Bad credit is a common reason that lenders reject small business loan applications. Lenders turn away small business owners having a bad credit score. Since poor credit points towards the fact that you have not managed your business finances properly in the past. Young entrepreneurs who are looking for new business loans also come under this implementation. Many people give up on the idea of starting a business just because they have a bad credit score. They get disappointed with the fact that they cannot move on with their idea of starting a business.
Some people want to expand their business but are unable to do so all because of bad credit. For business owners with bad credits, it is possible to get financing. The first thing you should know is that getting a traditional bank loan can be very difficult but it is possible. Alternative lenders offer multiple funding options.
If you want to make your way through with your business but have bad credit to start with or continue, then you must go through this article. You will learn how business loans work and even if you have a bad credit score, how can you get a business loan to start and expand your business.
Whenever you try securing funds for your business, a poor score may create problems for you. But it should not stop you from exploring options. You simply need to understand your needs and then go for the options that perfectly meet your requirements. This article includes all the options you can opt for. There are certain alternative lenders available who offer funding solutions even if an individual has a bad credit history.
What Are Your Options?
Don’t worry if you have a poor credit score, you can knock the door to get funding. Alternative and traditional lenders are providing business loans. Good credit score works as a bonus but unfortunately, if your credit score is on the low side, you can take a look at some lenders available who are willing to provide a small business loan. Generally, these lenders consider the strength of your business, your operating history, business revenue, operational and other potential parameters in your loan application. But other lenders focus on your credit score. One important thing you should keep in mind is that your credit score plays a major role in your loan application approval. Simply the worse your credit, the higher the defaulting risk i.e. the higher your interest rates will be.
Traditional and alternative lenders offer several options to you. Most of them require a certain score within their offered range. The range can carry according to the lenders. If you want a business loan and have a poor credit score, then you should first focus on improving your credit score by getting a secured credit card. With these cards, you will improve your personal credit as they require a cash security deposit on the opening of an account (Other ways to build up credit score are briefly discussed later in the article). But some of them do not require a minimum credit score, instead, they consider other factors that are mentioned above.
There are other several financing options available. This article highlights all of them, and before choosing any financing option, you should consider the following:
- As mentioned, the credit score and interest rates are inversely related. The lower the credit score, the higher the interest rate. If you have a bad credit score, you will perceive a higher interest rate on your business plan.
- Approval of your plan is based mainly on your invoices’ value if and only if you have unpaid customer invoices, but lenders may still check your credit score. It is totally up to the lender. You can immediately cash through invoice financing or factoring.
- If you have patience and you can improve your personal credit (how to increase personal credit is mentioned above), then you should definitely wait for it. In this way, you may qualify for more options at a better rate.
Business Working Capital
A business working capital is simply a loan that will provide you the working capital. Without capital, a business will not be able to operate. At two events any business needs working capital. First, when you want to start a new business and do not have money to do so, at this time, you might be able to get working capital in the many different forms. And the second is at a time of change, expansion, and growth when your business is on the track of success and moving forward, you need capital to finance that change and expansion. You can easily get a loan for working capital from any lender or from the one you have worked before.
Debt. Capital vs Equity Capital
There are two forms in which capital is available: Debt and Equity. Debt capital comprises of credit cards, business loans, and other lines of credit. Financial institutions lend capital under certain terms of paying it back including interest.
Equity capital, on the other hand, involves exchange company stocks for cash. Business owners sell partial businesses or ownership to the investor. In this way, the investor gets a share of every sale or success of your business. Entrepreneurs can also use their own personal cash to fund their business but if they have a bad credit score it is nearly impossible for them. So personal funding is not an option for them.
Getting a Business Loan
If you are a small business owner or willing to start a fresh new business, then you need access to capital for funding. One way is small business loans. They are usually used to grow an existing business or to fund start-ups, to pay for marketing, to help buy furniture or inventory or to strengthen the financial foundation of your current business. But if you have a bad credit score, it gets difficult to access capital to fund your business. Here are some loan options for bad credit:
- Traditional Bank Loan
Generally, traditional lenders have specific limits on who they will finance, so this option is less expected to work if anyone has a bad credit score. However, it is not impossible. This option works with the concept of high-interest rates. If you qualify for a traditional bank loan you will be paying a higher interest rate rather than the standard rate. The risk is high in this option, so think wisely before choosing for a traditional bank loan.
- Shop for A Microloan
A microloan is small, short-term and similar to a traditional bank loan for those with bad credit or small business with low capital. A microloan is one of the least expensive options. They are easier to get approved as the credit requirement is low. microloans can be used for inventory purchase or working capital. However, many non-profit organizations and credit unions have restrictions on how the loan can be used (as it cannot be used to refinance existing debt or to purchase real estate). If the amount of funding suits your need and you qualify, this is a good option.
- Peer-to-Peer Lending
It is a type of lending where numerous investors contribute to a single loan via an online market place. You are qualified only when investors decide whether to contribute to your loan or not after reviewing your application and profile. You will be provided with a single monthly payment (just a single loan) while your loan will be funded by several investors.
One advantage of choosing peer-to-peer lending is that its application process and access to capital are much faster than a traditional loan but again you have to pay high-interest rates on the loan if you have bad credit. Also, investors require your personal guarantee, so in case you are unable to repay the loan they have your personal finances on their side as security.
- Merchant Cash Advance
If you are facing cash flow problems and need to access to cast in a short period of time, it is the best financing option. It is also known as a business cash advance. Your anticipated sale is the lending criteria used by lenders to provide a loan amount. There are two ways in which a merchant cash advance can be repaid. You can either repay the loan by transferring a fixed daily or weekly amount from your bank account or can opt to repay the loan from your future debit and credit card sales. But again, high-interest rates that can hit triple digits, is applicable. The only benefit of paying off a cash advance early is that it can improve your cash flow. So, if you do not need this, avoid advancing with higher interest rates.
- Term Loans
It is one of the easiest ways to get a loan for your business. You have to agree to repay a fixed amount within a set payment schedule. Principle amount and the interest you owe are included in the payment you repay to the lender for a period.
- Equipment Loans
Alternative lenders are more likely to lend you equipment loans if you have a bad credit score than traditional lenders. They normally finance 80% – 100% of the cost of your equipment. In other words, the equipment acts as security for the loan.
- Business Credit Card
If you can get a credit card by your company to make purchases and on-time payments, you are more likely to build good business credit. This option does not work for everyone as interest rates, the credit limit, and terms of payment vary. Also, each bank has a different eligibility requirement.
- Lines of Credit
With a business line of credit, also called a revolving line of credit, you can easily get a pool of funds by lenders. There is a specific limit on the amount of money you can borrow. The good thing with a business line of credit is that you will not be charged on the maximum limit instead of charged interest only for the amount of money you draw.
As the line of credit will be your property, you can access it for any business-related needs, whether to fill gaps in cash flow, purchase equipment or to expand your business. If you make the minimum payments, you can use it for as long as you need it. And once you have repaid the lender, a full line of credit is allowed to access.
- Revenue-Based Loan
The revenue-based loan comprises several recipients, such as your business, must make a specific amount of sales, you must have a definite credit score and the loan amount should not exceed a certain amount of revenue given while approving the loan application. If you fit these criteria, you can get a revenue-based loan in the shortest time.
- Invoice Financing
Invoice financing also is known as factoring, is the best option to choose if your business is facing ongoing cash flow issues because of your unpaid invoices. The lender purchases your unpaid invoices at a discount and pays you most of the amount owed and holds onto a certain portion (normally 20%) until the invoice is paid.
But one thing you should keep in mind is that invoice financing can be a risky option. You should consider the factoring fee and the interest to decide to go on with this option as these can quickly add up.
- Government Grants
There are multiple government grants available to help small and new businesses with funding without any expectation of a refund. With this option, you do not have to worry about your bad credit. But applying for a grant is a complex and time-consuming process and there may be several limitations on how the grant should be used.
- Ask Family and Friends
You can tap onto people in your life to get an amount you need for your business. If you have a bad credit score, it is possible that they might think it is risky. You should get the loan agreement in writing. In this way, you can avoid any impact on your relationship.
- Equity Crowd Funding
Another option for start-ups and small businesses with bad credit is looking for a lender who can contribute relatively small amounts. Investors will have equity in your business and there will be no expectation of refund on the business’s part.
Planning for the Future
When you are finally able to opt for the best financing option for you despite having bad credit and the business is running smoothly, you should focus on the recovery of your credit. As we have already discussed how important credit is, your next priority should be its rise. In the end, we are proving some ways to build up your credit:
- Understand How Credit Works
First of all, you need to understand how credit works. You are basically the credit representative of your business. Lenders look out your credit history while lending you a loan. So better is to get knowledge of how things flow.
- Get Personal Financial Advisor
The work of a financial advisor is to advise the client financially in the business and provide a portfolio of investments. You should hire a financial advisor to get in-depth knowledge of finance and prepare business plans according to his advice.
- Start with the Basics
Make sure personal and business expenses are separated. Set up the range of regular payments you can afford. The business should be focused on its goal.
- Prepay Everything You Can
Don’t keep the burden on yourself or business. Prepay everything in advance to avoid any problems in the future.
- Ask for smallest Funding
Ask for the smallest amount enough to cover your needs. This way you will not saddle yourself with more amount to refund. Only ask according to your needs and requirements. So that you only have to repay the minimum amount without getting any pressure.
Ultimately it all comes down to several factors to get a business loan, fund, or business working capital. Fortunately, there are many choices for those who need a business loan with a bad credit history. One can make the right choice according to the needs and requirements of the business, both now and in the future.
Hopefully, this article has provided you with helpful ideas to get a business loan even if you have a bad credit score. Do not get discouraged if your loan application gets rejected just because of your credit. There are several lenders out there to provide business loans to entrepreneurs with bad credit history.