Bad credit is the biggest financing hurdle for small businesses. It is one of the most common grounds for traditional banks rejecting small business loan applications. But all hope is not lost for those seeking small business loans with bad credit. In this article, we’ll tell you about the options you have to get the funding you need despite the bad credit.
Financial lenders consider bad credit loans a credit risk. Credit score is a measure of your creditworthiness. To them, a bad credit score signifies a high risk of defaulting on the loan. The worse your credit scores, the higher the risk. And the higher the interest rates are likely to be.
Many lending institutions and credit unions are more understanding of your predicament. They are more lenient about your credit score and credit history.
These financial lenders are willing to advance small business loans to you but they often come with caveats. The caveat may be higher fees or higher interest rates to balance out the higher risk involved in lending to businesses with bad credit.
What Are Your Options for Small Business Loans with Bad Credit?
Big banks usually reject your small business loan application if you have a credit score below 600. While bad credit makes it hard to get small business loans from traditional banks, here are some of the options for bad credit loans you may consider.
1. Family and Friends
Before you go out to look for a financial lender, consider asking your friends and family to support and invest in your business. If you are a new business or just starting out, getting a loan can be very difficult since you do not have a credit profile. And you probably need a lot of cash to establish your business.
It is always a great idea to ask your inner circle of family and friends to invest in your business. This is great because you these people will most likely not consider your credit score or charge very high interest rates.
2. Business Credit Card
Not all small businesses need loans for large sums. Most small businesses are short of working capital from time to time. The unrealized debtors or payments imply the small business is short on funds. The best way to meet these short term cash crunch needs is using a business credit card.
If you are eligible and qualify for a business credit card, you’ll have a ready source of cash. The lender issues the card in the name of your business. The credit limit, terms of payment and interest rates will vary depending on the lending bank or credit union.
3. Business Cash Advance
Also commonly called the merchant cash advance. This option is ideal for those small businesses that are facing cash flow problems. It is usually offered at a very high interest rate. Small businesses that are find it difficult to get a small business loan due to bad credit can opt for business cash advance.
Bad credit is the biggest financing hurdle for small businesses.
You get access to the money funds you need irrespective of your credit score. It does not use the traditional credit score to decide eligibility for loan. Your future credit sales determine the eligibility of business cash advance. Here the repayment is via small deductions from the future credit card and debit card sales.
4. Short-Term Secured Loans
While most banks reject loan applications if you have bad credit, some are willing to lend to small businesses with bad credit. These will usually ask for a lot of projected cash flows and sales charts. Small businesses with bad credit often use this option to get funds provided they can convince a lender to invest in the business.
The risk borne by the lender is pretty high; thus, they usually need you to offer something of value, like real estate, as collateral to avail this option. This mitigates their risk. In case the small business defaults on making payments, the lender can recover their costs from the collateral. This option increases the risk of the business owner, although it is a great way to finance your small business as you find your feet.
5. Working Capital Loans
This is similar concept to short-term secured loans. Here, a small business owner with bad credit can offer their valuable assets as collateral in exchange for a small business loan. It is a preferable option to meet the day-to-day cash flow requirements of a small business.
6. Equipment Financing
Capital investment is the most difficult aspect of starting out as a small business owner. While most lenders will deny you credit, equipment finance serves as the perfect solution. In this option, the business capital asset you plan to buy serves as collateral for your loan.
Small business owners with bad credit can use equipment financing to buy the heavy duty assets and expensive equipment. With equipment financing, you can maintain a positive cash flow since you have to pay in installments. In the event of default, the lender will repossess this equipment and sell it to recover his expenses.
Under this option, you can secure a specific percentage of invoices as cash advance. The lender receives the balance outstanding invoice amount when the customer or debtor pays up.
It follows a concept where the small business sells off its accounts receivable and invoices at a discount for ready cash. The factoring company then collects the full amount of the invoices when they become due.
The difference is the profit of the factoring company taking into account the time value of money. As this option uses invoices already made as collateral, the lender has a significantly lower credit risk.
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How to Get Small Business Loans with Bad Credit | First Capital Business Finance