Many small businesses can face periods of low revenue and still be able to get a loan. But with it, it carries added risks for small business owners.
As the world keeps facing more and more periods of uncertainty, your small business isn’t immune to it. With the current inflation putting a dent in small business finances worldwide — and a looming recession on the horizon — acquiring business funding can prove vital.
Although that’s the case, many small business owners can vouch that these couple of years haven’t been kind to their cash flow. As such, financing doors can become a bit more difficult to open for your small business, but they aren’t impossible.
Small business financing can come in many forms for many business owners. As you’ll see in this article, business financing with low revenue is indeed possible — but not without added risk. Here you’ll learn all about it, as well as:
- Why do lenders care so much about cash flow;
- What you must take into account before applying for a business loan with low business revenue;
- The best loans for a small business with a stretched cash flow;
- How you can improve your chances of applying for funding even with a low revenue;
And more. After this article, you’ll know how to apply for a business loan and if applying with low revenue is the best course of action for you at the moment.
Why Lenders Need to Evaluate Your Revenue:
As a small business owner, you know that cash flow is one of the most important — if not the most — areas of your business. Capital is the lifeblood of every business, and when a small business presents negative cash flow (more expenses than their revenue), it raises all sorts of challenges for business owners.
When business owners are faced with negative cash flow and think of counterweighing it with a business loan, it brings more challenges — this time involving lenders. When offering business funding, lenders will always take a risk, a risk involving business owners fulfilling their loan obligations or not.
Lenders only want one thing: that you can fulfill your loan obligations and complete your repayment terms. While they are concerned about other eligibility factors, if a business presents negative cash flow — or sometimes no money at all — lenders become hesitant. After all, it’s a positive cash flow that makes businesses more likely to fulfill their loan obligations.
What to Take into Account Before Applying for a Business Loan With Low Revenue:
Many factors can make small business owners look for small business loans with low revenue. You know better than anyone else the financial situation of your small business and know if business funding will help you or not.
But, as a borrower, you also need to take into account the risks that come with it. Small business loans already have fairly significant competition — especially with the most well-established lenders like banks or the Small Business Administration — and low revenue will make your options shorter and riskier. So it’s a good idea to take some steps into account, such as:
- When Will You Get Revenue After Acquiring the Loan: It might seem obvious to you, but many borrowers concerned about business funding forego this step altogether. If you have a running business waiting for your clients’ payments, it’s a good idea to account for this, even letting the lender know in advance. Not only that, but with a certainty of later payment, a lender might become more inclined to offer you the funding you need.
- Run Through the Worst Case Scenario: What will happen if clients haven’t paid you by the agreed date? How will you pay the loan within the agreed time? For the pessimistic type of small business owner, they can think of many more situations, but what matters is that you answer them all and evaluate if the risk compensates your request for business funding.
- Can You Cut Costs on Your Small Business: One popular trend that emanated from the startup world was the idea of lean startup. With this philosophy, entrepreneurs ran their businesses with only the bare essentials while still maintaining high efficiency. Do you have any areas of your small business that you can reduce — if not cut entirely? Look at this step, and you might be surprised how much money it could be bleeding in certain areas.
- Can You Afford to Wait: Understandably, many small business owners can’t afford to wait when dealing with low revenue situations. But if you can, it could be a perfect opportunity to look for more ways to generate revenue, improve your credit score, and wait for pending client payments. Sometimes, slowing down the momentum of your small business can prove to be more profitable than just looking for productivity.
Best Types of Loans for Small Businesses with Low Revenue:
Acquiring a small business loan with low revenue will present other types of challenges for small business owners — even if you have a stellar credit score or credit history, a low cash flow will make most traditional lenders opt-out and not approve your loan request.
If your small business is facing a period of low revenue at the moment, chances are that acquiring a bank loan or an SBA loan is off the table. For these lenders, revenue requirements are essential, and even for established business owners with good credit scores, years of practice, and good cash flow can prove already challenging and time-consuming. A business owner with low revenue will likely see their loan request denied.
But there are other types of loans that financial institutions or alternative lenders can offer you, even if your cash flow isn’t the best. Let’s look at some options for your small business.
Business Credit Card:
Business credit cards, much like personal credit cards, allow you to borrow a determined credit limit and repay your balance at the end of the month. One of the advantages of business credit cards is that you can avoid paying interest rates altogether if you consistently repay at the end of the month. Another hidden benefit is that this method allows you to improve your FICO credit score for a small business loan request in the future.
Business credit card issuers are not overly concerned with your business cash flow, as they prefer to use your personal income and credit score as the qualifying basis for approval. It’s a good option for new businesses without polished financial statements, but keep in mind the repayment period because if you fail your payments, the interest rate will accrue until fully paid.
Business Line of Credit:
Another good option if your current small business’s financial situation is not the best, a business line of credit works similarly to a business credit card. You receive a lump sum of cash on your business bank account — up to $250.000 — and only pay interest on the money you use. Although the application process may require them to know your business’s monthly revenue, it’s not the only eligibility factor important to lenders. They also evaluate your creditworthiness, time in business and business plan, and more factors that can sway the loan request in your favor.
You can also opt to secure the loan request with some form of collateral — equipment or even real estate, depending on the loan amount — to improve your loan application process. But beware that this type of loan also carries heavy repayment terms that can put a business with low or no revenue under stress. Interest rates can go from 10% to 99% — sometimes with weekly repayments. If you opt for this loan option, it’s a good idea to research the market and thoroughly evaluate the benefits and drawbacks of this loan offer.
Equipment financing is a valuable loan program for new businesses or startups to acquire equipment without a polished — or even existing — annual revenue statement. With equipment loans, a lender will front you 80% to 100% of the equipment’s value, and you’ll pay back the loan similarly to a lease, but at the end of the loan, you’ll fully own the equipment.
If you can prove to the lender the usefulness of the equipment for your small business, we will not be overly concerned about your business revenue. That’s because the equipment can work as collateral, but if you default on the repayment terms, the lender will move in and seize your equipment.
Invoice financing — also known as accounts receivable — allows you to sell your clients’ unpaid invoices to an invoice factoring agency. The factoring agency will then front you a percentage of the invoice’s value, move to collect payment from your clients, and then return you the value minus a small fee. With this method, you pay the value of the percentage the agency fronts you, plus interest rates.
This type of business lender is a bit different than other lenders, as well as the funding option — since you’re not acquiring anything other than your due payment. But if your clients default on their payments, going to an invoice factoring agency will guarantee the invoices get paid. The eligibility terms are also very relaxed since the invoices themselves work as collateral. But like other similar financing options, it’s worthwhile to look for the best option available, as the repayment terms can be quite significant.
Online lenders can offer you small business loans similarly to traditional banks and credit unions, but with the added benefit of speed and ease of application. Online lenders were the financing option preferred by many small business owners that saw their business loan requests denied by traditional banks or credit unions. They can offer you short-term loans, working capital loans, and even microloans that traditional lenders didn’t approve.
Although you’ll have a fast and easy application process, you must know that you’ll also have an increased interest rate and a reduced repayment term. But on the other hand, online lenders have experience working with borrowers with bad credit and new businesses without a substantial cash flow. Many lenders will offer you the best repayment terms possible for your small business situation, even with those factors.
In the case of Biz2Credit, you can reach out to our small business funding experts and get to know the best option for your business needs — and how you can achieve your monthly payments smoothly, even with low revenue!
Steps to Improve Your Loan Eligibility:
- Prepare Your Documentation: Even though your cash flow isn’t the best at the moment, having your business’s annual revenue supporting documents, business credit score statements, personal credit reports, bank statements, and many more types of documents can save you time and also allow you to reaccess what’s the best funding option for you.
- Have a Very Detailed Business Plan: Providing a lender with a business plan and showing what exactly you intend to do with the loan product or loan amount is essential. But what will put you on better terms is that you have a clear-cut, easy-to-understand plan for everything you intend to do. If you put effort into this step, the lender will not ignore it, especially when a good business plan is a rarity.
- Take Some Time to Improve Your Credit Score: If you can, taking some extra weeks or months to pay some debts or credit card payments will allow you to improve your credit score, and this step is essential in a loan’s eligibility process. Furthermore, a good credit score will allow you to look for loan options that’ll offer you better terms in the future.
- If Possible, Provide Collateral: If you have real estate, equipment, or other assets that lenders might deem collateral worthy, it could be worthwhile to consider it. While it’s true you might be putting your workplace or essential equipment at risk, it’ll also heavily tip the loan request in your favor by securing it — it might even allow you to ask for better repayment terms.
Even With Low Revenue, Your Responsibility is to Make Your Small Business Thrive:
While the world still faces an economic downturn, it’s the responsibility of many business owners worldwide to maintain their businesses afloat. Financial hardships won’t last forever, and the small businesses that wither the storm are the ones that will be more successful when it passes.
Even if you’re facing a moment of low revenue, that doesn’t mean you can’t — at the very least — try and acquire business funding. And with Biz2Credit, you’ll have all the help you need to achieve it.
With just about 4 minutes of your time, you can change the face of your small business forever! If you’re still uncertain if business funding is for you, you can talk to a member of our small business funding experts team and get to know the best course of action for your small business.