You probably already know that maintaining an above-average credit score is extremely important while running a business. Of course this can be especially pivotal when you’re in need of additional working capital and want to receive a small business loan from a traditional lender. Unfortunately, it can make it very challenging to get approved for financing if your credit score is low.
Topics Covered in this Article:
7 Ways to Get a Bad Credit Small Business Loan
1. Create a Clear Business Plan
2. Research Lender’s Credit Score Requirements
3. Be Prepared to Receive a Higher Interest Rate
4. Work on Improving Your Credit Score
5. Pursue a Merchant Cash Advance
6. Ask Family or Friends for Money
7. Pay Your Bills on Time
Business Loans for Poor Credit: Qualifying is Possible
Today we will offer tips on how to get a business loan with bad credit, in addition to a few ways to build business credit and improve your chances of getting approved. Now let’s get started, so that you can determine if business funding with poor credit is possible for your company.
7 Ways to Get a Bad Credit Small Business Loan:
1. Create a Clear Business Plan
Understand that it is crucial to have an organized business plan in place that you can share with your lender when applying for small business loans with a low credit score. Remember that this will likely be helpful in convincing them that you can handle the repayment terms.
In addition, please be ready to provide your lender with your business’s monthly sales earnings. Ideally, you’ll be able to show improvement in your business’s finances over time.
A lender may be more apt to work with you if they can see that your finances are on an upward growth trajectory even if your credit score isn’t stellar. On the other hand, if your sales are low or unpredictable, they may not feel comfortable providing you with a business loan.
Information on how you plan to use the loan is another section that you should include in your business plan. Perhaps you’re planning on using a term loan to purchase a new piece of equipment for example. Just outline this in your business plan and explain how using this loan for this cost will benefit your business’s finances in the long-term.
Continuing with the equipment example, you could explain how once you have updated equipment, you’ll be able to service more customers (and in turn earn more sales). This could convince a lender to work with you, even if you don’t have an excellent credit score. A good advisor will also help you look into applying specifically for an equipment loan instead of a general business loan or credit card for which you may be more inclined to qualify.
Once again, if you can prove that having access to business financing will benefit your business’s sales, you could be more likely to be approved. After you have access to more capital, you’ll have an easier time repaying your loan, which is a primary concern for lenders.
2. Research Lender’s Credit Score Requirements
Before getting started, conduct research and determine which lenders provide loans for small business owners with bad credit. You’ll find this will be especially important if your credit score is under 500. While some online lenders are relatively lenient on this, if your score is less-than 500, it may make lenders apprehensive about working with you.
You will simply waste your time applying with a lender if you don’t meet their minimum credit score requirements. Alternatively, focus on ways to build business credit, and submit a loan application once your score has improved. But for when you’re in a crunch and need additional working capital as soon as possible, try and find a lender with a lower credit score minimum.
3. Be Prepared to Receive a Higher Interest Rate
At the time you apply for business financing from a lender, you’ll need to consider the rate they’re providing you with. If your business has a low credit score, it may result in you receiving a higher rate than a business with a high credit score. Your lower credit score leads the lender to assess you as a higher-risk customer that might not be capable of repaying their loan on time.
If this is the case, you should consider whether your business will be able to responsibly pay back the loan amount. If you don’t think you’ll be able to afford loan payments while also keeping your business operational, it might be better if you wait on taking out a loan.
Take into consideration that your business credit score won’t improve if you miss loan payments. As such, if you know that the terms and rates will be difficult to manage, it might not be the right time for you to receive a loan.
4. Work on Improving Your Credit Score
We know you’re serious about getting a business loan despite your bad credit score, and the answer is simple: improve your credit score prior to applying. The process is simple but takes time.
Initially, you’ll need to examine your business credit report so that you can see your score and determine if there are any discrepancies. In this case, you should report these issues to all credit bureaus so that your score can be adjusted.
Realize that raising your credit score isn’t something you can achieve overnight. Achieving a better score will require you to form healthy financial habits, and then prove your financial responsibility to credit bureaus over time. We know this can be frustrating if you need access to a business loan as soon as possible, but it may be your best bet.
When you’re not in a rush to receive financing, you should focus on raising your score, and then start applying. Be certain to keep reading, because #7 features a simple way to help build your business’s credit.
5. Pursue a Merchant Cash Advance
When you’re interested in business financing options but have a low personal credit score, it may be better to apply for a merchant cash advance.
While a merchant cash advance is a type of business financing, it isn’t classified as a small business loan. If you receive a cash advance, you’ll receive lump sum financing in exchange for the provider receiving a percentage of your personal credit card sales. Thus, even if your credit score is below average, if you have consistent business credit card sales you could still qualify for this product.
During the merchant cash advance application process, the financing provider will be looking for a large number of deposits in small amounts. Therefore, your poor credit score could be overlooked if you meet this requirement.
Additionally, a notable benefit of cash advances is that your remittance is based on your credit card payments at that time. Therefore, if you have a slow month, your repayment amount will be smaller than it would be during a busier time. Of course many business owners like this because they’re able to fulfill their obligations without set terms.
6. Ask Family or Friends for Money
When you’re in a bind and need immediate financing to keep your business up-and-running, consider asking a friend or family for some cash.
While we don’t recommend taking a loan from a loved one in most cases, if you know someone who’s willing to give you money to get by until you can apply for financing, you can improve your business credit in the meantime. Later, when your credit score increases, you can apply for a business loan or line of credit from an alternative lender!
7. Pay Your Bills on Time
Be a good steward of what’s lent to you. Consider that one of the easiest ways to improve your credit score is to pay your bills on or before their due date. Clearly, paying bills late can be a contributing factor to why you have a low credit score, so make this a priority moving forward. You’ll find a few ways listed below in which you can ensure that you pay your bills on time.
Now that you have your payment schedule, set a monthly calendar reminder: If you frequently miss bill deadlines, we suggest setting up calendar notifications that will remind you as the due date approaches. In this way, you’ll have fair warning that the due date is upcoming. Sometimes you can also set up automatic payments online or through other means.
Review and refine your budget: If you’re paying bills after their deadlines because you’re short on cash flow, you should improve your business’s budget going forward so that you can afford to pay for monthly expenses. We know that setting a budget can be daunting, but it’ll help you avoid overspending in the future.
Utilize apps: There are many financial apps that help business owners pay and manage their bills. If you’re interested in this type of technology, check out apps such as Mint, TimelyBills, and Bills Monitor.
Try these tips so it’ll be easy for you to pay your bills by their due dates and, in turn, earn a good credit score.
Business Loans for Poor Credit: Qualifying is Possible
We hope this post has provided you with helpful ideas on how to qualify for a business loan with bad personal credit or business credit! Remember not to get discouraged when going through this process, as there are alternative lenders out there who will provide loan options for small business owners with bad credit history.
Let us know: If you’ve received a bad credit business loan or have successfully raised your score in order to get approved for financing, share your top tips with us in the comment section below!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.