If your credit score is less than stellar, lenders simply aren’t willing to take a risk on a business with bad credit, or if they do, the terms of the business loan could push your business further into debt.
You may find traditional lenders willing to extend business loans for bad credit. However, be aware you may be charged higher interest rates and the terms of the loan contract may vary from loans for businesses with good credit.
Economically speaking, the last few years have been tough for many small business owners. Tough times mean slow business, loss of revenues, and the potential for falling behind or defaulting on payments. All of these things can result in bad credit for business owners, which means difficulty obtaining additional capital for your business.
1. Know Your Credit Score and Your Credit Risk
The first step is to understand how the whole process works. There is no credit score for businesses. However, every individual that has credit of any kind (credit cards, auto loans, mortgages, etc.) has a credit score. Do you know your FICO score? Your FICO score is a summary of your credit risk which lenders use to assess things such as whether or not to extend credit and if so, at what interest rate. You can identify your credit risk and find out your FICO score by employing free online tools such as the one at www.fico.com.
There are three primary reporting agencies (Equifax, TransUnion and Experian) that monitor your credit history including if your payments are on time, a few days late, or significantly late. All of these results in a “score” which lenders use to assess your credit risk. Or, in simpler terms, they use your credit score to predict the likelihood of your business defaulting on the loan. Lenders look at your entire business profile – including your personal credit score – to determine risks with bad credit business loans.
These factors are key for any lender when they are considering your ability to repay any small business loans. The bottom line? Keep your credit as impeccable as possible. Know your credit scores, fix any errors, and work to improve your credit scores if you’re faced with pursuing small business loans. Bad credit can be fixed!
2. Getting Business Loans for Bad Credit
If you’re a small business owner with less than ideal credit, you may have difficulty securing a small business loan from a traditional lender. One thing to keep in mind is that loans for businesses are based on calculations of cash flow. If a business can show on paper that they can afford to make a payment then a bank will be more likely to extend a loan offer to that business. What will vary are the terms of the loan, depending on the credit risk – things such as the interest rate (generally speaking, the worse your credit is, the higher the interest rate), and the terms of repayments. Also, the amount of collateral required to secure the loan is a variable as well.
To judge your ability to pay, a bank looks at the last three years of performance at a minimum. If it’s a relatively new business, the bank will require projections and a solid business plan. A new business would be required to have more equity (cash) invested depending on what the loan is for. A business needs loans for only a few reasons (build or start up, expand the existing business, modernize or make it more efficient, or to fund inventory). The only time a bank will turn down a loan for a business is when the business cannot show the ability to pay it back or if the business owner has bad credit.
3. Risks with Bad Credit Business Loans – Using Traditional Lenders (such as banks)
If a traditional lender agrees to extend business loans for bad credit, you can expect to pay significantly higher interest rates than a business owner with good credit. Also, with traditional lenders, you can expect more stringent terms of repayment as this will be considered a bad business loan. Traditional lenders, such as banks, may take awhile to process your loan request, especially for small business loans with bad credit. And finally, if traditional lenders do extend a loan offer, they may require that you put up additional collateral to secure the risky loan.
4. High Risks with Bad Credit Business Loans
- Cash advance or additional line of credit on your credit card. If you choose to get a cash advance or increase your credit limit, you’ll find exorbitant interest rates. And if you only pay the minimum due each month, you’ll be paying off significantly more than your original loan amount in the long run. This is a very risky move that pays off for some, but may be more than you and your business are willing to take on.
- Home equity line of credit. Most finance experts do not recommend putting your home on the line, but it is an option. Essentially, your home becomes additional collateral you’re putting up when applying for the business loan, which may help to secure the loan in the eyes of a traditional lender.
- Co-signer. You could bring on a partner for your business and have them co-sign your loan. A note of caution: their personal credit will be taken into consideration for the small business loan. And should you be late with payments, or worse, default on the loan, your co-signer risks damaging their own credit as well. Think carefully about the personal and professional risks you run with these kinds of bad credit business loans.
5. Three Steps to Prepare You for Obtaining Business Loans with Bad Credit
Now that you know the risks of lenders extending business loans for bad credit, there are some things you can do to position yourself and your business in the best possible light to secure the additional capital you need – even with bad credit.
Step 1: Make sure you have a solid, strategic business plan. Lenders will look more favorably upon businesses with a solid plan in place for the growth of the business. Be sure to include fact-based projected revenue as well.
Step 2: In addition to showing projected revenue as mentioned in Step 1, you must also show that you are currently generating revenue. This is key. Lenders – whether traditional or alternative – will not look favorably upon businesses that are already “in the red.”
Step 3: Look beyond traditional lenders and consider nontraditional lenders, such as Kabbage or the SBA. Lenders such as these offer key advantages including a quick and easy process with approved money delivered electronically within a matter of hours or days. Also, the process is convenient and private. You can apply from home safely and securely on your home or business computer, and you will not deal with anyone face to face as you would when dealing with a bank.
TIP! Know before you apply. Know how much you reasonably need and most importantly – know how much you can afford to repay. Lending sites work hard to get you the best possible loan at the best possible interest rate, but ultimately it’s up to you, the business owner, to know what amount of capital is right for your business.
Many small business owners think they’re stuck accepting high interest, high collateral, and small business loans for bad credit. But the truth is, with a little creativity and out-of-the-box thinking, there are ways to minimize your risk and secure the loans you need.
6. Your Credit Repair Plan
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Loan Deferment is a postponement of a loan's repayment. There are many reasons why someone might seek to defer a loan, including a return to school, economic hardship, or unemployment.