How to Get a Bad Credit Business Loan
Before starting your application, get organized. Gather all the necessary information a lender will want to see when you’re preparing to apply for a business loan.
1. Check your personal credit score. Learn more at the FTC’s Get My Free Credit Report page
2. Review all the different business loan options for people with bad credit. Which one best suits your current borrowing needs and your business?
3. Study the requirements for your preferred business lending, as well as the lender’s reputation and experience lending to businesses in your field. How much emphasis gets placed on your personal credit score? Do lenders also consider your business revenue history? Is there a business length requirement? And what about collateral?
4. Decide how well your business could meet the application requirements at this time. Remember, we’re here to give you customized advice for your particular business financing situation. One of our advisors can help you determine the best solution. And they can also help you through the application process.
Credit Scores and Business Loan Applications
Several criteria come into play when traditional lenders review business loan applications. However, they do pay special attention to credit scores. (Note: there are different types of credit scores. Many traditional lenders use FICO scores, developed by The Fair Isaac Corporation, to assess the creditworthiness of personal and business lenders.)
Your credit score is a number that represents how likely you are to pay back your loans. It’s based on your previous borrowing history. Lenders look at business owners’ personal credit scores before offering credit to new businesses, or if a personal loan guarantee is required.
Credit reporting agencies calculate credit scores based on what’s known as “The 5 C’s of Credit.” They include
- Character – this is based on your credit history of repayment
- Capacity – your debt-to-income ratio, or how much debt you carry in relation to your income
- Capital – your money – especially the money you and the other owners have already invested in the business
- Conditions – the loan’s purpose, the amount of the loan, and the current market or economic conditions, such as interest rates
- Collateral – an asset to secure the loan, such as real estate, equipment, or even vehicles
How To Improve My Chances of Getting a Business Loan With Bad Credit
Take action to increase your chances of business loan approval.
To boost the likelihood of getting a “yes” to a business loan with imperfect credit, offer collateral as security for the loan. This could be something like equipment, or even your accounts receivables or credit card sales.
For example, let’s say you need to purchase an expensive piece of new equipment. This equipment or machinery will allow you to bid on bigger contracts and fulfill bigger orders. With equipment financing, you could use the equipment as “collateral” to secure a loan. This means that if you don’t pay back the loan as agreed, the lender gets the equipment.
Invoice and Receivables Financing
Another business financing option for borrowers with bad credit is invoice and receivables financing, also known as accounts receivables factoring. With this type of financing, you could sell your accounts receivables to a third party factoring company at a discount. The third-party would then take on the responsibility of collecting the monies owed, and you don’t need to follow up with each customer who owes you money. Instead, you get paid by the third party when the factoring agreement is processed.
Credit Card Receivables Financing
Credit card receivables financing (also known as a merchant cash advance) work in a similar way. If your business has strong day-to-day credit or debit sales, you could have the option to borrow against those sales. With this type of funding, you avoid disruption to cash flow. You repay the credit card processing loan with a portion of future daily credit card sales until you pay off the merchant cash advance.
Lenders like secured loans with collateral because it reduces their risk. They know they’re legally entitled to the security should the borrower not fulfill the terms of the loan. And for borrowers with a history of credit challenges, offering collateral could make the difference between a “yes” and a “no” on your credit application.
Get a Co-Signor
Another workaround for getting a bad credit business loan involves getting a co-signor who has good credit. A co-signor agrees to make the payments as per the terms of the loan if you default.
Your Business Loan Gets Set Up – Now What
Here’s the thing – a business loan offers business owners with poor credit more than just financing. It also offers you a chance to re-establish your credit. Any activity that could positively impact your business credit score could benefit you down the road. You could get faster approvals, lower rates, higher limits, and overall more favorable terms.
To make the most of your business loan, make sure you understand all the terms and conditions. Set up automatic repayments if required so you don’t miss any payments. Make all of your payments on time and in full. This helps to establish a pattern of responsible repayment. And after all, consistent debt repayment is a key factor in calculating credit scores.