Qualifying for a Poor Credit Business Loan

A poor credit business loan is designed for a business person or persons with a poor credit history.

In the life of a business, virtually all come across a time where extra money is needed for business growth, expansion, a new venture, or paying outstanding bills. Businesses owned and operated by an individual or individuals with a poor credit history are of no exception. The fall back on this type of situation is that it is difficult to qualify for a conventional loan if you are an individual or a part of a business partnership with an individual who has poor credit, and are in need of a business loan.

Poor credit business loans are designed especially for business people with a poor credit history. Poor credit business loans apply to both new ventures and existing businesses, and offer the business owner or owners the opportunity to turn around their poor credit rating, while also providing much needed financing for the business.

Pros of Obtaining a Poor Credit Business Loan

1. A poor credit business loan can offer a business person or business persons with poor credit an opportunity to receive a loan when they may otherwise not qualify for a conventional loan.

2. Poor credit business loans can offer the business owner or owners the opportunity to improve their business, and ultimately, improve their financial situation, economic standing, and ultimately, their credit ratings.

3. Loan terms for poor credit business loans can range from three to 25 years. Longer loan terms can offer the business owner or owners enough time to see the business through a rough financial period, proving their worthiness of the loan, and again, improving credit scores so that future loans can be obtained at a lower interest rate.

4. A poor credit business loan offers the business person or persons a chance to improve bad credit history. The poor credit business loan will provide money required to help the business grow and overcome its financial problems, as well as allow the business owner or owners the opportunity to become current on the new loan in order to increase credit scores by continuing to make monthly payments as scheduled.

5. An opportunity to have a lower interest rate is available on a poor credit business loan, provided that collateral is available to the lender.

6. A poor credit business loan can provide the business with regular access to cash, so that even in the worst financial situation, the business need not sell the entire business or part of the business to another individual or company to raise money.

Cons of Obtaining a Poor Credit Business Loan

1. The rate of interest on a poor credit business loan varies greatly according to the collateral offered. An unsecured poor credit business loan will have a much higher rate of interest.

2. If a poor credit business loan is not paid, it will not only affect the business owner’s or owners’ credit ratings, but also, it will only create even more problems for what was previously a grim financial situation.

3. A poor credit business loan will require a very high rate of interest to be paid if the borrower is considered extremely high risk to the lender. Collateral can assist in keeping the interest rate as low as possible.

Any business person who has the potential to repay a poor credit business loan and does not have a very severe credit history that includes things such as unpaid collections, repossessions, or serious late payments for a long duration, can qualify for a poor credit business loan. Even individuals who have had the misfortune of a bankruptcy more than ten years ago can qualify for a poor credit business loan. Business owners with poor credit who wish to either start a new venture, or require a poor credit business loan to improve or expand on an existing business, are provided a unique opportunity to help their economic and financial situation turn around and improve.

Before applying for a poor credit business loan, however, be sure to have a viable business plan, and prepare a professional loan proposal to show how much money is needed, and how the loan amount would make a difference to the business’ future endeavors. Great care and consideration should be taken to ensure that the business venture, expansion, or improvements will not fail. If the loan appears to be a high risk for your business, examine the situation carefully. An individual or individuals in business should take out a poor credit business loan only if it is completely clear that the poor credit business loan will make the situation better and not worse.

Pricing a Business For Sale – Key Factors All Play a Role!

Correctly Pricing A Business Is Important If You Really Want To Sell It!

As a consultant I talk to many business owners, brokers, and agents on a daily basis about valuing businesses. It always amazes me on how some of these individuals come up with the values on small businesses being sold. No wonder only 30% of all businesses sell! In many instances no consideration is given to the total picture – like will the available cash flow of the business be able to pay the debt of a loan, will the deal as structured or priced even be attractive to financing sources, “cash” price vs. “note” price and how these factors figure into the equation!

I have seen many “professional valuations” where the price just doesn’t make sense – and sellers wonder why their business for sale just sits there with no action!

Market Approach

There is a solution that is grounded in the fundamentals of economics, and time tested in the marketplace, where the influences of supply and demand ultimately determine where a business belongs on the price scale. One economist explains this market approach by comparing a business to a machine which has the purpose of making money: The more money it makes, the more it’s worth. And that explains why, for example, there is a strong demand for a very profitable distribution business with few hard assets; and why it is worth more in the marketplace of available businesses, than a large machine shop that would cost nearly $1 million to duplicate, but can’t make a living for its owner.

Adjusted Net Income

The first category of information needed is called adjusted net income, and is the total amount of cash produced by the “money machine.” It’s a figure that includes the profits, the owner’s salary and all of the many cash-related benefits which are enjoyed by the principals of small businesses. Those benefits can include the use of a company car, the company-paid premiums for health, life and auto insurance, plus personal expenditures tucked into travel and entertainment, subscriptions and similar business “expense” categories. Interest expense should be added to adjusted net income, along with accounting entries-such as depreciation and amortization-that can divert money to the owner’s pocket so that it never appears on the bottom line of the P&L.

While some of these items vary from business to business, any owner knows which categories of expenses in his or her financial records include sums of money that should be added to adjusted net income. Many business owners also know of cash income that never sees the business records in any way, shape or form. Some owners feel they should get credit for these sums in the calculation of value. But it’s a poor policy to collect unreported income and then attempt to have it included in adjusted net income for evaluation purposes. When selling, your buyer prospects want any statements you make about your business to be supported by evidence in the form of accounting records and other reliable sources. To admit that you are doing business “off the books” not only exposes you to problems with the IRS, it also sets a bad tone with prospects who-if they are going to be interested in your business– need to believe your practices and record keeping are above reproach.

Adjusted net income is usually the first thing any buyer wants to know about when investigating a business; and not just the past few months’ worth of income. A seller should be prepared to demonstrate a history of earnings, and have the documentation to back it up.

Multiplier Method

The next piece of the equation comes from the expectations working in the marketplace to shape the multiplier-a figure which will be computed, along with the cash flow, to calculate a rough value. The validity of the multiple is that it reflects behavior in the market. There is no need to theorize about a proper multiplier. It’s calculated by determining what people actually pay for small businesses in California.

The experience with low risk businesses is that their high market demand is reflected in a fairly strong multiple. A lot of buyers want, for example, a well-established franchise, or a grocery store with a long lease in a densely populated area and little direct competition. Its multiple might be in the range of two to three times annual adjusted net income.

A one or two multiple, on the other hand, would be associated with an enterprise in which the buyer is assuming greater risk. An example is a retail store near a large shopping area, which leaves the buyer of the smaller business vulnerable to the competitive marketing activities of much larger companies. The lower multiple is a consequence of lower market demand. Fewer people want that kind of business.

Since profitable distributorships and manufacturing companies are much sought after, it’s not unusual to see them command a price upwards of four times annual adjusted net profit. The company in this category providing adjusted net profit of $200,000 might realize a selling price in the range of $800,000, assuming a favorable deal structure (more about that shortly). Also warranting a high multiple are businesses loaded with assets-equipment, trade fixtures and inventory. But remember that a seller must be able to establish the company’s “history of earnings” with financial reports and tax returns, before the higher price will be offered.

More commonly available businesses, such as restaurants, are priced with a lower multiple – in the one to two range – to reflect the abundance of this kind of business available for sale at any one time. In this case it’s purely a matter of supply and demand.

And a company in any industry that is difficult to finance, will be hard to sell. I’m familiar with a retail business in Northern California that is not generating enough adjusted net income to support its $1.5 million asking price. Because a new owner would have a difficult time paying off a loan that was hefty enough to swing a purchase of this company, there are no lenders willing to provide the money. That severely affects marketability. In fact, the company is probably unsalable as presented.

Importance of Deal Structure/Terms

And the final factor thrown into this equation is particularly useful in determining the value of businesses offered for sale. It recognizes that the terms of a transaction–in other words, how a price is paid–are critical in calculating that price. When sellers demand all cash for their businesses, for example, the market tells us that they can expect to receive about 60% to 80% of the sum they would have gotten by taking a down payment and financing the balance.

It’s easy to understand why deal structure is such a vital component in the valuation process. For a business to be affordable, the cash flow needs to be substantial enough to support the price at the multiple being used. A deal that requires a lot of cash up front, in relation to the expected amount of adjusted cash flow, will place a greater burden on the buyer. That principle, translated into the language of the marketplace, means the business will only be appealing at a low price. If, on the other hand, the level of adjusted net income supports the buyer’s ability to make payments to the seller in order to purchase the business-this opportunity will interest more potential buyers and the result is a higher achievable sales price.

Other ways an attractive deal structure can be used to build market appeal include a delay of a few months–after close of escrow– before monthly payments on the seller’s financing are due to begin, a low interest rate, and interest only payments for awhile, until a new owner is able to build the business to more easily meet the loan obligation. Creative deal structures always help sell a business and will usually command a higher market price for the business (remember it has to make sense)!

Pricing a business is as much or more of an art than a science. Sellers who take a look at the big picture – looking at both deal structure and price are usually the ones who are successful in selling their business!

Obtaining a Poor Credit Business Loan

Business owners with poor credit ratings may find it difficult to obtain a loan for business purposes, such as expansion or to invest in a new product. Because lenders focus primarily on personal credit scores for business loans, you need to focus your efforts on going to the right lender for a poor credit business loan.

Poor credit business loans are available to business owners who would not otherwise qualify for a conventional business loan. Before applying for a lender, take a few important steps to increase your chances of getting a poor credit business loan.

1. Write a sound business plan.

Having a sound business plan is your biggest asset in obtaining a poor credit business loan. The plan should be completed and should represent your business in detail. Pay the closest attention to your business’ summary, which is stated at the beginning of the business plan. The summary is generally one to three pages in length, and details your business’ management experience, marketing efforts and goals, business goals, and other information about the business. If the lender likes what they see in this summary, they’ll read on.

2. Rent, rather than purchase, business space.

If you’re applying for a poor credit business loan, look for attractive business rental property that fits easily into your business’ budget. Lenders favor businesses that rent or plan to rent business space rather than purchase a building, especially for businesses that are in the early stages of development, and will often approve poor credit business loans provided space is rented rather than purchased. This is due to the fact that lenders prefer to see a business owner investing in assets that generate income for the business, such as inventory and equipment. Lenders also frown on expensive renovation costs to rental space if the business is a young or start-up business.

3. Review your credit reports.

Checking your credit reports from Experian, Equifax, and Transunion is an important start to the application process for a poor credit business loan. Your credit reports can cue you in on what the lender will see as soon as you apply for a poor credit business loan. When you obtain copies of your credit reports, review all information, including your name, address, phone number, and social security number to make sure that they’re all correct. Additionally, check your listing of creditors. If there are listings that you don’t recognize, report them to the credit bureau. Additionally, if there are listings that were turned over to a spouse after a divorce, for example, report those as well. The credit bureaus will contact the creditors with these disputes. Creditors are given a 30 day period to respond and verify that the debt is true, or if they are indeed errors, they are required to remove the listings from your reports. If no response is received after you file your dispu!

te, the credit bureau is required by law to remove those listings from your reports. Demand that the credit bureau correct these mistakes promptly.

If your credit report shows legitimate late payments or bankruptcies, include a letter with your poor credit business loan application, explaining the circumstances of these marks against you, and how the situation has changed for you. This can greatly reduce the impact of these negative listings. Be honest with the lender! Trying to conceal your past credit problems is the fastest way to get your poor credit business loan application discarded.

4. Consider a small lender.

Larger banks aren’t necessarily the best place to apply for a poor credit business loan, and in fact, can sometimes be the worst place to apply. Smaller banks and credit unions are often more inclined to finance businesses in their community, even those applying for a poor credit business loan, and their loan officers are more likely to give you individual attention and listen while you state your case. Each inquiry into your credit report generally reduces your credit scores by five points, so choose your lender carefully before applying for a poor credit business loan. Ask the lender to review your situation prior to pulling a credit report. If they feel that the proposal shows great potential, while being honest with them regarding your poor credit, and the lender feels that the loan could be approved, you’ve reached a safe point to move forward and allow them to request your credit report.

Poor credit business loans can sometimes be difficult to obtain, so be resourceful on where you get your loan.

A. Consider a home equity loan.

For example, home equity loans can be used for business purposes. However, keep in mind that if the business fails, you may also be at risk of losing your home if payments are not made.

B. Consider working with a specialty lender.

Some lenders specialize in poor credit business loans for high-risk entrepreneurs. These loans usually have high interest rates, but can sometimes offer a provision for lowering the rate when the business shows positive cash flow and the borrower demonstrates the ability to pay the debt.

C. Approach the Small Business Administration.

The Small Business Administration (SBA) has a wide variety of loan programs to assist business owners and potential business owners. The SBA does not provide loans, but rather, guarantees a loan, reducing the lender’s risk of loaning you the money for the poor credit business loan. The SBA also maintains a list of business-friendly banks. For more information, contact your local SBA office, or visit sba.gov.