It’s not impossible to get a business loan even with bad credit, but you may prove yourself. For an entrepreneur like you, hard work is nothing to fear. This guide will be a great place to start for you to find out the things you have to do to get the financing you need and move forward.
What Does It Mean to Have Bad Credit as a Business?
One misconception of new business owners is that their personal credit score will not be a factor in their business. But if you are an entrepreneur about to launch a new business, expect banks, credit unions and online lenders to review your personal credit score before approving your application for a small business loan. It’s how they gauge your ability to repay the financial assistance. Of course, the worst-case scenario is you may be unable to start a business if you can’t get the funding necessary for the equipment, marketing, payroll and more.
By the numbers, bad credit is a score below 670 on a scale of 300 to 850. Most lenders require a credit score of at least 530 to qualify for what’s called a bad credit score business loan. If you can get approved for a business loan, expect to pay a higher interest rate than if your credit score is above 670. If you have a bad credit score, you will have a hard time getting lenders to take a risk on you with a small business loan. Other potential distributors and vendors may avoid doing business with you for fear of not getting paid. If you are trying to rent a building for your business, you may struggle to find property owners that will offer a lease. But can you get business credit with bad credit?
Understanding Credit Rating Agencies and Business Credit Ratings
Let’s face it, your personal credit score is a number that gets tossed around. Still, you may not know much about it, which is understandable since how it’s calculated is confusing and may vary between the credit rating agencies. If you are a business owner, your business credit rating will also be a factor once you have established the business long enough to have a meaningful business credit score. But don’t confuse your credit rating with your credit score. They are two different things. Your credit score or you may call it your FICO score, results from activity in your credit history. Think of it like a grade that banks, credit unions and online lenders use to decide if you are going to pay back a business loan, credit card debt and other types of credit. That score is an ever-changing number that you can strive to improve over time by monitoring your credit report for errors and paying bills on time since 35% of your credit score is based on payment history. Also, don’t cancel old credit cards or open new ones since your credit history accounts for 15% of your credit score, and frequent applications for credit have an adverse effect on your credit score. If that’s not enough, be sure to track your credit utilization since the amount of credit you’re using as a percentage of credit you’re approved to use has an impact on your score as well.
The three reputable credit rating agencies are Equifax, Experian and TransUnion. They monitor your credit and update your credit history regularly. It’s smart to check your credit history at least once a year, and if you have a bad credit score, several times a year. You can get free credit reports from each of the credit rating agencies every year, so don’t fall for marketing ploys that make you pay for it. Do what you can to boost your credit score before you apply for small business loans.
Are There Loans for Businesses with Bad Credit?
If you’re asking whether you can get an SBA loan with a 500 credit score, the answer is no. However, while your options may be limited, there are loans for businesses with bad credit. You will pay higher interest rates and may be subject to stricter payment options as a result of your poor credit history. The good news is that you may be able to take advantage of a growing marketplace of online lenders that offer financing solutions quickly and at competitive interest rates to business owners like you. Here are several options to consider.
Business Credit Cards
Business credit cards work the same as any personal credit cards you may already be using. With bad credit, you may qualify for a business credit card, but be aware that the interest rate you pay could be higher. As you may already know, late fees will have a long-term effect on your credit score, so be sure to make timely payments on your business credit card. In fact, try not to carry a balance and only use the business credit card as a last resort. It’s smart to keep your personal and business purchases separate for easier bookkeeping and tax purposes.
Business Lines of Credit
Business lines of credit are similar to credit cards in that you use the credit as you need it once you are approved. You can get approved for a certain credit limit and pay interest only on the amount you use. Once you pay it back, you will be eligible to borrow again up to the limit established when you applied. But remember that with bad credit, you may not be eligible for a business line of credit from traditional banks and credit unions. Online lenders that offer lines of credit may be more flexible in terms of creditworthiness and other requirements to open a business line of credit.
Invoice Factoring
Invoice factoring is not a loan, but it’s one way to get cash to cover business expenses. With invoice factoring, you sell outstanding invoices to a factoring company in exchange for the money you need. You can usually get 85% or less of the original invoice amount. Your customer then pays what’s due on the invoice directly to the factoring company. Invoice factoring is easier to qualify for than some other types of small business loans, but there are high fees, and there are risks that the customer won’t pay the original invoice. In addition, lenders will expect to see accounts receivable and account payable reports.
Merchant Cash Advances
Merchant cash advances, or MCAs, provide you with a lump sum of cash from a merchant lending company in exchange for future sales receipts. If you need cash fast, MCAs are best suited for small businesses that have both a high volume of sales and bad credit scores.
Term Loans
Term loans are the most common type of small business loan and may be an option if you happen to find a lender that is willing to work with you despite your bad credit. A business term loan is a lump sum of cash that you repay on a monthly schedule with interest for an agreed-upon term. The interest payable on the loan may be deductible at tax time, which is an advantage of term loans versus a business credit card or other types of business financing. Your credit score may be a major factor in whether you’re approved for a term loan, so find a lender that weighs your credit score less strictly.
Getting A Business Loan with Bad Credit
There are several steps you can take in order to get a business loan with bad credit.
Determine What You Need the Funds For
Any lender that will do business with you will require that you have determined what you need the funds for. Especially with bad credit, you don’t want to borrow more than you need since you will pay interest on the loan. Any amount you add to existing debts will have an impact on your ability to make loan payments. Lenders may ask that you have determined there is no other way to accomplish your business goals than with additional funding. If this process reveals that making loan payments will be difficult, now may not be the right time for you to apply for a business loan.
Check Your Eligibility
Bad credit scores are not the only requirement for business loans, so check your eligibility to make sure you will qualify in other ways. For example, be clear about the purpose of the loan and understand how your current debt load may affect your ability to pay back a small business loan. The length of time you have been in business will also play a role in whether lenders will consider your loan application. If you already have time in business, cash flow and annual revenues will be considered by lenders as well.
Compare Your Loan Options
As you compare your loan options, find out what credit score is needed for an SBA loan or other traditional business loans. Then, be realistic about the loan options available to you. If your need for business funding is urgent, look to online lenders that are known for easy applications and quick funding. If you’re determined to work with a local bank or credit union, compare their loan options with others you may qualify for.
Prepare the Necessary Requirements
The necessary requirements you need to prepare will depend on the type of business financing you are applying for. If your business is new, you may need to submit proof that you operate the business, personal and business tax returns, business financials, and sales projections.
Get A Business Plan Ready
If lenders decide whether to give you a business loan with your bad credit, you will want to get a business plan ready to show that you are a competent business owner. Your business plan explains your goals for the business as well as your strategy for a successful business. Your business plan should demonstrate how you will be able to make loan payments as a result of your ability to generate revenue. If you are wondering what goes into a business plan, you should include a description of your products and services, a listing of your management team and any advisors you may consult, a marketing strategy you will implement to grow the business and also financial statements, if your business is established.
