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Business owners with bad credit find it difficult to acquire traditional small business loans. This is one of the primary reasons why revenue based loans have become popular in the last decade. After the Great Recession of 2007, revenue based loan programs started to become more prevalent in the small business world. During this time, many small business owners saw their sales decrease and their personal credit scores plummet. While revenue based loans can be a viable financing option for small business owners who can’t qualify for a bank loan, it is not for everyone. It’s wise to know and understand everything there is to know about revenue based loans before applying.

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What are Revenue Based Loans?

In short, revenue based loans are debt financing that’s an advance or percentage of your past cash flow. For the sake of this article I am focusing on merchant cash advances and ACH loans. A merchant cash advance is an advance of your most recent credit card sales. When applying for a merchant cash advance, a financial institution (i.e. lenders) will ask to see the last 6 or 12 months of your business credit card statements. The amount lenders will approve depend on the average monthly amount of your credit card sales.

An ACH loan is a short-term loan that is based on your business checking account deposits. For ACH loans, lenders will ask to see the last 6 or 12 months of business checking account statements. The amount lenders will approve depend on the average monthly amount of your business checking account deposits.

Are Revenue Based Loans More Expensive Than Traditional Small Business Loans?

Merchant cash advances and ACH loans can be considered expensive in comparison to traditional small business loans. Traditional small business loans can have interest rates of 6% to 13% (on average) and terms for up to 6 years (or more). Merchant cash advances and ACH loans are short-term financing. The interest rates (or cost of financing) can add up to 45% annually for these types of revenue based loans.

Merchant cash advances and ACH loans are more expensive for several reasons. They are designed to meet the working capital needs of small business owners who have bad credit (or less than perfect credit). They are also designed for companies that have consistent cash flow but struggle to obtain capital via a traditional financial institution. In many cases, you also don’t have to pledge any of your physical assets as collateral to obtain a merchant cash advance or ACH loan.

How Are Revenue Loans Paid Back?

Besides being expensive, revenue based loans such as merchant cash advances and ACH loans have to be repaid very quickly. Repayment begins within 30 days of the initial disbursement date of the advance or loan. The maximum term for most merchant cash advances and ACH loans is 12 months. However, some lenders offer revenue based loan programs with a 36 month term. The lenders who offer merchant cash advances or ACH loans will require you to make daily, weekly or monthly payments to pay off the advance or loan. Lenders usually require daily or weekly payments for this type of business financing. With merchant cash advances, lenders will take a percentage of your daily credit card sale to pay back the advance. With ACH loans, lenders will debit a set amount from your business checking amount daily, weekly or monthly.

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How Do I Qualify for Revenue Based Loans?

Most lenders require small businesses to be operating for at least one year and generating at least $5,000 per month in revenue to qualify. Lenders will ask to review the last 6 or 12 months of your most recent credit card sales statements or business checking accounts statements. They use this information to verify that your business meets the minimum revenue requirements to get approved. Although you aren’t required to have the best personal credit history to qualify, lenders will still check your personal credit. If you have any bankruptcies that haven’t been discharged or unpaid tax liens you may be denied. Even though this is true, merchant cash advance and ACH loan lenders will still approve you with some credit delinquencies like medical bill collections.

Essentially, you are being approved for merchant cash advances and ACH loans based on the total (average amount) of revenue your business is generating and by providing a personal guarantee. You provide a personal guarantee when you sign the financing application, agree to let them check your personal credit history and agree to the terms of the cash advance agreement or promissory note.

Where Can I Get Revenue Based Loans?

LenCred can help small businesses that have been in business for at least one year obtain revenue based loans from the right lender at the best cost. A LenCred Advisor will first determine what business financing options can work best for you based on your personal credit history, financial situation and business needs. Then they will go over the best financing options for your small business with you so you can fully understand the pros and cons of the type of financing you qualify for.

Consulting with a LenCred Advisor will help you make a better financing decision. You have a higher chance of getting approved for business financing when you consult with an expert before you apply. The best experts will educate you on the different types of business financing available to you, how to qualify for those financing options and which lenders to apply to. This enables you to better prepare yourself before you apply, increasing your chances for approval.

LenCred Advisors can help you prepare yourself to get approved for financing. Don’t take the risk of applying on your own and getting denied because you went to the wrong lender. Let the LenCred team guide you in the right direction. You could get up to $50,000 or more in merchant cash advances or ACH loans. Contact us today for more information.