Everything seems harder when you have bad credit. Vital resources are more expensive, and you probably won’t be able to obtain the means to grow your business anytime soon. That is, if you don’t look into all of your options. In the past, yes, it was nearly impossible to get a small business loan with bad credit. But that was mainly because very few business owners knew exactly what they had to do to make up for this massive disadvantage. Instead of giving up on being approved, these business owners simply accepted that their path to a small business loan would be different than what they had heard.
They realized that by focusing on their advantages, not their disadvantages, they could partner up with a business financing institution that won’t cripple their cash flow with unfair terms. Here are 3 viable options for business owners to get bad credit business loans:
1. Offer Collateral (But Not The Kind You Think)
One of the countless myths about small business loans is that the only definition of collateral is your car or your house. If you don’t own property or something else that’s ridiculously expensive, you have nothing that could be deemed “collateral.” This suggests that in order to be approved for a secured business loan, you would literally have to risk ruining your life. Plenty of people do this, but mostly for access to a traditional, long-term bank loan with a high borrowing amount. Offering collateral can grant you access to several other types of small business loans. But if you need short-term financing, you won’t even have to think about losing your car or your house.
A business line of credit and short-term working capital loan are two examples of short-term financing. They fulfill temporary gaps in cash flow and allow you to capitalize on sudden opportunities. Since you’ll be reimbursed shortly, the collateral required for approval is usually short-term assets. The business lender might ask for accounts receivables, or the inventory you intend to buy with your borrowed funds.
If you are considering offering your car or house as collateral, it’s important to remember that your amount won’t be equal to the value of your collateralized asset. Should the business lender have to sell the asset, they won’t get as much as you paid for it. So, if your collateral is worth $20,000, you might only be approved for a $12,000 business loan.
2. Emphasize Your Income History
Another major benefit of short-term working capital loans is that just a few months’ worth of payments can dramatically raise your business credit score. Any expert will tell you that this is a more effective and efficient way to offset previous credit issues than arguing on the phone with credit reporting agencies, trying to get something removed from your report. Business lenders (and potential business partners) would rather see a previous credit issue followed by a paid off business loan rather than, well, nothing at all.
But this isn’t your only option. If you can prove a history of predictable income (substantial revenue flowing in at a cyclical pace) or make regular bank deposits (no matter what season it is), you will likely be approved for a revenue-based business loan. With this program, a percentage of those regular deposits would be automatically transferred to your business lender to repay the lump sum you were initially given. If you can prove strong debit and/or credit card sales for a decent period of time, you may be approved for a merchant cash advance. Both options decrease the likelihood that one of those temporary gaps would make it harder for you to pay off the debt.
Most merchant account loans, however, are not technically categorized as business loans. Unlike a short-term working capital loan, they won’t be reported to all of the main credit reporting agencies. So, if your credit score is excessively low, you might want to take out a short-term loan the next time you know you’ll be able to pay it off quickly.
3. Skin In The Game
Some business lenders may be impressed to see that you have used your own money to finance your business. They will get the impression that, since your business is now a personal investment, you would never let the business fail. But this is only recommended if you only use a portion of your own money to finance operations for a limited time or to cover an undeniably wise investment. Pushing these boundaries is not “investing in your business” but mixing business and personal finances. No business lender wants to see this.
Mixing business and personal finances makes it difficult to get a clear view of cash flow. It’s safe to say that the overall approval rate for small business loans would be a lot higher if so many business owners didn’t combine checking counts or credit cards. But putting some skin in the game at a crucial moment (topped off by a personal guarantee) could very well persuade business lenders to disregard your bad credit.
Always Begin With Unbiased Advice
No matter how your bad credit came to be, the first step to solving this extremely common problem is seeking unbiased advice. At United Capital Source, the options we offer are not motivated by our own interests. We’ll explain the pros and cons of each option, even though there’s no guarantee that your next business loan will be from us. Sooner or later, you’ll find out that learning how to simultaneously build credit while funding your business is more helpful than any amount of cash.