Subprime Lending: What it Means, How it Works

It’s not uncommon for small business owners to face challenges regarding their credit rating. A supply chain disruption, PR mishap, or an economic slowdown can result in slower than expected sales, missed payments, or a host of other issues that can negatively impact credit scores. The result? It’s hard to get business financing when you need it.

When this happens, a subprime business loan might be a smart option, whether you need money for startup costs, business expansion, inventory, working capital, or operational expenses.

What is Subprime Lending?

Subprime lending is a financing option designed for small business owners who don’t have the credit needed to qualify for a traditional business loan.

A borrower can have bad, slow, or no credit and still qualify for a subprime loan, as subprime lenders have more relaxed underwriting.

The caveat is that because the lender assumes more risk in loaning money to a company without a good credit rating, they usually charge higher interest and increase fees to take on that risk.

How Does a Subprime Business Loan Work?

Subprime business loans vary from lender to lender. But overall, they work much like most small business loans. You receive funding upfront and repay it with interest over time. However, you’ll often have less time to pay back a subprime business loan than a traditional term loan.

A flexible subprime lender will consider many variables when determining your loan’s interest rate. For instance, collateral, such as inventory, equipment, or real estate, will bring the interest rate down significantly.

If you’ve been in business for at least two years and have all your financials in place to show a successful track record, it can also help get you a lower rate.

Doing your homework and working with a small business lender who has built a solid reputation in their field and caters to subprime borrowers is essential. It’s also vital to examine which types of fees each lender charges for the loan to figure out the actual cost of your loan.

But the bottom line is that a subprime loan can give you the cash you need to run your business uninterrupted.

Most subprime business loans are issued by online lenders, as traditional lenders such as a bank or credit union will require more extensive collateral and a good credit record before even considering issuing a subprime loan.

Pros and Cons of Subprime Business Loans

As with any loan, it’s always best to consider its advantages and disadvantages before moving forward.

Pros of Subprime Business Loans

• A subprime loan can build business credit. If you’re a startup just getting off the ground or have very little or no credit history, a subprime business loan can help you generate a credit history for better business loans and terms down the road.
• Access to the funding you need. As a business owner, you can’t afford to let a lack of money impede your progress. It’s vital that you have access to funding options regardless of where your credit stands. A subprime business loan can help you get financing until your credit is established. Depending on the situation, you can get funding for equipment, inventory, working capital, or a commercial building.
• Flexible loan criteria. Subprime loan underwriting is more lenient than standard or prime loans, which requires a borrower to have near-perfect credit.
• Faster funding. A prime business loan with a traditional lender can take months to get financing (if you’re even approved). With a subprime lender, you can get fast funding in as little as 24 hours after approval, depending on which lender you use. This can make all the difference when you have a business opportunity that requires immediate action.

Cons of Subprime Business Loans

• Subprime loans cost more. Lower credit scores generally mean you will pay higher interest than borrowers with good credit. And typically, you also have to pay the loan back quicker, which can put a lot of pressure on your business.
• Collateral is often required. While collateral is often needed for prime types of loans as well, it’s even more common with a subprime loan. This is because the lender assumes a higher risk with a subprime loan and needs a guarantee that they can recover their money if the buyer defaults. The primary risk to you is that you can lose any assets used as collateral if you don’t make payments on your subprime loan.
• There may be limits on how much you can borrow. Some lenders look ONLY at your personal and business credit scores and history, while others, like Biz2Credit, look beyond your credit to establish your creditworthiness. For instance, they may look at how long you’ve been in business or where your business is located. They’ll also examine how much revenue your business has, its cash flow, and your business debt to determine your ability to meet its financial obligations and pay back a business loan. A good subprime lender will also look at other factors outside of your company, such as political and economic trends that might be influencing a temporary downturn. Forecasts for your industry may also come into play. The bottom line is that a run-of-the-mill business lender is more likely to place borrowing limitations based on your business factors alone, while the best business lenders will examine other factors and work harder to get you what you need, recognizing that some things are outside your control.

The Takeaway

A lack of credit or a temporary downturn in your business shouldn’t impede your ability to grow your business. Many businesses experience challenging times and make it through the other side stronger than ever.

A subprime business loan can be a temporary answer to funding until you’re in a better place to get a small business loan with more favorable terms.

Biz2Credit has helped small businesses like yours for more than 16 years. Take Ajay & Arjun Sondhi, for example. The pandemic left their New York City remodeling business dealing with challenging times. But they partnered with Biz2Credit to receive ongoing funding to keep their business operational. They were even able to expand their business with the help of our loan experts.

Contact our lending experts to learn what we can do for your business.