It is quite a tough situation for young entrepreneurs who have an idea that seems viable but lacks the sufficient funds for it. If for one reason or another the entrepreneurs have bad credit history, their chances of securing a traditional business loan from a bank are restricted. The vicious cycle in which bad credit puts an entrepreneur and its effect on small business loans can be quite demotivating. But not all is as bad and ugly as it seems if there are red flags on your credit history. There are still some options available to those with bad credit who want to get a small business loan.

The Good:

One very viable alternative to a traditional bank loan is the concept of the Business Cash Advance. This is a system in which lenders, proper registered cash advance companies, provide funds in advance to a business for a fixed percentage cut of future credit card sales. This has several advantages as it is easier, quicker and more flexible than a loan from a bank. It is a short term, unsecured loan (i.e. no collateral required) and the borrower has complete freedom over how to budget the funds. The companies dealing with this do not require any proper background check of funds or credit ratings as they secure their deal through future payments. Being sales oriented, this system relieves stress from the entrepreneur of having to make timely payments and is also provided with some leeway during slower sales periods.

Although the business cash advance system is quite appealing, entrepreneurs should note that for not considering credit history, the lenders generally charge a higher interest rate than a traditional bank loan. However, this also can push the entrepreneur to increase sales so as to make sure that the loan is paid off as early as possible.

The Bad:

While a business cash advance is generally a good idea, the possible downside in the long run can be that the credit rating never improves. A loan through this method does not help to improve credit rating as it is not through the traditional bank route. So while the temporary solution of funds for a project is found, the long term bad credit remains. This can have adverse effects for a company as the funds available through a business cash advance are termed small loans and if the company needs to expand drastically, requiring a higher amount of capital, a bank loan would be needed. With bad credit, that bank loan will continue to be tough to obtain.

            The Ugly:

If, as in some cases it happens, that the bank approves a loan on bad credit after analyzing the company and its future prospects, the interest rate that is imposed is ridiculously high. This is done to discourage defaulters and half-hearted loan applicants. However, this does put quite a lot of pressure on the company. In such a situation the company has to be exorbitant amounts in interest (first to a business cash advance company and then to the bank) just to keep the company running. The long term cost-benefits should be analysed at this point to see the feasibility of running the company any longer on such a model.

Although, it takes quite a long time for bad credit to be removed from someone’s history, such an individual should try to constantly strive for it. Simple steps such as a reassessment of the financial situation, proper budgeting, paying bills on time, accepting only those loans which can be paid off and thorough balancing of books can help towards achieving a stable financial situation which allows for small business loans.