Coming into the small business loans process, you wouldn’t be alone if your instinct is that your business’s annual revenue is the determining factor for qualification. And if you’re a low-income earner seeking a business loan, or you’re running a startup business that’s not generating any revenue, that’s probably terrifying.
The picture actually isn’t so grim! The options for business loans for low-income earners certainly exist—especially if you’re willing to be a little but flexible on the type of financing and amount of your loan.
In reality, your current revenue is only one piece of a multi-slice pie that’s examined by lenders when determining your eligibility for a business loan. That’s why, before you let low income (or no income) hold you back from your entrepreneurial ambitions, dig into the various options that could still be available.
You might just find that being a low-income earner doesn’t have to hold you back from obtaining a business loan.
Since “low” is a relative term, let’s begin by defining what we mean here when we talk about business loans for low-income earners or very little money available.
Although most lenders do require a minimum annual revenue to qualify for a business term loan, there’s not a universal bar for income—each lender sets their own minimum. This often falls somewhere between $25,000 and $150,000. And that’s certainly a big range. But they don’t come out of nowhere—often, lenders look at how much you’re looking to borrow, and their income requirement is around 8% to 12% of the business’s annual revenue.
If your annual revenue falls below the minimum set by a specific lender, it’s important to seek out other lenders and see what they require for business financing. If you’re struggling to find a traditional loan from a lender that fits your annual revenue, you should investigate other types of credit.
Remember that the rise of alternative lending means you have lots of options out there, and if you’re not already working with a lending marketplace, this might be a good time to start. Small business specialists know the requirements for each individual lender and loan type, and can match you with the financing products that you’re qualified for and that are in your best interest.
For many low-income earners, securing a small business loan might feel impossible. Fortunately, your annual revenue is only one piece of the financial puzzle that lenders use to understand and assess your ability to afford a loan.
In addition to income, lenders also look at your credit score, business profitability, debt obligation, cash flow, financial history, investment, time in business, and business plan:
If there’s one aspect that lenders weigh as heavily as annual revenue, it’s your credit score. And that’s because your credit score is a single number that shows a lender your track record with paying back debt. It’s a huge signal in either direction of your risk as a borrower.
Some lenders will look at your personal credit score, your business credit score, or some combination of the two when deciding how much and if they should fund your loan request. Before applying for a loan, it’s important to check your personal and business credit reports to remove any mistakes.
Your business’s revenue is important to lenders, but so is your profit. A lender will want to know whether or not your business has been profitable, for how many years, and at how high a percentage.
A profitable business isn’t a requirement, but if you’re looking for a business loan as a low-income earner, it will certainly help. Particularly if your business has low annual revenue but has shown consistent profitability over time, you might have a better chance of obtaining a business loan than if your business had higher overhead costs.
When you apply for a business loan, your potential lender will want to know whether your business has any other debt obligations, such as other business loans, credit card debt, or a tax lien against your business.
Most lenders don’t like to take a second position to another lender as it raises their risk. That’s because in this situation, if your business goes bankrupt, the proceeds of your bankruptcy will go to the first lender, leaving the lender in second position out of luck in recouping their investment. (It’s also worth noting for you as a borrower that if you’re looking for a second loan, it may be against the terms of your first lender’s agreement entirely to stack loans.)
If you’re looking for a business loan as a low-income earner, having an existing loan with another lender will make it more difficult to receive approval for a second loan.
Most importantly, lenders evaluating your business loan application want to know whether your business will have the consistent cash on hand to make your loan payments on time, every time. By looking at how you manage your cash flow and how much cash your business keeps on hand, a lender can assess how likely you are to be able to pay them back.
Most lenders will request and examine three months of business bank statements to assess your cash flow and management. They will want to see that you’ve had consistent income coming in, and that you’ve maintained an average minimum bank balance of at least $2,500 in the few months preceding your loan application.
This might seem like a nebulous term, but essentially it covers anything that a lender will discover by looking at your credit report. Again, this might include not only your business credit report but also your personal credit report, depending on the lender.
Your credit report will show:
All of this gives a lender information about your ability to handle and repay debt as well as managing of business assets.
Some lenders want to know how much time and money the business owner has invested. This is especially true for smaller businesses and startups seeking business loans, and many low-income businesses also fit into those categories.
Essentially, this means that the lender wants to know that you’re personally committed to the business and have a personal financial stake in whether the business is successful:
Before a lender invests their money in your business, they want to see that you take seriously your own investment in the business’s future. All off this helps add to the way lenders evaluate risk.
Similar to owner investment, a lender might want to assess how long your business has been operating. Low-income startups have a reason to not be turning a profit yet. There are specific small business loan opportunities for startups.
Also, a business that has been in operation for a number of years but isn’t turning a large profit may have some red flags that a lender is looking for. Again, this info gives a lender a good picture of—you guessed it—risk.
Some lenders will want to examine your business plan, especially for younger or startup businesses.
Your business plan is your time to prove to the lender that you know how to manage assets and capital to become profitable and pay the lender back. Show them your investment to the business and intelligence, and your low income won’t be as important a factor.
Lenders will assess lots of factors before making a decision as to whether a business is creditworthy or not. It’s not impossible to find business loans for low-income earners—it just takes a little more planning and research.
With that in mind, you have to know what to look for. Some traditional lenders do offer term loans business loans for low-income earners, yes. But if you don’t qualify, other types of financing and credit options rely less heavily on annual revenue as a determining factor, or offer only small amounts of loaned funds:
If you’re a B2B business that invoices its customers, invoice financing might be a fantastic loan option for your low-income business.
Invoice financing is a loan based on unpaid invoices. You choose which invoices you’d like to borrow against and the lender forwards you between 80% and 100% of the worth of those invoices.
When the customer repays the invoice, the lender repays itself plus a small fee and the leftover comes to you.
This is a good business loan choice for low-income earners since your business’s annual revenue isn’t considered for this type of loan. Invoice financing lenders examine your business’s financial history, the likelihood that your customers will pay their invoices on time, and how many outstanding invoices you have. That’s it.
If your low-income business is in need of new equipment, you’ll be glad to hear that you may have even more options available than you may have previously thought.
With equipment financing, the equipment itself acts as collateral for the loan cost, lowering the lender’s risk. If you fail to repay an equipment loan, the lender repossesses and sells the equipment to recoup their costs, meaning that lenders can be less stringent in their income requirements than they may be for other types of loans. In a way, an equipment loan is a type of business loan with no collateral of your own required.
A lender will likely look at your annual revenue and financial history for an equipment loan, but only to assess that you can actually afford the equipment. Because the value of the equipment is so important for equipment financing, a lender is less likely to judge your business harshly for low annual revenue. (As a result, there are even options for equipment financing with bad credit.)
Because they’re typically issued for a small and a short period of time, short-term loans are a great business loan option for low-income earners. A short-term loan might not offer you all of the cash you desire, but it will help you get your foot in the door.
Short-term loans are available for $2,500 to $25,000 with interest rates starting at 10%. Repayment typically takes place weekly over three to 18 months.
Along with these more manageable terms, short-term loans also provide low-income earners with the opportunity to build a business credit history and establish rapport with a lender. Show the lender you’re a good borrower, and they’ll be more likely to work with you in the future for higher loan values.
Short-term loans for low-income earning businesses are typically a step toward more substantial term loans and annual revenue. It’s important to break down your needs as a business and assess just how much of a loan you need right now to get by and build up your annual revenue.
SBA loans are the gold standard for business loans. Most SBA loans will be out of reach for low-income earners, but not SBA Microloans. These were government business startup loans keep funding in reach for those just starting out, with low annual revenue.
Similarly to short-term loans, SBA Microloans are small loans that are available to smaller and lower-income businesses. SBA Microloans are available for up to $50,000, with interest rates between 8% and 13%.
Because SBA Microloans are available for only small amounts, this is a great opportunity for low-income businesses to build credit and lender rapport.
Many business owners worry that their low annual revenue will prohibit them from being able to find a business loan. That might have been the case 10 years ago, but no more. There are now many online lenders that work specifically with low-income earning business owners and offer specific loan products to work with their annual revenue.
So, even if you’re currently a low-income earner, there are business loan options that apply for the business funding you need.
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.