Finance

How A Bad Credit Business Loan Can Save Your Business

How A Bad Credit Business Loan Can Save Your Business

Most borrowers often give up when their loan application gets declined. It’s understandable because lenders mitigate default risk by lending to individuals with good or excellent credit scores. 

If you have a history of default, your lender will fear advancing credit to you as they view you as uncreditworthy. But it’s not the end of the road; some institutions lend money to individuals with bad credit, albeit under certain conditions.

Can a bad credit business loan save your business? Keep reading as we dive into the topic.

Why Does A Business Need A Loan?

Your business may need a loan for the following reasons;

1. Expansion

As your business grows, many costs will come into play, such as acquisitions of new assets, hiring more staff, new buildings, marketing, and renovations. Loans can save your business by covering the expenses without eating into your operating funds.

2. Working Capital

One of the biggest challenges for businesses is how to stock and have money for working capital. By taking out a business loan, you can have money to restock and keep your business running.

3. Cash Flow Requirements

Managing cash flow is a big problem for small businesses. During your business operations, you need money for rent, mortgage, utilities, and staff. A small loan can come in handy to help the business stay afloat.

4. To Consolidate Existing Debts

Debt consolidation can be the only solution if your business is in debt and is struggling to pay it. It helps improve your cash flow by reducing your monthly repayments. 

What is a Bad Credit Business Loan?

Financing your business can be extremely difficult if you have bad credit. However, bad credit loans are available from several lenders even when your creditworthiness is put into question. 

A low credit rating typically reflects a low credit score, which impacts your ability to get loans and other financial help from lenders. 

Equifax, Experian, and TransUnion are the major credit reporting organizations that assess your credit score based on your capacity to pay back debts.

You have no credit score if you have never taken out a loan, and it will suffer if you skip credit card payments or put off loan repayment. It’s important to note that your personal credit score will impact your business score.

To understand how the credit score works, here is a table illustrating the various ratings from the Experian credit reporting agency.

ClassificationCredit Score
Very Poor300-579
Fair580-669
Good670-739
Very Good740-799
Excellent800-850

If your credit score is fair to poor, you should look for a lender who offers no credit check loans.

Where To Get A Bad Credit Business Loan

Bad credit business loans are more difficult to qualify for than regular ones. Not all lenders are willing to advance these credit facilities. 

Luckily, you can get a bad credit loan from the following lenders;

  • Bank and lending institutions: Some banks can offer small business loans for borrowers with bad credit. 
  • Online lenders can advance bad credit loans, but mostly these come with high interest and processing fees. 
  • Credit unions: Some states or cities have credit unions that lend bad credit loans, especially if your business is a start-up.
  • Invoice factoring companies are alternatives to business loans and lend you money against expected cash receipts.
  • Merchant service providers offer money against future credit sales.
  • Community Development Financial Institutions (CDFIs) are private organizations that lend businesses working capital loans. You can search for your local CDFI in your state or city.

How To Get A Bad Credit Business Loan

Most lenders who advance bad credit business loans use certain aspects to approve loan applications.

1. Credit Score Requirements

As noted, a poor credit score is generally considered bad and may deny you the opportunity to have your loan application approved. When applying for a business loan, be sure to compare different lenders to get one that matches your credit score. 

2. Interest Rate Requirements

As you probably know, most lenders offer favorable interest rates to people with excellent credit scores. Because of the degree of risk involved, your lender may offer a higher interest rate if your score is poor. 

Before you sign the loan agreement, shop around for a lender that discloses their interest rates upfront. Even though interest is not the only factor to consider, check if you can get a favorable rate. 

3. Repayment Terms

Because of the risks involved, most lenders offer a shorter duration of up to 12 months for bad credit business loans. During your loan application, your lender will disclose their repayment terms. 

Most lenders have different structures, ranging from daily, weekly, or monthly payments. A shorter repayment period will keep you on your toes but may harm your business cash flows. 

4. Processing Fees

Lenders can charge processing fees for a bad credit business loan at the onset of the application. Other applicable fees may be charged depending on the lender, including late payment fees, early settlement charges, attorney fees, and valuation fees in case of a secured loan. 

To keep your business expenses down, choose a lender with lower fees and consider all the charges when making a decision. 

5. Security

If you have a poor credit score, your lender may approve your credit application if you meet certain conditions. One of the things they may ask for is collateral or security for the loan. In this case, you’ll need to pledge an asset as security to support your borrowing request. 

If your credit exposure is supported by security, it’s known as a secured business loan. However, it becomes collateral security after the lender registers a charge over it. 

6. Guarantor or Co-signer

If your credit score is poor, your lender may ask for a guarantor to support your application. Your guarantor must have a good credit score, and if you fail to pay, they will be held responsible. A co-signer guarantees to pay your business loan if you fail to pay. 

Even with a guarantor, you must demonstrate a solid and consistent cash flow to be eligible.  

How To Get A Bad Credit Business Loan

Now that you know the different aspects of a bad credit business loan, here is a step-by-step procedure for obtaining the credit facility.

1. Know Your Credit Score

Before applying for a business loan, it’s important to know your personal credit score. It helps you to comprehend better how it affects your borrowing. 

Moreover, by knowing the specific score and details of your business credit score, you can be in an excellent position to assess your business creditworthiness. 

Credit reports are generated by the leading agencies – Experian, TransUnion, and Equifax. You can get a free report via AnnualCreditReport.com.

2. Take Steps to Improve Your Current Credit Score

You can improve your current scores by reviewing the report and identifying areas negatively impacting it. If there are issues, you can raise the same with lending institutions and ensure those items are regularized in your report. 

Also, pay smaller debts such as utility bills first and ensure you continue with timely payments. If your report has no history, take a credit card and start utilizing credit. However, don’t exceed the 30% limit.

3. Have Business Records Ready

Before advancing credit, your lender will conduct a thorough background check to exercise due diligence. This process involves evaluating your business cash flows, bank statements, financial documents, business plan, tax reports, licenses, legal documents, and asset titles.

It’s essential to have your records ready, as they will demonstrate to the lender that you’re focused on achieving your business objectives.

4. Identify Your Guarantors

As noted, a guarantor bears all the obligations of the loan. Identifying someone with a higher score is important to improve the chances of loan approval. Also, with a guarantor, your lender can offer a longer-term loan period. 

5. Shop Around

A poor credit score doesn’t necessarily mean picking any possible lender. Some lenders can offer loans with higher interest rates to mitigate the risks. 

Whereas you may not get a favorable rate like someone with a good credit score, you can compare the interest rates, fees, and repayment terms offered by different lenders. 

Another thing to keep in mind before signing the loan agreement is the lender’s reputation. Read reviews from previous borrowers and pick those with a good reputation. Check if customer support is accessible via mail or phone to respond to borrowers’ concerns. 

Additionally, look at the turnaround time for the loan application. Delay can hurt your business operations, especially if you’re applying for a working capital loan. 

Conclusion

As you can see, it’s not the end of the road if you have a poor credit score. You can seek money for expansion, working capital, debt consolidation, equipment purchases, and operations by taking out a bad credit business loan. If you are not in a hurry, take steps to improve your credit score, which is essential for the overall financial health of your business.

About the author

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Steven Ly

Steven Ly is the Startup Program and Events Manager at TheNextHint Inc. She recruits rockstar startups for all TC events including Disrupt, meetups, Sessions, and more both domestically and internationally. Previously, she helped produce Dreamforce with Salesforce and Next '17 with Google. Prior to that, she was on the advertising teams at both Facebook and AdRoll, helping support advertisers in North America and helped grow those brands globally. Outside of work, Priya enjoys Flywheel, tacos, the 49ers, and adventuring around the globe.

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