Getting a Small Business Loan

Small business loans fall into one of two types asset-based and factoring financing. Each loan requires different documentation and has different requirements, allowing you to choose the one that works best to keep your business going.

Asset-based loans are similar to traditional loans and require extensive documentation to show both that you are personally credit-worthy and that your business can keep up with the payment plan. Many financial institutions use the Small Business Administration’s 7(a) Loan Program to guarantee asset-based loan so there’s less risk to the lender.

If you just need short-term funding, consider a factoring loan, sometimes referred to as accounts receivable financing to cover a cash shortage. Factoring involves selling your accounts receivables to get a short-term loan. You’ll get less than the balances owed, with the specific amount dependent on your industry and the perceived risk that any of the debts will go unpaid.

Qualifying for an asset-based loan generally requires a credit score that’s in the 700 to 800 range and up, according to Forbes. You may still qualify with a score in the 650-700 range. If you’ve been in business for at least a couple of years and can show a strong history of sales as well as reliable cash flow, you’re more likely to get the loan than a startup. You’re also more likely to get a loan if you have collateral with which to secure the loan, such as equity in real estate or an investment portfolio.

The bank requires fewer qualifications for a factoring loan. As long as you’ve set up your business properly and have a history of positive cash flow, you likely qualify.

Develop a full business plan for asset-based loans. The plan explains your company’s strengths, weaknesses, opportunities and threats, also known as a SWOT analysis. Describe how your background and education help you run the business. Add financial data, including profit and loss statements for the past three years, if available. Include cash flow statements, a current balance sheet and three years of personal tax returns. Use the executive summary of your business plan to explain why you need the money and to tell your company’s unique story so the lender understands where your business is headed.

For factoring loans, you need an accounts receivables report that shows invoices for the past 90 days. Plan to complete an invoice factoring application and include business documentation that shows your company is set up with the proper government agencies, such as state and federal tax authorities.

Without a strong credit rating, your chances of getting an asset-based loan are greatly diminished. The SBA recommends providing additional documentation as part of your business plan if your credit score is weak or you have experienced bankruptcy. For instance, include bank deposits that show you make regular ongoing deposits and have positive cash flow. Another option is to find a credit partner who has a preferable credit score who is willing to co-sign for the loan.

Getting a Loan From a Bank Using Collateral

Many financial institutions lend money on the basis of collateral. Your collateral, such as a home, car or deposit account, represents a security interest; the lender knows that if you cannot repay the loan that the collateral can help recoup some or all of the difference. Traditional banks are only one of the places to obtain a collateral-backed loan, however. Your specific credit profile can direct you to the lender best suited to fill your borrowing needs.

Traditional Banks

Traditional banks like Wells Fargo offer secured loans. In addition to the option of using your home for an equity loan, traditional banks often accept vehicles as collateral. Remember that you must have the title to the car to qualify, although some banks will accept a relative’s titled vehicle provided that individual co-signs on the loan.

If you have a savings account or certificate of deposit at a bank, the bank may be able to use it for collateral. Remember two things, however, if you explore this route. First, just having a deposit account does not guarantee loan approval since you will still have to pass a credit check. Second, if you are granted a deposit-backed loan, the bank will place a “hold” on the funds. This means you will not be able to withdraw them or renegotiate the deposit rate until the loan is repaid.

Credit Unions

Credit unions offer an alternative to traditional banks. If you are already a credit union member, that institution may be able to offer you a lower rate than a bank, a major advantage. Pennsylvania State Employees Credit Union (PSECU), for example, is owned by its members, not stockholders. The nonprofit operation thus allows for lower margins on loans.

Even if you don’t belong to a credit union, you may be eligible to join. For instance, PSECU reminds potential borrowers that although the credit union started as public employees-only, now many other people are eligible to join. Keep in mind that credit union membership does not guarantee you’ll be lent money. Your collateral must be acceptable and you must pass a credit check first.

Finance Companies

The last resort for many borrowers in the consumer finance company. Finance companies traditionally charge considerably higher rates of interest to customers with weaker credit profiles. Although the finance company may ask for collateral, they may not require it; many finance companies also will accept your older model car or mobile home as collateral, items that more conservative lenders often refuse.

You will almost certainly pay a higher interest rate if you use a consumer finance unit for your loan. Although your collateral may knock off a few points of interest as compared to an unsecured loan, it is common as of 2009 to see finance company loan rates in the high teens and even mid-20-point range. This is at least six times higher than the current prime interest rate.

Bad Credit Personal Loans Banks

It is possible to get personal loans from banks when you have bad credit. In fact, there are financial institutions that specifically target customers with bad credit. Because these banks are willing to assume the financial risk of loaning money to those with bad credit, they can charge loan fees and much higher interest rates, creating the potential for greater profits. Borrowers with bad credit may lack other choices in banks when seeking personal loans until they can improve their credit.

Banks consider individuals with credit scores below 620 to have poor or bad credit. Banks find out your credit score from at least one of three privately held credit reporting agencies. Most banks offering to do business with individuals with bad credit are internet-based or local businesses that offer payday advances. Some payday advances are more like personal loans because they are renewable each payday until the borrower is able to pay in full. Of course, fees apply with each renewal.

The banks offering to loan money to those with bad credit do have some basic lending requirements that individuals must meet in order to apply. The banks require the borrower to be at least 18 years old and a legal resident with a minimum verifiable income of at least $800, although some require $1,000. Banks may require the borrower to have no outstanding payday loans or an active checking account.

Most banks seem willing to offer unsecured personal loans of up to $1,500 to individuals with bad credit. Common offers are loans of $500 without a credit check deposited into your checking account in 24 to 48 hours. Secured loan amounts are a percentage of the value of the collateral.

High risk lending banks may charge loan origination fees to applicants as well as high interest rates that may be three times the average interest rates or more. If a borrower cannot pay on the due date these banks may offer to delay payments with extension fees. The terms of the loan may include prepayment penalties; these are additional fees for paying off the balance early, so read the fine print. Lenders may also offer loan insurance for an additional fee. If you are considering this option, be sure you fully understand the costs and exclusions. If the banks fees and rates are tier-based, then a loan for $2,000 may have a significantly lower interest rate than a loan for $1,999, so be sure to ask.

Once you begin searching for personal loans you may be approached by fake lenders, phony debt counselors or scam artists who may even be using real names of loan companies. Learn about the latest advance fee loan scams and identity phishers before giving anyone your personal information such as your social security number or bank information.

Finding Credible Online Payday Loan Companies

Payday loans are a common way for people to borrow money quickly. Often all you need to do is show the payday loan company some previous pay stubs. If you pay the money back by your next payday, you should only have to pay a small fee. However, if you plan to make payments on the loan, you could pay a ridiculous amount in interest fees. Finding a credible online payday loan company is not so hard if you know where to look and what to look for.

Open your Internet program and go to your favorite search engine. Type in “online payday loan companies.”

Look through the different choices that come up. Choose a few to look at further, looking for names that might already be familiar to you.

Go to the “Terms of Agreement” page on each one of those sites. Print out all of the pages of the agreements. Mark which agreement goes with which company.

Read the terms carefully. Highlight anything that you have questions about. Take note of payments required as well as the amount of interest they will charge. Look for line items about extra charges for missing a payment or hidden fees. Reasonable fees are a sign of a reputable company.

Call the companies or chat online with a representative when you have questions. Make sure they answer your questions without going in circles. Expect clear-cut answers from reputable companies.

Look up each potential company on the websites of “Consumer Reports” and the Better Business Bureau. Also contact the Better Business Bureau’s office for your state.

Take note of how long the company has been in business. The longer it has been doing business, the more reputable the company. Stay away from new payday loan companies.

Getting Payday Loans With Bad Credit

A payday loan is a good way to get extra cash when you need it fast. In an emergency, payday loans can get you money you need quickly. If you have bad credit, there are still ways to obtain these types of loans.

Pull your credit report in advance if possible. This way, you have a better picture of where you stand and can correct any potential errors ahead of time.

Locate your car’s title. Many payday loan offices will offer customers a loan with a car title in hand, regardless of credit.

Gather together your most recent pay stubs and a utility bill, so you’re prepared when you go to get the payday loan.

Call as many local payday loan offices you can in advance, and ask them what the requirements are to get this type of loan. Choose the one with the best criteria that suits your needs.

Complete the necessary paperwork. In most cases, you should have an answer on how much cash you can borrow almost instantly.

Consolidating Payday Loans

Taking out a payday loan may help you take care of an urgent situation. However, if you take out multiple loans at the same, it could become unmanageable. The good news is that you may be able to consolidate your payday loans into one monthly payment.

Consider a secured debt consolidation loan if you own a home. This is actually a home equity loan with a low interest rate. Consumers who owe thousands of dollars in payday loans may be able to take advantage of this option.

Use a credit card with no annual fees and a 0 percent introductory rate to pay off the loans. You would have one monthly payment and pay less in interest charges and fees. Take advantage of sites like Bills.com to find the best credit card offers.

Explore the possibility of using services like Prosper.com to find private lenders who are willing to lend money to private borrowers.

Take out a personal unsecured debt loan from a lending institution. This may be your best option since you don’t need collateral. A good credit history is essential to obtain this type of loan.

Ask a friend or family member for a personal loan. Offer to put everything in writing and to pay good interest rates. Paying a reasonable interest rate is better than continuing to incur fees from the payday loan companies.

Payday Loan May Affect Your Credit

Taking out a payday loan can provide quick relief in a financial emergency. These are short-term loans that can hold you over until you get your next paycheck. In some respects, it’s like borrowing from family or a friend in a pinch — there are usually no credit requirements and the loan won’t have much effect, if any, on your credit report or score.

No Agency Reports

Credit reporting agencies keep tabs on your borrowing and repayment activity. The big three are Experian, Trans Union and Equifax. Virtually all reputable lenders use one or more of these agencies, but payday lenders typically don’t report to them, according to the Consumer Financial Protection Bureau. If you take out a payday loan, it’s unlikely that anyone other than the lender will know unless you tell them. If you pay the loan back promptly, the activity won’t raise your credit score. Conversely, if you default, this event won’t show up on your credit report either provided the lender doesn’t turn you over to a collection agency or sue you.

Debt Collectors

Payday lenders often sell or assign their bad debts to debt collectors. If you default and your payday lender turns the debt over to a collection agency, the agency is probably going to pursue you wholeheartedly for the money. It doesn’t get paid unless and until you make good on the debt. The federal Fair Debt Collection Practices Act controls what debt collectors can and can’t do to try to get you to pay, and they can report your account to one or all of the credit reporting agencies. Your payday loan would then appear on your credit reports and affect your score.

Lawsuits and Judgments

Even if the lender doesn’t turn your loan over to collections, a defaulted payday loan can show up on your credit report if the lender sues you for the unpaid balance. Lawsuits and judgments issued against you are matters of public record. The credit reporting agencies regularly review public records to gather this type of information, then they report it and use it when calculating credit scores. Judgments and lawsuits can stay on your credit report for seven years, even if you pay off the underlying debt.

Special Credit Tracking

The Consumer Financial Protection Bureau warns that some payday lenders report to specialty credit reporting agencies. These companies gather information on loans of this nature. Payday lenders might also request a report from such an agency when deciding whether to approve someone for a loan. Even if information about your payday loan doesn’t reach the three major credit reporting agencies, it’s possible other payday lenders know about it through this source. This might help or hinder your ability to get other payday loans in the future.

Direct Payday Loan Lenders

Direct payday lenders dispense small, short-term loans to consumers when they need money between paychecks. Direct payday loans, also called cash advances or payday loans, are available electronically, including the application submission, approval and deposit of funds. Following are tips for finding a lender.

Select a reputable lender and then find out whether that company offers direct payday loans. Many lenders advertise payday loans, but also offer the services of a direct lender.

Check that the site lists the loan fees, interest rate and any other fees or charges. Most states require that lenders make this information available to consumers before applying for a payday loan.

Check with the Better Business Bureau to see if there are any complaints against the lender. Another option is to enter the name of the company in the search feature followed by the word “fraud” or “scam.” This will bring up any complaints made by unsatisfied customers.

Finding the Best Payday Loan

A payday loan is also often called a cash advance loan. This is a short-term loan usually of a small amount intended to temporarily cover emergencies. Often people will take a payday loan to pay a bill to avoid late fees and bad reports onto their credit history. When taking a payday loan, just like any other loan, you want to find the best option available.

Contact several lenders for interest rate quotes. The interest rate may vary considerably from one lender to the next. Be sure to compare rate quotes to ensure you are getting the best rate available to you for your payday loan.

Remember there is more cost involved than just interest. Usually loans will carry fees from the lender in addition to the interest being charged. Be sure to ask the lender for a list of all fees that you will be expected to pay and factor these in when making loan comparisons.

Find out about re-payment terms. Ask the lender how long you have to pay the payday loan back. There should never be a penalty fee charged for paying a payday loan off in advance. Ask the lender about pre-payment penalties. If there are any, go someplace else for your loan.

Compare customer service. Although interest rates and fees might be the most important to you, you do not want to do business with a company that does not have good customer service.

Run a check with the Better Business Bureau before signing on the line for a payday loan. Contact the BBB in the city and state that the business is located in to find out if there have been any customer complaints about the company and if so if there were resolved appropriately.

Payday Loan Business

Payday loan centers are springing up on every corner, which means that the demand is high. If you can run a legitimate and ethical payday loan business, you’ll be ahead of most of your competitors, and you’ll have the satisfaction of knowing that you can help people when they need it most. A payday loan business is one that provides short-term loans (such as two weeks), usually for less than $1,000.

Decide how you will fund your payday loan business. Since you will be providing loans, albeit small, you’ll need sufficient capital to provide all approved customers with the money they need, but without depending on the return to make end’s meet. You can also buy a franchise of an existing payday loan business for as little as $25,000.

Determine how large of a loss factor you can tolerate to keep your business afloat. If clients default, how long can you sustain your business without having to shut your doors or turn to alternate sources of funding? This is important to know before you start so you can accept clients accordingly.

Purchase or lease a storefront from which you can provide payday loans. It doesn’t need to be a very large office, but it should have enough room for a desk, chair, counter and storage area.

Learn the regulation laws that govern a payday loan business (see Resources below). This industry is highly regulated, and failing to follow the guidelines can result in serious fines.

Write a contract for loans with the help of an attorney. It should contain the terms of the loan, the fees or interest rates, the date the loan is due to be repaid and the consequences for non-payment. The language of this contract is crucial, so make sure you obtain knowledgeable advice.

Advertise your payday loan business in newspapers, on television or on the Internet. Driving customers to your store is the most important thing, so make room in your budget for advertising costs on a weekly or monthly basis.

Decide how you will qualify applicants for loans. Most payday loan businesses don’t run credit checks on candidates, but they do have their own screening processes. You should, at a minimum, require a recent pay stub and a copy of the applicant’s tax return from the previous year. Additionally, you will need to verify identification, ideally from two sources (e.g. driver license and social security card).