Alternatives For All Businesses Looking To Access Capital
By: Kevin Harrington and Nick Bentley
We’ve helped tons of businesses get the capital they need to grow and now… it’s time to tell you how all this REALLY works.
I’m sure you’ve heard ads on the radio and seen commercials on the television talking about “no-doc,” any credit qualifies type of financing for small business owners.
Some of these claims are true.
Some are not.
Let me tell you the products, the guidelines, the procedures and what you really need to have in place to ensure you are able to qualify if you need financing for growth.
Let’s start with the business loans for bad credit entrepreneurs.
As we go through this I’ll discuss in detail the credit needed to obtain financing and what/if any bearing it has on the underwriting decision and approval.
Let’s get started
Revenue Based Loans
A revenue based loan is a very simple, fast, and easy way to obtain financing. It’s based solely on one thing; how much money your company is depositing into the business bank account on a monthly basis.
There are basically no credit requirements and there’s no collateral needed.
To be more specific, credit doesn’t necessarily have a bearing on the underwriting decision but rather the loan approval amount.
For instance, take the business owner who is depositing $50,000 into the business bank account, clean bank statements (no NSF’s or negative days), who’s been in business for 5 years, and has a 680 FICO credit score may qualify for $42,000-$45,000 over the course of 15 months.
That same business owner with the same bank statements and time in business with a 520 FICO may only qualify for $20,000 to $25,000 over the course of 6 months.
|Business owner A||Business Owner B|
|Time In Business||5 Years||5 Years|
|Approval||$42,000- $45,000||$20,000- $25,000|
|Term||15 Months||6 Months|
However, just like anything else this type of financing is about relationships with the lender.
Once the lender sees you’re able to pay back on your loan, the second time around your likely to get a higher approval with a better rate and term.
Both would be able to receive funding within a few hours.
The above is one of the reasons you’ve seen this type of financing really surge in the last year or two. The ability to access business loans regardless of credit, the same day is very appealing to those who need money quickly.
Key to Success
You must be able to get a return on your investment
I know that goes with any type of financing but here it’s even more critical.
It’s a fee based loan.
For every $10,000 you borrow you will pay back $2,000-$4,000 (depending on credit).
So don’t be surprised if you see a $50,000 loan with a $60,000 payback over 9 months.
This is the norm.
If you can take that $50,000 to generate an additional $2,000, $5,000, $10,000 a month who cares about the premium right?
With this type of business loan you need to have a specific action in your business that will drive you more business. Whether it’s a marketing plan, a new piece of equipment,
the ability to expand your space…whatever the case is, do not take this financing if you cannot get a nice ROI.
Account Receivable Financing
Account receivable financing (AR financing) is one of the best types of small business loans for business owners who are getting paid on net terms.
Many business owners need additional cash flow to support seasonal demands, growth, business opportunities, or solve a short-term cash need.
AR financing provides your business with flexible and immediate cash that will give your business the opportunity to grow, restructure, take advantage of supplier discounts, hire additional employees, or even to fund payroll.
With AR financing options, you can access cash without having to give up equity in your company, and it is less restrictive and less expensive than equity financing.
Here’s how it works
You provide goods or services to your customers.
You invoice your customer for the goods or services provided.
That invoice is then provided to the financing company for review
Your financing company will issue you up to 90% of the value of the invoice you’re waiting to get paid on.
When you’re invoice is paid by the customer, it’s paid to the
The remaining 10% of your invoices is then forwarded to you
less the small fee the financing company charges
Here’s why it works
It doesn’t matter what your credit is.
Because the financing company is relying on your customer to pay the invoice, we look at the customer’s credit.
Now… the customer is not just anyone.
You typically can only factor your invoices with customers who have proven track records.
For instance, at Ventury Capital we only really work with people who invoice to fortune 1000 companies.
I’ll give you an example:
Derek S, a good friend owns a company out of California. He upgrades cell phone towers from 3G to 4G.
He submits hundreds of thousands of invoices (in dollars) a month to Sprint. Since he’s doing the contracting for Sprint and upgrading their towers, he gets paid out as a contractor.
Sprint has a great credit rating.
So as a lender we are confident Sprint will pay the invoice due to Derek.
Even though the work was performed Sprint typically doesn’t pay on those invoices for 60 days.
But Derek has payroll, equipment, and other costs involved to complete the project for Sprint.
Using account receivable financing, regardless of bad credit, Derek is able to finance his operation, complete his jobs, place new bids on new projects, and in turn has a nice little business.
Because he’s able to use AR financing he access capital within 24 hours of invoice submission.
It takes about 14-21 days to get setup initially with the factoring company but once your setup, all future invoices can be funded into the business bank account within a business day.
Pretty cool financial vehicle and one of the oldest types of financing that’s been used since the Romans.
Asset Based Loans- 3 Types
This is something you’ll hear almost any time you talk to a debt financier.
“What are your assets?”
Everyone wants to know what you’ve got to back your request for financing right?
Asset based loans come in a variety of forms.
Though there are many different asset based loan programs, I’m going to discuss some of the most popular we see on a day to day basis. Asset based loans are a great alternative for business owners with bad credit.
Because you have collateral, you’re able to leverage that. This allows bad credit business owners to access capital regardless of any credit hiccups in the past.
Everyone loves real estate…. still….
Real estate is the most common type of asset based loan used in financing today.
Essentially how this works is you put up a piece of collateral, in this case the property, to secure the note issued to the business. Because the lender has a house on the line if you default, your credit, regardless of how bad it is has almost no effect on your approval.
*(Note: This Asset Based Loan Is Completely
Different Then A Real Estate Portfolio Loan)*
These notes are typically 12-18 months notes with the ability to extend an additional 6 months if need be.
They are typically short term notes, in-and-out type of deals.
The majority of them will be 12% (really 1% a month) that require non-owner occupied properties.
The minimum loan amount is usually around $50,000 and they can swing upwards of $2,000,000.
The loan to value usually never goes north of 85%. This basically means if you have a $100,000 you’re not going to be able to get more than $85,000 for this transaction. The best part about this is there is no pre-payment penalty.
So if you fix and flip, you can get out without the headaches of being penalized for making a good transaction.
Asset based loans in the real estate world are typically used for new construction, provide bridge funding, fund the purchase of a non-owner occupied properties and provide real estate backed lines of credit.
It’s great for building your portfolio for income producing properties
If there is a product with the real estate asset back loan it’s time to fund and documents required. Time to fund is a function of the amount of documents required.
Here’s a list of the required documents:
- 4506 Tax Return Form (Attached)
- Past 2 Months of Bank Statements
- Purchase & Sales Agreement
- Personal Financial Statement
- Borrowers Authorization Form
- Appraisal Nation Payment Authorization Form
- List of tentative rehab work needed/cost breakdown
- 2 years business and personal tax returns
Quite a list…
But… it is cheaper than a revenue based loan.
As my partner Nick Bentley would say:
“Time to fund and amount of headaches have an inverse relationship in the lending world.”
Couldn’t have said that better myself….
The luxury small business loan is one of my favorite types of financial vehicles that doesn’t require the business owner with bad credit to suffer the inability of accessing capital.
Here we use gold, diamonds, gems, watches, fine artwork, luxury cars (I love these) and even fine wine collections to use as collateral for a small business loan.
The luxury loan is essentially a term program that offers fully license institutional security and whole sale rates.
Again, there’s no need to have good credit here. Bad credit business owners can get rates as low as 00.33% per month to access capital.
There’s no penalty for a pre-pay here as well, which benefits the business owner looking to use it for a quick term use.
The loan amount typically goes to $25,000,000 (though we’ve seen 2.3Billion in ancient gems come across the desk which was awesome) , a 20 year term ,and based on the type of luxury good, the loan to value of the collection varies.
This means you may get a 95% loan to value on your diamonds but your box of Rolex’s may only get you a 80%. It depends what the market says…
That’s basically the program.
A 3rd party appraiser comes out to do the appraisal, the note is drawn up, and the deal is struck. The lending institution does not seek to hold or possess the asset. In some cases it will be held in a bank vault but the majority of times you can keep your gems right where they are and you get your money.
-Stock Based Loan
Stock based lending is for entrepreneurs who have built a solid portfolio in the market.
It fundamentally works just like the Luxury based program above except here, the collateral required is a list of approved securities.
The absolute minimum is a portfolio of $80,000 in value, and stocks trading at $5/share or higher. They must have an absolute minimum of 200,000 shares per day in the market.
Here’s where it gets really cool though.
There is no credit report pulled for this product and rates are as low as 2%.
Therefore as a lender, we would not know if you had outstanding business loans or liens on the business.
The stock market and stock based lending in general is such a strong financial backed security, credit has zero bearing on approval.
3 Things Matter
- Do you meet the minimum criteria of $80,000 portfolio?
- Do you have 200,000 shares in the market being traded?
- Do the securities you hold fall into acceptable shares/ commodities?
Let’s hit on that for a second.
First we like to see shares held that have little risk. Also known as blue chip stocks.
In addition to blue chip stocks like Coca Cola, Johnson and Johnson, Proctor and Gamble etc… T-Bills and Bonds are highly desired future contracts that hold minimal risk.
Just like everything else, you must be diversified.
You can’t have 2.5 million shares of Proctor and Gamble and get this loan.
How do I know?
Because that exact scenario came across the desk and there was nothing I could do because his risk exposure was 100% dependent on one security.
There is a downfall
So, there is a caveat to this product. You must switch brokerage firms before the loan is funded. Not to worry, all brokerage firms we work with are some of the bigger firms you would have heard on the television and all FINRA/SIPC/FDIC insured. This has to be in place however so the short term lien can be issued against the shares.
Most securities have a 95% loan to value ratio, one of the highest in lending today.
Considering you can close on this within 5 days with low rates, 95% LTV, and no credit pull…you can see why the entrepreneur with bad credit would use this for a small business loan.
We see most business owners use this type of small business loan for purchasing franchises, opening and financing new businesses and building their real estate portfolio.
All this without selling a single share or transferring title of the stock…
Merchant Cash Advance
A merchant cash advance is a type of fiancning that has had a black cloud hanging over it for quite some time now.
I’ll explain why.
Fundamentally, a merchant cash advance takes money from your merchant account before it ever batches into your business bank account.
But it does this in two ways
First, the lender requires you, the small business owner, to switch merchant account companies. Many times it’s to a merchant account company that the financier owns or is in bed with.
So they get you with the merchant fees first. 2-4% is common.
Then, before your processing batch gets sent to the business bank account, they will draw a certain percentage (Sometimes as high as 30%) of your processing batch before they send the remaining amount to your bank account.
Bad credit business owners can access this financing regardless however.
All the financier wants to see is the number of tickets being batched and the stability or consistency of those batches.
Things like industry, time in business, and business bank account “healthiness” still come into play.
But the reason why this type of financing is much more liberal than most is because they take the money before you ever even see it.
They make sure they get paid.
Many times you’ll see merchant cash advances operate in 2 weeks swings
The pitch is as you put the money to work and make more and more money you’re going to be able to pay the loan back sooner so you can afford it.
However, just like you see the talks on Sharktank, the worst thing you can do to a growing company is siphon cash away.
Here’s an example.
You have a business owner who processes $1,000 a day by selling online health products.
The financier sees a steady healthy business generating about $30K a month.
The business owner has poor credit and has been turned down by the bank. But its Christmas time and sales spike as people dedicate the New Year to a new body.
He’s needs inventory.
The financing company may offer the business owner $25,000 with a 12-15% receivable daily rate.
As Christmas inches closer the business owner sees a spike in sales. He’s now doing $1,500 a day on average. A 50% increase in business. Not bad.
He keeps it up for two weeks.
The financing company, after $25,000 is sent out, will log in and see “wow, the business owner has been able to use this money effectively. They can pay us back quicker.”
The percentage will adjust, without notification, to the higher range of the receivable withdrawal.
That’s why there’s a dark cloud.
If business owners don’t know what they’re getting into and without reading the fine print, they will get bamboozled.
There are advantages however.
If you cannot access capital because you just came out of bankruptcy, or you have tax liens, or you’re a convicted felon, this is an option.
This product was designed for entrepreneurs who truly have no other options for them to pursue.
I know plenty of business owners with bad credit who have been able to use merchant cash advances to their benefit but man…did they pay for.
Above I’ve described, in detail, the most popular types of small business loans for bad credit situations. I believe all of them have value and some have imminent drawbacks. However, one thing to consider when using debt financing is what type of return on your investment are you going to get?
It doesn’t make much sense to take out a small business loan if you don’t think you’re going to be able to turn that into additional profit…especially in the case of something like a merchant cash advance.
Having the ability to take the financing and hire more staff, expand your space, buy that piece of equipment, or launch the next marketing campaign is crucial to your success.
For me, when I invest in businesses I have a specific niche I try to work in. Debt financing broadens the gap to finance any industry. Therefore, debt financing has huge upsides and truthfully, is almost always cheaper than equity financing.
Be noted that using debt financing does not allow you to use resources of the financing agents however. On Sharktank you don’t just get money, but you get connections…. That’s the value in equity financing.
Here it’s different
The debt companies focus on you, the entrepreneur, and your ability to grow your business.
They bet on the jockey….and the jockey’s bank statements, vendors, hard assets, receivables and securities.