Applying for a Small Business Loan with Bad Credit

Matthew Gillman

October 4, 2018
Bad credit business loans for small business

One of the over-all barriers that business owners face, especially small business owners, is funding. How do you get a small business loan to fund your business when you are just starting? Not to mention, with a bad credit ?

Many new small business owners don’t have immediate access to expendable cash to operate. Additionally, a majority of new businesses have not yet established good credit scores. This article will discuss the top five things you should know when you are applying for a small business loan with bad credit.

Related: 4 Tips to Secure Small Business Loans with Bad Credit

Owner Personal Credit

The first thing a small business owner must consider is their own personal credit score. Many lenders will look at the business owner’s credit when their small business applies for a loan. An owner represents their business. This means that, in addition to the owner’s credit, factors like duration of time in business, annual revenue, capital available, and potential collateral are all other elements that go into the lender’s decision.

Managing Risk 

Low credit is a red flag for lenders. They don’t want to give money to people who won’t be able to pay it back. To provide loans to riskier clients, financial institutions protect their money with loan terms. Depending on your credit score, your lender might reduce the length of the terms and could limit the total amount borrowed.

Because of difficult loan terms, your small business needs to learn to manage risk. By limiting the total amount borrowed, your business is protecting itself as well, especially for new business owners. The last thing you want to do is dig yourself into deep debt early in the game.

Consider Collateral

If your credit score is low, one way of getting better loan terms is to put up collateral. This is applicable to small business experiencing rapid growth. You could offer business assets to secure financing from lenders. This will lessen the risk the lenders are facing when letting your business borrow. With collateral, lending companies will have a fall back in case you default on payments, which hopefully, you’ll not.

Business owners can consider offering inventory, equipment, or accounts receivable to financial institutions to obtain capital. Understand that if you should fail on meeting payments, the banks or lenders will automatically seize the collateral to pay for the loan.

Consider Partners

Having a co-signer with a higher credit score can increase your chance of getting a business loan. By finding a trustworthy partner, you can secure financing for your small business. Presenting a co-signer will bring more resources and ideas to the table. Of course, this is a big decision to make for a small business owner, as well as the guarantor. But finding the perfect partner can make a huge difference in your loan approval process.

Options for Business Owners with Bad Credit

One loan option for small business owners is a business term loan. These are shorter in length, usually with a lower total amount borrowed. Term loans are great for businesses that are growing rapidly while providing risk management for the borrower as well as the lender over the course of a fixed term.

Another loan option for business owners is a business credit line. This allows businesses to get cash needed to cover emergency expenses or other important business expenses. Credit lines are a little harder to obtain with a low credit score. However, if you can demonstrate that you will be able to support regular payments, your chances of approval will increase substantially.

Related: The Difference Between Business Term Loans and Business Line of Credit

Applying for a Small Business Loan With a Bad Credit Doesn’t Have to be Challenging

If you’re a small business owner with low credit, it is easy to get caught up in the numbers. While some lenders won’t consider borrowers with low credit scores, there are a lot of factors other than the credit affect eligibility. Length of time in business, accounts receivable, equipment, inventory, or other quality assets that your small business has also matter. A good record of these might be enough to obtain the financing you need. So, don’t let your bad credit stop your small business from reaching its goals.

While businesses have their own credit scores, the owner’s personal credit still plays an important role. Bad credit usually means higher interest rates and much stricter terms, considering the risks. The first thing businesses with bad credit should do is to work on repairing it as soon as possible. Each and every small business needs capital to grow. By managing risk and working out reasonable terms with a lender, you can find a small business loan that works for you even if your credit is not the best.

 

Matthew Gillman

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