountant’s help, prepare a full breakdown of both money your business owes and is owed.
Understand Your Offer
Your bulletproof small business loan application will naturally land you an offer. But how did the lender come up with this offer, and what does it mean? The lender uses your business financials to determine what size small business loan is right for you. Their offer includes an APR as well as an interest rate, both based largely on your credit score.
How High Is Your DSCR?
The debt service coverage ratio is a tool to assess whether you’re applying for the right size small business loan. Calculating your DSCR helps determine whether a business can cover loan payments. It answers the question, “Will this business generate enough profit throughout the term of the small business loan to cover payments?” If the answer is no, all your profits will go to paying off the loan, or, worse, you won’t be able to pay at all.
DSCR Calculation: The ratio of your net income to your annual debt obligations
To calculate your DSCR, divide your net income by the total debt (principal + interest + associated fees) you owe. If you run a business with a net income of $100,000 and an annual debt obligation of $50,000, your DSCR is 2. Your business’s net income can cover its debt obligations twice over. At Bond Street, we require an average annual DSCR of 1.15 to approve a small business loan.
Note: Many people confuse DSCR with interest coverage ratio. Interest coverage ratio measures how comfortably a company can pay off its interest payments, not the entire debt obligation.
Interest Rates vs. APR
In addition to the small business loan amount, your offer will include two other numbers: your interest rate and annual percentage rate (APR). The interest rate is the percentage of the principal amount of the loan that the lender charges you to take out the loan.
APR represents a more complete picture. It represents a yearly average of the total interest you will pay, including fees and service charges. A small business loan with a low interest rate and big fees may have a higher APR than a small business loan with a higher interest rate and low fees. It’s important to compare both numbers.
At Bond Street, we base the terms of our offer on your personal credit score, your business credit score, and your business financials. To get an offer for a small business loan with the lowest interest rate and APR, remember best practices for keeping your credit score high:
- Access your credit reports.
- Check for errors in the report.
- Pay off past-due debts.
- Pay off any tax liens.
- Keep your balance and utilization rate low.
- Diversify your credit mix, if you can.
- Consider hiring a credit monitoring service.