What is a Subprime Business Loan?

A subprime business loan is a loan in which the business owners’ personal credit score and/or business credit score is impaired in a way that prevents them from getting approved for conventional loans. “Subprime” has a stigma attached to it due to the business borrower’s unsavory credit score and its impact on business loan product availability and terms, like higher interest rates. The costs and terms of a subprime loan are not as favorable as a traditional business loan. 

Used properly, subprime loans play a vital role in providing businesses access to capital. Even business owners with poor credit scores need working capital. Without subprime loans, there would be no other options for this segment of business owners. Blocking all subprime borrowers from starting a business would diminish the diversity and overall existence of small businesses. It would also disrupt the balance of access to self-employment.

What is Subprime Credit?

Subprime credit means your personal credit history is fair to poor. The term subprime is derived from “prime,” which means thriving, or best. “Sub” means below normal standard. Personal credit is not just a FICO score but an overall description of credit.

What Are the Most Common Uses for a Subprime Business Loan? 

Here’s a list of the top reasons that people need access to capital from Subprime loans.

• Working Capital to improve cash flow
• Inventory and/or Supplies
• Marketing/Advertising
• Equipment Purchases
• Renovations
• Interior Decorating/ Remodeling
• Emergency Repairs

How to Choose the Right Subprime Business Loan

The first step is to ask yourself why you need the money. What’s the purpose? How will it benefit your business? Will it help you strike the balance of finances your business needs to grow? The purpose and use will dictate what product you will choose. You need to balance costs and benefits because subprime credit lending costs more. The length of time of repayment, payment frequency, and product flexibility when making the best choice must also be considered.

4 Top Subprime Business Loans

1. Business Lines of Credit

Business lines of credit operate the same as a personal credit card in that it is an open revolving line of credit that allows for draws at any time up to a specific credit limit. Because of the draw feature, business lines of credit offer flexibility, unlike other loans and business funding products available in the marketplace, except for credit cards. Borrowers love this subprime loan option because the user experience is so smooth and simple.

Product Overview

Rates: Interest rates starting at 4.5%
Terms: Revolving credit with renewals quarterly, biannually, or annually
Fees: 0% to 3% origination fees
Payments: Monthly payment
Credit Standards: Fair credit history to strong credit history
Special Features: You can draw up to a limit at any time
Processing Time: Same day or up to 30 days (lender-dependent)

Benefits and Best Uses

Flexibility is one word that can sum up why borrowers choose this product. It can also be used in conjunction with other small business loans. There are no restrictions on using the money, but the most common uses are general working capital and cash flow needs.

Learn More

2. Short Term Subprime Business Loans

A short term business loan can handle a poor credit score because it has fixed amounts offered upfront, with a fixed payback amount over a fixed term of time that’s less than conventional loans to compensate for the fact that borrowers are more likely to default on the loan. Short term financing can be a great alternative when you cannot qualify for conventional loans due to your credit score. Rates are based on factor costs, not principal & interest, and cost more than conventional loans for business. The good news about this product is that credit requirements are much more forgiving than conventional loans.

Product Overview

Rates: Factor rates from 1.10% up to 1.45% of the funded amount
Terms: 6 to 18 months
Fees: 1% to 5% origination fees
Payments: Weekly, bi-weekly, and monthly payments. Daily (Mon-Fri) payments in some situations
Credit Standards: All types considered: bad credit, good credit, strong credit.
Processing Time: Same day to 24 hours

Benefits and Best Uses

Short term lending has higher interest rates and fees to compensate for the high risk of default, but it can come in handy if you can’t get approved for more conventional loans because of your financial history. Lenders implement very few restrictions for borrowers regarding the use of this money. The funds from this type of loan are most commonly used for working capital and cash flow problems. There is no adjustable-rate; everything is fixed.

3. Merchant Cash Advance

Merchant cash advances advance a fixed sum of money to a business owner with a payback (discounted purchase price) that is a greater amount than the sum provided to the merchant upfront. These advances are repaid to lenders by taking a fixed percentage of future credit card sales batches until the payback amount is paid back in full.

There is no term limit with a merchant cash advance as the payback is a set fixed percentage that does not change from future sales batches. Because of this repayment process, merchant cash advances take an even greater risk when evaluating business owner credit scores than short term business loans that have to collect out of the business bank statements. The time frame to pay back the loan amount depends on the volumes of future credit card sales and fluctuations. It’s estimated that merchant cash advances are set up with the expectation of being repaid in 6 to 18 months. However, this can fluctuate depending on future sales from credit cards.

Product Overview

Rates: 1.09% up to 1.45% factor rate
Terms: Paybacks are estimated to be 6 to 18 months. No term limits
Fees: 0% to 5% origination fees
Payments: Fixed percentage splits from future credit card batches
Credit Standards: All types considered: bad credit to strong credit

Benefits and Best Uses

The flexibility of repayment, which is attached to the fixed percentage of future sales, is very popular even though merchant cash advances cost more than traditional bank financing with higher interest rates and fees. This money can be used for various purposes, but a majority of subprime borrowers use this money for working capital or cash flow needs.

4. Business Cash Advance

Business cash advances are similar to a merchant cash advance that provides a fixed amount of money to a business owner right away with a payback that is a greater amount than the sum provided to the merchant upfront.

Unlike a merchant cash advance, the business cash advance is repaid by taking a fixed percentage of future overall sales. Payments are collected by a fixed daily or weekly payment deducted from a business bank account based on the fixed percentage of future sales. Every month, if the fixed payments take more than the set future percentage of sales, a refund back to the merchant can occur. This repayment continues until the payback amount is paid in full. There is no term limit with advances as the fixed percentage never changes. The time frame to pay back is not fixed because volumes of future overall sales are not the same type. The expected timeframe for repayment is 6 to 18-months.

Business cash advances usually evaluate the business owners’ credit score, just like short term business loans. Also, BCAs are unable to go as deep into bad credit as merchant cash advances.

Product Overview

Rates: 1.09% up to 1.45% Factor Rates
Terms: Estimated payback periods are 6 to 18 months. No term limits
Fees: 0% to 5% origination fees
Payments: Fixed ACH payments weekly or daily Monday-Friday
Credit Standards: All types considered: poor credit, good credit, strong credit.

Benefits and Best Uses  

Business Cash Advances cost more than conventional loans and have less favorable terms, like high interest. Still, it provides money to businesses as an alternative to traditional financing. There are almost no restrictions on the way borrowers choose to use this loan for their business.

The fast, convenient and straightforward way to get the money you need for your business – now! Get your quote today by filling out our simple form.

Subprime Loans: FAQs

Is it difficult to obtain financing for these types of business loans?

No, it is not difficult to find. There are many subprime lenders and marketplace providers that offer these types of products. Approval rates are much higher than that of traditional business loans.

What are the interest rates for these types of business loans?

Interest rates vary widely depending on the business loan product. Factor rates, which are not interest rates, are common and range from 1.09% up to 1.45%.

How much will this type of loan cost in fees?

The fees range from 1% to 5% of the loan amount or funding amount. Costs and fees vary widely depending on the product you qualify for. Always look at financing disclosures and agreements and check the terms and conditions of any offer for all specific fees to be charged.

Can I qualify for any of these loans if I have a bad credit score?

The short answer is yes, probably. Short term business loans were created just for that purpose. Both business and merchant cash advances allow for bad credit scores with some limitations. Traditional business loans and traditional lines of credit do not allow for bad scores. If you want to learn more about building and establishing business credit, read one of our industry-related articles.

What type of collateral is used for these loans?

Most funding options only require an overall business blanket guarantee for collateral that covers everything under the business. Personal collateral is usually not required.

Can I get one of these loans without a personal guarantee?

Yes. Some business loans and advance products come without personal guarantees but, be careful. Without a personal guarantee, rate costs tend to be much higher than with a guarantee. When getting business financing, weigh your options carefully.

Can I get funding if I am a start-up business?

The short answer is no; you cannot get business funding without at least six months of business cash flow activity.

The Bottom Line: Advice, Tips, Warnings About Subprime Loans

If you’re considering this type of loan, you first must ask why. So, are you looking at these business loans because you were declined based on your personal credit history? Have you evaluated the cost vs. benefit analysis?

If the answer is yes to any of the above questions, we would recommend looking into asset-based business loans. If the answer is no, take the time to look at better business finance opportunities that offer better rates, costs, and terms.

Subprime Borrowers and Subprime Lenders: Predatory Lending

There are many important topics related to subprime loans, but predatory lenders are one of the most important to discuss. Not all subprime loans and lenders are equal. Unfortunately, some subprime lending institutions are founded on bad intentions.

Subprime borrowers tend to be preyed upon because of their low credit ratings and high risk of default. Worst of all, subprime loans usually have very high interest rates, which jack up the monthly payment. Borrowers might get a subprime loan from an unsavory lender to pay an installment loan they’re already struggling to pay. Installment loans tend to be car loans, student loans, mortgages, and more. They usually have a lower interest rate.

There is no set interest rate for a subprime loan. This applies to subprime mortgages and auto loans, not just business loans. Each lender gets to choose the interest rate themselves, which is why you need to be extremely careful when you shop around for a subprime loan. Predatory subprime loans with high interest and unmanageable interest payments lock borrowers into debt. In short, this type of loan is, at best, unfair and, at worst, abusive on the part of the lenders.

Subprime Loan Risks

Although poor financial histories and credit scores usually lead borrowers to unfair subprime loans, this type of loan digs borrowers further and further into debt. If you end up with a loan like this, you’ll find that your monthly payment becomes outrageous. You’ll watch the balance in your bank account drop while your mortgage, auto loan, and any other type of loan you have, pile up.

Lenders may not always have your well-being in mind. Remember, offers that appear too good to be true probably are. At AdvancePoint Capital, we promise to be completely transparent and honest. It is our mission to help our customers achieve financial balance. We want the best for you, not the worst.

Signs of Predatory Lending to Look Out For

Two characteristics can identify a predatory subprime lender:

  1. Lenders who create loan terms that can’t be met within reason
  2. Lenders who seek borrowers who obviously can’t meet these unreasonable terms

Additional signs of predatory practices include:

  • Basic loan costs aren’t made clear to borrowers
  • Lenders have a lot of complaints and negative reviews
  • Lenders require electronic payment (this is actually illegal)
  • Lenders do not check credit scores before issuing borrowers a loan
  • Lenders offer an unreasonably high interest rate.

If lenders or banks exhibit these signs when you are looking for a loan, head for the door. These characteristics don’t just apply to subprime business loans but also subprime mortgages, auto loans, or any other type of loan you may need. Banks, money lenders, and mortgage lenders engage in these practices for malicious and self-serving reasons.

What to Look For in Subprime Lenders:

People often wonder what they should be looking for in subprime lenders. Although the signs of bad lenders and banks are pretty clear, how can you be sure?

  • Talk to at least three different lenders and compare their terms and fees.
  • Pay attention to the prepayment terms. If this period and its fees seem too high, you may end up locked into the loan forever.
  • Reputable lenders don’t require upfront fees.
  • Lenders should never pressure you into borrowing more than you’re comfortable with, signing incomplete contracts, or overstating your income.

Whether you need a subprime mortgage, auto loan, small business loan, or some other loan, you have to shop around for the best rate loans. Avoiding predatory lenders will allow good people like you to live a financially stable life.

How to Get a Subprime Business Loan

Applying for a loan with AdvancePoint Capital is a simple 4-step process. Start with our online form, fill out the short application page, wait a few hours for your approval, and then get your money!

AdvancePoint Capital offers an easy business loan experience and countless resources to set you up for success. Our borrowers love the streamlined process, high approval rates, and flexible monthly payments that we offer. Unlike other banks and lenders, we offer the best deal in town.

If you need a subprime business loan with a low interest rate to achieve the financial balance that your business needs to thrive, call our excellent customer service team or fill out the online form to get your free quote today.

The quick, convenient, and straightforward way to get the loan you need for your business – now!

Applicants can contact AdvancePoint Capital and get your quote today by filling out our simple form.

Get Quote Now!

* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.