Yes, you can get small business loans with bad credit. Bad credit is such a prevalent problem for small businesses, the Small Business Administration (SBA) addresses it directly on their website. “Unfortunately, bad credit plagues a large percentage of small business owners as a result of the financial crisis several years back. The fact remains that it’s harder for small businesses – even with stellar credit ratings – to get traditional bank loans than it is for larger businesses.”
Thankfully, today there are other avenues. “The good news is there are alternative business funding programs and solutions providing business owners the opportunity to obtain a small business loan or line of credit.” These are based on various factors other than your business credit score.
Here are nine tips to help you get small business loans with bad credit:
Tip #1: Clearly assess your needs, and have a plan
Why do you need money now? Knowing what you will do with the money helps determine which type of loan makes the most sense. Knowing how much you need keeps you from borrowing too much. Or too little. Take a holistic look at your business – not just your immediate status but how your income and expenses flow throughout the year. That allows you to manage your money better. And you can plan your borrowing more strategically. This helps you as a business owner, and it will help you improve your credit.
It also builds credibility with lenders. You may have shaky credit, but you're serious about your business. Lenders will be even more impressed if your plan explains how you’re working to improve your business credit (see tip #7 below).
Tip #2: Investigate SBA business loans with bad credit
Traditional bank loans are all but impossible if your business has less-than-ideal credit. But SBA backing could tip the scale in your favor. As I noted above, the SBA is trying to do more to help struggling small businesses obtain the funding they need to survive and grow. So you may qualify, even with a somewhat lower credit score.
There are several types of small business loans that fall under the SBA 7(a) category. You can borrow up to $35,000. There are also other government programs to help you sustain or expand your business. There are special programs for women, minorities, and veterans.
The SBA is a federal agency. But remember that SBA loans are funded and managed by local financial institutions. And not every bank qualifies as a Preferred SBA Lender. Therefore lending criteria and other details can vary from one place to another. Is your state one of the best? Or one of the worst when it comes to SBA loans? Check out this recent ranking report.
Tip #3: investigate unsecured business loan options
The versatility of unsecured financing provides options for all types of small businesses. You can get unsecured funding despite your bad credit. And you can use the money for almost anything. Unsecured loan examples include:
- Seasonal or revolving business lines of credit
- Business credit cards
- Accounts receivable financing
If your business has a history of predictable income, you may be eligible for a revenue-based loan. Let’s say you make regular bank deposits. A percentage of those deposits can be automatically transferred to your lender to repay your business loans. Or you might have regular credit card sales. In this case, a merchant cash advance may work for you. You receive your funding up front. Then you transfer a percentage of future credit card sales to the funding company as repayment.
Alternative business lenders such as United Capital Source have opened many more doors for small business loans with bad credit. When I talk to small business owners, I always point out that bad credit doesn’t mean no credit. We know there’s more to your business than your credit score. So we give you credit for other positive factors. You don’t have to spend precious time researching loan options. Or trying to figure out which to choose.
We know hundreds of lenders who make all types of small business loans. But we aren’t linked with any one of them. That lets us match you with the right business lender and the right funding program for your business. We work quickly. You can apply online, get an answer usually within a day, and get your money in about 72 hours. We specialize in helping small businesses with bad credit find money. And we specialize in helping you use smart financing to rebuild your credit.
Tip #4: Offer collateral
Putting some of your business assets on the line helps offset your bad credit. That’s because there is less risk for the lender. Collateral has tangible value. If you default on your business loan, the lender can take your collateral and sell it. With your business assets at stake, you have an added incentive to repay on time. That can bolster your future business credit.
Some small business loans are automatically backed by collateral. For example, real estate and inventory financing. Even so, you may have to provide a personal guarantee on top of that. Whether collateral is required or voluntary, be aware that you can’t sell or “use up” the assets until your loan is repaid. You should also know that lenders do not accept the full monetary value of your assets as security. They discount it. So let’s say your collateral is worth $10,000. That might be enough to secure a $6,000 business loan. The exact amount depends on the loan type, amount and individual lender.
You can put up personal assets, too – your home or other property, for instance. But do you really want to take that risk?
Tip #5: Consider using “credit boosters”
By partnering with another business or individual with great credit, you can boost your own credit-worthiness. Your credit partner is low-risk. They co-sign your loan, making your business less of a repayment risk despite your bad credit. Of course if you default, your credit partner will be stuck with your loan.
You could take on a formal business partner. Someone with excellent credit who wants to invest in your business. But they will probably want to have a say in running your business, too.
Not ready to relinquish control? You could consider peer-to-peer lending. Over the past decade, this type of small business funding has become more popular. Like many alternative financing options, it is simpler and faster than applying for a traditional loan. A peer investor is different from a venture capitalist. They are not a formal partner. They profit via the interest you pay, not by taking a percentage of your business.
Tip #6: Consider raising money the “new-fashioned” way
Crowdfunding is something like peer-to-peer lending, only with lots of “peers.” With the advent of Kickstarter and other online sites, small businesses can raise money from anyone. It’s sort of like an informal IPO. You don’t issue stock, but you may have to offer some incentive to investors. If you have an interesting product or business concept, you can appeal to people’s imagination. They may not care about strictly-business credit scores, etc.
Is it right for you? Popularity is growing, but most small business owners don’t really understand crowdfunding. You’ll need to do more research. And bear in mind that this isn’t an appropriate financing option for every small business need. And it’s not an option for ongoing cash flow management.
Tip #7: Clean up your business and personal credit rating
Bad credit may be a chronic issue for your business. Or perhaps it’s more recent, the result of specific problems that made you unable to meet your obligations. It’s heartening to know you can get business loans anyway. But you should work hard to repair your bad credit. And take steps to keep it from backsliding in the future.
Tip #8: Investing in your business is good, combining business and personal finances is not
Most small business owners have used their own money to finance their business at some point. That’s called “bootstrapping.” It is a good idea. After all, if you aren’t willing to put some skin in the game, why would a lender have confidence in your business? The key is to use your own money wisely. Relying on yourself to fund ongoing operations indicates you aren’t managing your business finances well. And what happens when you need a lot of money to expand?
Your small business needs to stand on its own, as a separate entity. Even if you have bad credit. Perhaps your business looks risky to lenders but your personal credit is good. A personal guarantee might increase your chances to land a small business loan. That said, the last thing you want to do is co-mingle your business and personal finances.
Commercial banker Jay Desmarteau warns that “Small business owners who mix personal and business finances within one account may have difficulty getting an accurate view of cash flow and producing income statements needed to obtain financing.” Nonetheless, he says more than half of small business owners combine checking accounts as well as credit cards. Don’t do that. Your business needs its own distinct credit profile.
Tip #9: Get unbiased advice
Today, there are more options than ever before to get small business loans with bad credit. That’s great news. But it’s also daunting. As an entrepreneur or small business owner, you are seriously pressed for time. When can you research all your financing alternatives? Where do you turn to get answers that are in your best interest?
Nicole Fallon Taylor at Business News Daily says, “At one point or another, most business owners have to think about how they will finance their operations. Whether you borrow money, draw from your savings or choose another option, it’s important to choose the one that makes the most sense for you.”
At United Capital Source, our goal is helping small business owners live their dream. We know you want your business to succeed and expand, not just hang on. We’re here to help. We do more than give you a list of possible loans. We help you understand the pros and cons of each one. We find the best match for your current needs and financial position. The loan that not only gives you the money you need now but helps you build your business credit for the future. We connect you with the right lender, because that matters, too.
Anyone who knows about business lending will tell you it’s important to establish a good relationship with your lender. You may run across industry “experts” who say you can’t do that with an online lender. They say online lenders are invisible. Impersonal. Merely a link to money when you need it. This underscores why United Capital Source is so different. Our Number One goal is to establish a long-term relationship with your small business. We have no interest in doing one-shot deals. We love what we do because we get to watch small businesses like yours blossom and expand. And we get to be part of that process.
That’s pretty rewarding.