The first thing you should know is that even if you are certain that your credit is poor, it is still possible to get financing. It’s not easy, but it is possible. There are options, but bad credit loans are high risk; you probably wouldn’t take them under different circumstances.
Listen to Peter and Jonathan discuss why business credit matters with Levi King, founder and CEO of Creditera on the fifth episode of The Bcast, Bplan’s official podcast (at 12:56):
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In this article, I’ll cover:
- What options exist for those with bad credit
- The risks involved in taking on more debt
- Steps to rebuilding your credit
What are your options?
For those with bad credit, the door to getting funded isn’t completely closed. The choices, however, tend not to be ideal. Banks will base their decision to lend off of the credit risk of your business; basically, whether or not they think you’ll default on a loan.
The worse your credit, the higher they perceive the risk, and the higher your interest rates will be. Kabbage, an alternative lending platform, explains that most banks will look at the previous three years’ performance, and if your company hasn’t been around that long, they will need to see detailed financial projections and a business plan.
Here are the options for bad credit loans:
Traditional bank loan
This option is less likely to work out for those with bad credit because traditional lenders have limits on who they will finance. That said, it isn’t impossible. Your interest rate will however be higher than a standard rate and more collateral will probably be required of you than a traditional recipient. If you think you may still qualify, take a look at some of the loan options offered by the SBA.
A microloan is similar to a traditional bank loan, but they often come from alternative lenders like credit unions. A microloan tends to be easier to get for those with subpar credit because the loan amounts, as the name indicates, are small, typically fifty thousand dollars or less. Because of this, the credit requirements for these loans are also lower. If this amount of funding suits your needs, this is a good option. The SBA has a microloan program, and there are several alternative lending options such as Prosper and Zopa.
Merchant cash advance
Also called a business cash advance, this option is only applicable to those having cash flow problems who would need ten thousand dollars or less. Cash advances usually have very high interest rates meaning that you will almost certainly pay more in the long run than the initial loan, especially if you miss a payment. Be certain you can repay on time before going this route.
Business credit card
If you can secure a credit card in your company name and make purchases and on-time payments, you can get financing and start building good business credit at the same time. Of course, the credit limit, interest rate, and terms of payment will vary, and each bank or credit union will have eligibility requirements, so this option will not work for everyone.
Home equity line of credit
Otherwise known as “betting the farm,” it goes without saying that this is an extremely high-risk option, and only applies to those who own houses. You put up your house as collateral to secure a bank loan.
This type of loan has a niche pool of recipients: you must have a credit score of over 550, your company must make more than a hundred thousand a year in sales, and the loan amount can not exceed ten percent of your revenue. You can receive this type of loan in as little as a week’s time. If you fit this criteria, you can learn more here.
Friends and family
If you do have people in your life who could invest in your business, getting a loan from friends and family is sometimes an option. Of course, for many entrepreneurs who are just starting out and in need of cash, this just isn’t a possibility. Either the amount they need is too high, or their circle of friends and family is small or possibly strapped for money themselves. It’s possible that your friends and family will think it’s too risky because of your bad credit as well.
Is the money worth the risk?
It’s natural to consider if these options are worth the possible bad effects down the road. Of course, for some business owners, not getting more financing as soon as possible could mean having to take drastic measures—even closing the business. The silver lining here is that most of the above will help recover your credit if you keep in good standing and make on time payments. There is a caveat: if you can’t make on time payments, these options will sink your business into debt and make matters worse.
If you have poor credit but don’t need immediate financing, these options might not sound appealing to you, or the risks may appear too high. In either case, working to recover your credit is key to the success of your business.
What should you do to recover your credit?
If the timing is off for getting a loan, you can make sure that’s only temporary. What you should do is build up your credit, and here’s how:
1. Understand how credit works. There is such a thing as a business credit score, which factors in things like whether your business makes late payments or is in debt. Be sure to also remember that as a business owner, you basically are the credit representative of your company. Your personal credit score, factoring in things from credit cards to car payments, is a big factor when a bank is deciding whether or not to lend. Don’t lose heart; there are positive things you can do to build up credit.
2. Get the lay of the land. Visit your local SBA or SCORE office, or search for resources in your community—like the local university—that could connect you with a financial advisor. Each person is allowed one free credit report per year, get yours and make sure you know the financial status of your business inside and out.
3. Start small, with the basics. If you personally have bad credit, make sure business and personal expenses are separated. Call collections agencies and set up what regular payments you can afford. Pay all bills on time or early.
4. Incorporate your business. If you haven’t already, and make sure there are bills under the company name that you are creating a good track record with.
5. Prepay everything you can. Not only does prepaying bills often secure you a discount, when it comes to your credit, the more things that are already squared away and paid for, the better.
6. When you ask for funding, ask for the smallest amount possible to cover your needs. This will increase your chances of getting a loan and being able to repay it. You don’t want to saddle yourself with more debt than necessary, and you certainly don’t want to wind up with a large debt you can’t afford to repay.
Planning for the future
There are probably understandable reasons for your bad credit. Most of us are still bouncing back from the recession, and some businesses were hit harder than others. Whether or not you decide to get a “bad-credit loan,” building up your credit is planning for the future of your company. Once you raise your credit score, it will be much easier to secure funding as your company grows.