There might be a time when you are least expecting something an opportunity arises. You’ve dreamed of opening a new location for your retail business, suddenly the space in the neighborhood becomes available. You are planning to buy new products to rack up inventory, and you get a discount from a supplier on those hottest-selling products. To leverage such opportunities, you might feel a necessity for a small business loan. But if you have bad credit, do you feel like getting quick funding is a predicament? With the growing number of alternative lenders in the market, getting a bad credit small business loan is not a hassle anymore.
Credit Score for a Small Business Loan
Lenders typically consider both business and personal credit scores to determine your eligibility. If your time in business in less than a year, you might not have taken enough debt to provide information for the credit reporting agencies about how your business manages debt. In such cases, lenders consider your personal credit score to determine your creditworthiness, and whether to approve you for a loan or not. Essentially, traditional lenders require a personal credit score of 650 to 680 before they approve you for a business loan.
If you have been in business for more than a year, lenders take into account both your business and personal credit score. You can get your business credit score from credit reporting agencies (Dun & Bradstreet, Equifax, and Experian). Every lender has its own evaluation criteria before making a loan decision. Traditional lenders ponder more on business credit score, while online lenders consider personal credit score and financial metrics like business’s revenues, or debt usage.
Getting Approved for a Bad Credit Small Business Loan
- Review your credit score. Before you make a loan application, make sure to review your business and personal credit reports by getting copies of your credit reports from credit agencies. Review your credit reports for inaccurate or incomplete information, and dispute any mistakes in the reports with the credit bureaus. Understanding your credit score will help you conclude the types of loans for which you’re likely to qualify.
- Research your loan options. The next step is to research your business loan options that can get you the amount of money you need at the lowest rates and flexible repayment terms.
- Write a business plan. Providing a strategic business plan along with your loan application is a smart move. Even though some lenders might not require it, but you should have it ready with information like executive summary, company description, market strategies and analysis, competitive analysis, business development plan, operations and management plan, and financial projections. If poor cash flow management is the cause of your bad credit, a strategic business plan to help you manage your business finances more sensibly.
- Offer collateral. Offering collateral for a business loan will not only builds trust in the lenders but also increases your chances of getting a business loan with bad credit. If you default on the loan, the lender can take possession of the collateral and sell it to recoup the loss. Instead of using your property as collateral, try securing a business loan that allows you to use business assets (equipment, or receivables) as collateral. This way, if you default, you’ll not lose both your business and your property.
- Find a cosigner. If you’re unable to secure a business loan with bad credit, try finding a cosigner with a good credit score to help you get a business loan. A cosigner is someone who can guarantee the loan in case you default on the loan payments. While searching for a consigner, make sure the consigner can afford and is comfortable with the arrangement.
Types of Bad Credit Small Business Loans
With bad credit ratings, obtaining funding from traditional lenders is challenging and difficult. Luckily, there are options available for bad credit borrowers including:
- Microloans: If you need a small loan with bad credit, a microloan from a nonprofit organization such as Small Business Administration (SBA), Accion, Kiva, Opportunity Fund can help. Microloans are specifically designed for underprivileged businesses or for those that are socially responsible. In order to qualify for microloans, your business’s goals must align with the goals of a nonprofit, like providing direct care, creating new job opportunities for the poor, etc. Microlenders offer smaller loans with fewer documentation requirements at more flexible underwriting criteria.
- Short-Term Business Loans: Short-term business loans are another popular option for poor credit borrowers. You can get these loans from both traditional and alternative lenders with terms from six to 24 months. The repayment terms vary by lenders: some require fixed monthly payments, while some automatically withdraw payments from your bank balance daily, weekly or monthly.
- Business Lines Of Credit: Business lines of credit works similar to credit cards, where you can borrow and use money from an approved credit limit. After repaying the use amount, with interest, your credit limit goes back up- making it a revolving line of credit. A business line of credit is best to manage your short-term financing needs like payroll, rent, or inventory purchases.
- Business Credit Cards: With a business credit card, you can get quick access to working capital and help builds your credit score if you make timely payments – making it a great option for startups and new businesses to build credit and secure capital. While searching for the best credit card, make sure to choose one that offers a 0% introductory APR period, and reports your payments to the credit bureaus; not all of them do.
- Invoice Factoring: You can use your outstanding receivable and turn them into cash with invoice factoring. Factoring companies generally provide cash upfront, up to 80% to 85% of their value, against your unpaid invoices. The factoring company collects payment from your customers on your behalf and pays you the balance of the invoice minus the factoring fees. In this loan option, the value of your unpaid invoices is the consideration factor for the lenders and not your credit score.
- Accounts Receivable Financing: Accounts Receivable Financing or AR Financing is similar to invoice factoring, but with some key differences. In this scenario, the financing company advances the value of unpaid invoices instead of buying them. You have to collect the payments from your customers and repay the loan with any associated fees.
- Equipment Financing: When you need an equipment purchase or upgrade, equipment financing can help. In equipment financing, the equipment itself serves as collateral for the loan, and you can easily finance your purchase or upgrade. Since equipment acts as collateral, you might have to pay a lower interest rate.
- Merchant Cash Advances: A merchant cash advance is a suitable option for small businesses that accept credit cards as a mode of payments from customers (such as retailers or restaurants), Merchant cash advances are short-term loans for bad credit borrowers. In a cash advance, you get a lump sum of money in exchange for a fixed percentage of your credit/debit card revenues. The payments are tied to sales: you pay more when you generate more sales and vice versa. The only downside of this short-term financing is the high-interest rates and fees, so make sure to review your option before using a cash advance.
Factors to Consider For a Bad Credit Business Loan
You should consider numerous factors before applying for bad credit business loans. The details on those factors are as follows:
- Loan Approval Factors
Before you make a loan application, keep in mind the below-mentioned factors that can affect your odds of approval for a small business loan:
- Type of Lenders: Type of lenders matters the most when you make a loan application. Traditional lenders have rigid loan approval requirements including solid business credit ratings, extensive documentation, and a business plan. The approvals can take weeks even months for a traditional bank loan. Online lenders have more lenient approval requirements than traditional lenders. They typically require less paperwork, even accept bad credit and can get you funding within minutes.
- Credit Score: Credit score in the most important factor lenders consider while approving you for business loans. If you have a personal credit score of 650+, you can qualify for traditional business loans. On the contrary, alternative lenders have minimum credit score requirements. With a credit score of at least 500, you can easily qualify for a business loan. If your score is high than 600, you’ll have more loan options available to you.
- Time of Business: Time in business is another important factor that affects your approval odds. To qualify for a traditional loan, you need to provide at least three years of financial statements and tax returns with your loan application. Alternative lenders have convenient requirements for time in business. Even new businesses with 6 months to one year of time in business can qualify for a business loan from alternative lenders.
- Loan Comparison Factors
When you research your loan options, you’ll come across many types of small business loans. The key is to decide which works best for your small business. Here are factors that you should consider when comparing your loan options:
- Business Loan Term: Understanding the terms of your business loan is an important comparison factor you should consider. There are different business loan types with different loan terms. Traditional loans offer three to ten years, business lines of credit offer six months to five years, invoice financing offers three to six months, equipment financing offer 2-5 years, short-term loans offer 3 to 24 months and medium-term loans typically have one to five years.
- Loan Rates and APRs: While deciding a loan, choose one with the lowers interest rate and the annual percentage rate (APR). You should also consider the total interest you’ll have to pay over the term of the loan.
- Multiple Loans: When you already have an outstanding loan, securing another loan will be much harder. Trying obtaining a business loan that can get you the desired amount so you don’t have to apply to multiple financing sources.
- Loan Fees: Cost is the most important factor you should consider when comparing loan options. Understanding all the loan fees including origination fees, underwriting fees, closing costs, late fees, and factor fees will help you make a sensible decision while choosing a business loan.
- Loan Application Evaluation Factors
Here are a few key factors that lenders consider when reviewing your small business loan application:
- Cash Flow: If your business is generating solid revenues, but your cash flow is poor or negative, getting loan approval on your business loan application will be an uphill battle. Lenders want to see you have a positive cash flow to afford loan payments and other business commitments.
- Business Annual Revenue: A solid stream of business revenue can help you get quick approvals you’re your business to have a good track record of annual revenues, it can help cancel out a bad credit score – making business loan qualification easier.
- Current Debt: Your current debt load is also an important evaluation factor for the lenders. Lenders want to evaluate how much debt you’re carrying currently to determine how much additional debt you can afford.
- Loan Purpose: Lenders also want to know how you will use the funds. Your loan purpose is important for traditional lenders, whereas most online lenders typically don’t have this requirement.
- Business Plan: A business plan is another important evaluation factor for traditional lenders. They want you to have a solid business plan including sound business model, market and competitive analysis, and realistic financial projections. Online lenders typically don’t require a business plan.
Securing Business Loans at Affordable Terms
When you’re able to secure a business loan but aren’t happy with the terms, don’t worry. There are things you should do to help you qualify for business loans at terms that suit you best.
- Build your Personal Credit Score: The first step is to build your credit report; you can do this by getting your credit reports from the credit bureaus and disputing any mistakes on your credit reports along with making timely loan payments. Start paying your debts and obligations like rent, utilities on time. If you have any unused credit accounts, close them and don’t apply for new credit unless you build your credit score.
- Improve your Business Credit: After making payment current and disputing any mistakes in your credit report, the next step is to start building your business credit. You can do this by obtaining credit and utilizing it responsibly. Try to secure credit cards that report payments to credit bureaus (Experian, Duns & Bradstreet, and Equifax). Making timely bills payment and getting trade credit with suppliers will help you improve your credit score eventually.
- Revise your Business Plan: Revise your business plan to determine if you can cut costs or increase revenues to reduce the amount of financing. Getting feedback on your business plan from lenders can also facilitate. Learn, learn, learn, and use that information to revise your business plan to make it more comprehensive and perfect for future lending.
The Bottom Line
With so many lending platforms offering loan options, getting a bad credit small business loan is possible. However, getting a business loan with bad credit isn’t easy, but if you do your research properly and evaluate associated factors responsibly, you can secure the right loan product based on your financial needs.