Businesses and loans go hand in hand. However, if you have a poor personal credit history, it might be difficult to be eligible for a business loan. But, not all hope is lost! You can find lenders who specialize in startups and less creditworthy borrowers, while others offer financing services to entrepreneurs with poor personal credit. But, such loans come with repercussions, quite obviously! So, join us, as we explore the nitty-gritty of how you can get a business loan even with bad credit.
The Relationship between Bad Credit Loans and Businesses – Covering the Basics
A bad credit score is anything between 370 and 579. Poor credit in the entrepreneurial world means anything below a FICO score of 670. Quite understandably, a poor credit record vehemently reduces your prospects of getting a business loan with favorable rates. According to the latest Federal Reserve Report on Employer Firms, a whopping 76 percent of low-credit-risk enterprises were partially approved at major banks while a mere 45 percent of enterprises with medium to high credit risk were partially approved. The hurdles are quite obvious but it is still possible to qualify for a business loan with a poor personal credit score. How? Let us find out!
Is It Possible to Get a Business Loan with Bad Credit?
Let us get straight to the point – you can get a business loan with a poor credit score, anything less than 670. But, you probably have to pay a much higher interest rate, despite your FICO credit score being in the ‘fair’ category. A credit score, as we all know, is an indication of your debt-paying history.
It reflects how you handle repayment of business loans. A fair or poor credit score vehemently diminishes your loan options as fewer lenders are willing to take the risk of lending money to you. Moreover, if you have a poor credit score that falls in the 500s or below, you will probably have to opt for alternative financing options, as major banks would have already placed you in the red zone.
Business Loan Options for Entrepreneurs with Poor Credit Scores
1. Online Lenders
Online lenders are among the most popular choices for business loans with bad credit. These are alternative lending options that serve as a financial gateway for credit-challenged borrowers who have been shown the door by traditional, mainstream banks. Online lenders can help you get a business off the ground, especially if you are just starting with no money and poor credit. These loans are usually super-speedy, with some being processed in the same business day post-approval. The application process is quick and minimal documents are needed. However, you must have seen it coming from a mile away – online lenders can charge incredibly high interest rates and you might have to start repaying what you have borrowed very rapidly, often on a weekly or biweekly basis.
2. Working Capital
The second financing option for businesses with poor credit is working capital loans. They are devised to cover small or emergency expenses pertaining to equipment repairs or a seasonal plunge in revenue. Working capital loans are unsecured, short-term loans, as they are intended to cover day-to-day expenses. The credit score thresholds of working capital loans depend upon the lender. For instance, a working capital loan from National Funding needs a FICO score of 660, a minimum business operation of six months and an annual revenue of USD 250000.
3. Invoice Factoring
Invoice factoring is an alternative business financing that weighs the credit history of your clients and suppliers more than you or your business’s. The factoring firm buys slow-paying customer invoices and sends up to 90% of them. The company then takes the responsibility of collecting payments from your clients.
Once the invoice is paid, the factoring company takes out the factoring fee, which is a proportion of the total invoices and your enterprise is paid the remaining amount.
4. Equipment Loans
Even with terrible credit, they are one of the simplest business loans to get. Equipment-backed loans reduce the risk of financing to a credit-challenged company owner. In simple words, if you fail to repay your loan, the lender could sell the equipment and pay off the debt. Most equipment loans require a minimum FICO score of 600 or above and the enterprise must be in operation for two years or more.
5. Traditional Banks
The fifth financing option for businesspersons with a poor credit history is traditional banks. The terrain in this regard can be tricky, but worth it. Traditional bank business loans provide bigger loan amounts, lesser interest rates, and longer payback terms. But, these perks are usually available for borrowers with a robust credit rating.
However, you could be eligible for a business loan from a traditional bank, despite abysmal credit scores by showing your business strategy and convincing the bank about your foolproof plan. This could be an excellent opportunity to rebuild your credit score and establish a long-haul and fruitful relationship with a renowned financing institute. However, along with credit scores, you might have to put up collateral to receive funding and have an operational history of 2 or more years.
Simple Tips to Attract a Favorable Business Loan with A Bad Credit Score
Some tips and tricks can help you strengthen your eligibility for a better business loan with poor credit.
- Draft a business strategy that clearly describes your enterprise’s ability to earn revenue, make profits and repay the loan in a timely fashion.
- Find a reliable co-signer who has a higher personal credit than you
- Provide valuable collateral to secure the loan and reduce the risk assumed by the lender
- Take proactive steps to bolster your credit score before applying for a business loan
Wrapping It Up
So, long story short, you can get a business loan even with poor credit. Online lenders, capital loans, equipment loans, invoice factoring, etc, are accessible options. But, remember that a long-term plan to improve your credit score is the most feasible way to get favorable business loans.
