The cash obtained from a bad credit business loan can kick-start your business’s growth and help get your finances back on track.
Understanding Bad Credit Business Loans and Credit Score
Business owners with bad credit may find it challenging to finance a startup or expand their existing businesses. Fortunately, bad credit business loans can make financing more accessible, even for less creditworthy borrowers and businesses without established credit histories. In addition to transparency in pricing and terms, the best lenders can quickly fund a bad credit business loan in one to two business days.
Lenders typically consider both the personal credit score of the business owner and the business credit score when evaluating a loan application. However, the applicant’s personal credit score is of even greater significance for startups and other businesses without a credit history.
To qualify for a bad credit business loan, a business owner must have a personal FICO score* of at least 500 and demonstrate a viable and stable cash flow. It should be noted that even a FICO Score of less than 670 is typically considered bad credit for small businesses. And, therefore, will not qualify a business owner for the most competitive interest rates.
*The FICO score is a credit score created by Fair Isaac Corporation (FICO). Lenders use FICO scores and other information on credit reports to assess credit risks and determine whether to extend credit to borrowers.
It is worthing to note that a higher interest rate is charged by financial institutions for lending to less qualified borrowers to minimize the risk associated with such borrowing. Even if you are not eligible for the lowest rate, you can still save money by comparing loan amounts, repayment terms, and interest rates offered by different lenders.
Strategies to Improve Your Chances of Getting a Bad Credit Business Loan
Despite your bad credit score, there are still options available to you. To increase the chances of obtaining a bad credit business loan, business owners with less than stellar credit can utilize the following strategies:
✅ Review Your Personal and Business Credit Scores
Review your personal credit score before you shop for lenders. Understanding your exact score and the information contained in your credit report will help you better understand how lenders will evaluate your loan application. Also, review your business credit score with Experian or Equifax if your business is running.
✅ Improve Your Credit Score
Before applying for a bad credit business loan, you should consider improving your credit score. Start by reviewing your credit reports and disputing any inaccuracies that may negatively affect your credit score. Reduce your credit utilization by paying off debts and making on-time payments. If you do not have a credit history, it is best to open a credit account and start making regular payments.
✅ Make Sure You are Prepared for Due Diligence
Lenders conduct a thorough due diligence process before extending a loan to a small business. Therefore, creating a robust business plan and identifying collateral before applying can improve the chances of your approval.
Your personal and business bank statements, a business plan, and other financial documentation will be reviewed as part of the application process. In addition, you may be required to provide copies of relevant business licenses and legal documents, a description of how you plan to use the funds, and information regarding available collateral.
✅ Make Your Assets Available as Collateral
Even if you have bad credit, obtaining a cash advance or a short-term loan is possible by utilizing unpaid customer invoices, future credit or debit card transactions, and other assets. The focus of the loan application is primarily on your revenue and ability to repay the loan rather than your credit history.
✅ Provide a Personal Guarantee
Should your personal credit history be more robust than your business credit history, you might consider applying for a business loan based more heavily on your personal credit history. By signing a personal guarantee, you ensure that your personal ability to repay the loan is more significant than that of your business to make the repayment.
✅ Identify Possible Co-Signers
An individual who co-signs a loan agrees to repay it should the principal borrower default on loan. All lenders may not accept co-signers, but finding someone who has a high credit score can increase your chances of obtaining a loan. Talk with your business partners or anyone else who may be willing to co-sign the loan before applying.
✅ Accept a Smaller Loan Amount
Taking less money than what you were initially planning for may be an option if you are flexible in the amount you are seeking. You may be able to receive a smaller amount of financing at the beginning if you approach a lender that offers bad credit business loans. Following the repayment of the smaller loan, you will be able to borrow a more significant amount of money the next time.
Bad Credit Business Loans for Startups
Since a large part of a credit score is calculated using how long a company has been in business, startup companies may find it difficult to obtain a traditional business loan. Nevertheless, even successful startups tend to have less than perfect credit scores. Fortunately, it is still possible to get a bad credit business loan regardless of the age of your company. By using the above strategies, such as providing collateral or personal guarantee within contracts, startups will be able to obtain financing.
Where Can You Get a Bad Credit Business Loan?
Obtaining a bad credit business loan can be challenging. Therefore, it may be necessary to look at several lenders and, in particular, different types of lenders to locate one that will extend funds to your company. Here are some of the best places to obtain a bad credit business loan:
✅ Traditional Banks and Credit Unions
It is typically more challenging to obtain a small business loan from a traditional bank or credit union, as these institutions may offer fewer financing options. Suppose you have stable cash flow and already have a relationship with a local bank or credit union. Then you may be able to receive financing from a local lender who is familiar with your business and revenue.
✅ Online Lenders
Online lenders offer more flexible and less competitive qualifications than larger, traditional lenders. Indeed, some online lenders focus on serving borrowers with bad credit histories. Additionally, online lenders may provide faster funding than conventional banks.
✅ Invoice Factoring Companies
Factoring is a business loan alternative that involves the sale of a business’s outstanding invoices to a third party in return for cash. Although the company receives only a portion of the invoice balance, usually between 80% and 90%, the strategy provides access to fast cash without obtaining a traditional loan. You can find invoice factoring companies online to find a service that meets your company’s needs.
✅ Merchant Service Providers
As with invoice factoring companies, many merchant service providers offer financing in exchange for a portion of future credit card sales. Using merchant cash advances (MCAs) is an excellent option if your business experiences high sales volumes.
Do Not Let Bad Credit Stop You: If you have less than perfect credit, whether you seek long-term financing for equipment or short-term cash flow until receivables catch up, bad credit business loans may be an excellent option. It would help if you remembered that loan payments could pose a significant burden for a business with tight cash flow. Therefore, you must find a loan that allows you to make manageable payments and does not have excessive interest rates.
Michael Choi is a senior lawyer based in Hong Kong whose background includes international trade and trade financing. Over his career, he has assisted numerous international corporate clients in raising capital and increasing their funding levels. Michael has also provided free legal advice to the public in Hong Kong since 2011 to assist those who cannot afford to pay the legal fee.