One of the key ingredients for business growth is financing. But how can you finance your business if you have bad credit? Many entrepreneurs with bad credit worry that they won’t be able to obtain loans for their business. Though it can be challenging to secure a business loan with bad personal credit, it isn’t impossible. If you’re on the hunt for business loans, poor credit doesn’t need to be an obstacle. Here’s your guide to business loans for poor credit.
Business Loans: Poor Credit Limitations
If you’re looking to finance a business, your personal credit score can impact the types of financing you can access. This is because many lenders require the business owner to sign a personal guarantee–meaning the business owner is personally responsible for paying off the debt if the business itself cannot. Furthermore, if your business does not yet have revenue or business credit, your personal credit may become a major component of your loan application.
If you have poor credit, you should focus on searching for lenders that accept bad credit and lenders that do not review your credit. In the future, once you’ve improved your credit, you’ll be able to expand your search to find lenders that offer more favorable terms.
As a borrower with less-than-stellar credit, the loans offered to you may not have the most desirable terms. Loans for borrowers with bad credit may have shorter repayment periods, higher interest rates, smaller loan amount limits, and higher collateral requirements. However, these loan products can help you start establishing good business credit so that you can apply for more financing–and with better terms-in the future.
What Is Considered Poor Credit?
Each lender has its own criteria for evaluating loan applicants. The threshold for “bad credit scores” can vary from lender to lender. However, many lenders consider a FICO score below 580 to be a poor credit score. FICO scores from 300 to 499 are typically considered “very poor.”
If your personal credit score is considered poor or very poor, you can still qualify for business loans. You’ll just need to identify the right types of loans and speak with the right lenders. Though your credit score may be too low for one lender, it might be acceptable to another. And some lenders might not even check your personal credit.
Steps To Get A Business Loan With Poor Credit
Getting a business loan with poor credit is possible, but you may need to be more proactive and flexible in the search process. Here are some important steps to take as you pursue a business loan with bad credit.
Understand and Improve Your Credit Score
Check your personal credit scores through credit reporting agencies (CRAs) such as Experian, TransUnion, and Equifax. If your business is already established, you may want to check your business credit through an agency such as Dun & Bradstreet (D&B). By knowing your credit score, you’ll be able to search more efficiently for lenders that may be open to offering you a loan.
Once you’ve reviewed your credit reports and scores, you should try to improve your credit before you start applying for business loans. Check to see if your credit reports contain inaccurate information that you can dispute. If you consistently pay your bills on time, check with those providers to see if your payments can be reported to a credit bureau. You should also try to pay down any existing debts to lower your credit utilization.
Consider Getting a Co-signer
Though not all lenders will accept co-signers, it could be helpful to identify one ahead of time. A co-signer is someone who agrees to pay off the loan if the borrower defaults. A lender may feel more comfortable approving you for a loan if you apply with a co-signer who has a high credit score. Lenders may also be open to offering you more favorable loan terms if your co-signer has excellent credit.
Prepare Your Documents
Document requirements vary from lender to lender. It is therefore best to have your documents ready ahead of time. Some lenders may ask to see a business plan, which is a document that outlines your business's objectives and structure and explains which strategies you will use to reach your business goals. Lenders may also ask to see personal and business bank statements, as well as other documents that help paint a picture of your financial situation.
Compare Lenders
Compare the repayment terms, interest rates, and loan amounts offered by different lenders to find the most competitive option. Though you may have fewer choices than a borrower with excellent credit would have, you can still potentially save money by comparing what different lenders offer you.
Types of Business Loans for Poor Credit
Many different types of business financing exist, and some of these financing methods may be open to borrowers with poor credit. Here’s an overview of some types of business loans that may have flexible credit requirements.
Term Loans
With a term loan, you will receive a lump sum and then you will need to repay that loan over the course of a certain period of time. In many cases, repayment times range from one to several years.
Lines of Credit
With a line of credit, you’ll be able to withdraw funds on an as-needed basis and you’ll only pay interest on the amounts you borrow. This form of financing is therefore similar to a credit card.
SBA Loans
Many SBA loans require higher credit scores compared to other types of financing. However, some SBA loans have relaxed requirements. Therefore, if you have bad credit, it could be beneficial to consider loans that are backed by the SBA.
Equipment Loans
When you receive an equipment loan, the equipment that you’re financing becomes the collateral. Since the loan is secured by the equipment that’s being used as collateral, lenders may be more flexible regarding credit scores.
Microloans
Microloans are loans for small amounts of money. Many institutions consider a loan of less than $50,000 to be a microloan. Since these small amounts pose less of a risk for lenders, lenders may be willing to lower their credit score requirements for microloan applicants.
Invoice Financing
If your clients have not yet paid their invoices, you might want to consider invoice financing. With this method, a lender will pay you a portion of one of your clients’ unpaid invoices. Once you receive payment from your client for the invoice, you will pay the applicable fee to the lender. Business owners with bad credit who need quick financing may benefit from this option, since lenders care more about the clients’ ability to pay the invoice.
Invoice Factoring
With invoice factoring, you sell unpaid client invoices to a factoring company that will collect payments directly from the clients. The factoring company will pay you the invoice amount.
Getting a Business Loan with Bad Credit: Pros and Cons
Pursuing a business loan despite bad credit can present many benefits. For example, the loan can help you cover business expenses and expand operations. Additionally, making timely payments can improve your business credit and enable you to qualify for better loans in the future.
Getting a business loan with bad credit can have some cons as well. For instance, you may face higher interest rates and fees. Loan amounts may be lower. Furthermore, the lender may require you to use collateral to minimize the risk of default.
Alternatives to Business Loans
Business loans aren’t the only way to secure capital. Entrepreneurs with bad credit can pursue other paths to business financing and potentially avoid a review of their personal credit.
Crowdfunding
With crowdfunding, many people offer small amounts of money (in the form of equity investments or loans) to help you fund your project. People who contribute to crowdfunding generally do so because they are convinced that the business will succeed or they simply want to support the project. It is therefore unlikely that you will need to share your credit report to potential crowdfunding investors or lenders.
Business Grants
Grants do not need to be repaid–they’re essentially “free money.” You can find grant applications through government agencies and nonprofit organizations that support small businesses. Some private companies also offer grants. Grant applications may require you to demonstrate how you will use the funds to positively impact your business and the surrounding community.
Need Business Loans? Poor Credit Seems To Be An Obstacle? We Can Help!
We at BusinessLoans.com specialize in helping entrepreneurs find the best business loans. Poor credit does not need to hold you back from getting the capital you need. Answer some questions about your business today so our proprietary technology can match you with the right lenders.
