Small business owners who may need a business loan the most are often the very ones who do not qualify for many loans because their credit is often not ideal. Startup businesses, in particular, can experience problems with cash flow and meeting monthly expenses during those first, lean years.
Without a lot of collateral, it can be difficult to find a loan to move your business to the next level.
Fortunately, there are options available for small business owners looking for a business loan. While they may be turned down for loans with the best interest rates and terms, they can find business loans tailored to individuals with bad credit. There are alternative lenders that consider those with bad credit, and the Small Business Administration backs some small business loans given by lenders to high-risk borrowers.
What is bad credit?
Bad credit refers to an individual’s or company’s failures to make timely payments on credit cards, loans and other installment plans. A credit report considers the credit score, bankruptcies, state and federal liens and any legal judgments that require payment to another party.
The main criterion used to define bad credit for most banks and lending institutions is the FICO score. FICO stands for Fair Isaac Corporation, a company providing the gold standard in credit scores to all the major credit reporting agencies. A FICO score of between 300 and 629 is considered bad credit. Some banks do not lend to anyone with a score in this range, while others have a cut-off score such as 500.
Lenders also look at a business’s history. Does it generate dependable revenue? If so, then how much? Lenders usually ask to see the financials for a company for the previous three years in order to get a clear picture of how reliable the revenue stream will be moving forward. For startups, a detailed business plan and financial projections are needed.
Business Loan Options for Those With Bad Credit
Although it can be more difficult to get a business loan if you have bad credit, it is not impossible. You need to carefully review each type of loan offered and weight the advantages and disadvantages before signing any loan documents.
Small Business Administration-Backed Business Loans
While the Small Business Administration does not offer loans, they do guarantee or partially guarantee some loans made to small businesses by selected banks, nonprofits and other lending institutions. These loans may require an individual to make a personal guarantee, such as a lien against his or her home. This shows the lender you are serious about making your business work and are confident it will succeed.
Other considerations for SBA backed loans include the cash flow of your company and whether regular deposits are made into a business bank account. If you have these funds in place, then you may be able to get a loan based on your revenue.
Related Article: Debt Consolidation
Choosing a smaller bank or local lender offering SBA-backed loans may make it easier to get approval for a business loan. They may have less stringent guidelines and be more invested in helping a local business flourish than a large, impersonal bank. If you are turned down by one bank, then contact your local Small Business Administration or go to their website to get a list of other lenders in your area. You may get a loan through another lender despite being turned down by the first one.
Revenue-Based Business Loans
If your business makes regular bank deposits, then you can apply for a revenue-based loan using your monthly bank deposits as a sort of collateral. You can usually borrow up to ten percent of your annual deposits even with bad credit. These loans can usually be processed quickly, often in as little as one to two business weeks.
The interest rates are higher than a more traditional loan, and the longest term is usually 18 months. You will not have to provide real collateral, tax returns or company financials. You will, however, need to arrange for your loan payments to be automatically deducted from the business bank account on a regular basis.
Merchant Cash Advance
This business loan is also a way for individuals with bad credit to get a loan quickly with less paperwork than a traditional loan. In exchange for a specified sum of money, the lender gets a percentage of sales from the borrower. The repayment includes not only a portion of the business profits but also interest and fees.
As the borrower, you agree to give either a portion of all credit and debit card sales to the lender or a specified amount of money transferred automatically from the business bank account, much like a revenue-based loan. This is one of the most expensive forms of business loan, so be sure to evaluate how badly you need the funds and whether you are able to make the payments without fail.
Business Credit Partner
If you are having trouble getting a business loan because you personally have bad credit, then you can consider asking a business partner to use their personal credit to apply for lines of credit or business credit cards. This can be a viable option if your business does not have a good track record or is a startup without much revenue. Your partner will be taking a risk by cosigning a loan, but business credit cards do not show up on his or her personal credit report unless the business defaults on the card payments.
Repairing Your Bad Credit So You Can Get Better Business Loans
While the business loans listed above are viable options for those with bad credit, your best option is to improve your credit score so that you can more easily get a loan in the future and lock in better terms. Repairing our credit is easier than you may think.
- Educate yourself about credit scores and how they work. Be aware of how late payments and overextended personal credit can affect your business’s ability to get a loan.
- Find a business financial advisor and come up with a plan for improving our business practices. Local universities, Chambers of Commerce and the Small Business Administration can all help you locate an advisor.
- Begin whittling away at your debts. If you are in collections, then call and arrange to make affordable payments. Ask whether they will take a reduced amount as payment in full. Pay as much as you can afford each month on credit cards rather than the minimum.
- Incorporate your business and keep business bills separate, always paying them on time. This helps build your business’s credit history.
- Establish lines of credit with vendors. These should show up on your credit report.
- Get a business credit card, use it and pay most of it off every month.
Related Article: Business Credit Cards