Starting a business from the ground up is quite daunting. The feeling you get when it starts to take off is priceless. Most new businesses need external help in the form of financing to take their business to ‘the next level’. There is only so for you can go bootstrapping it unless you were born with a golden spoon in your mouth.
As you might have heard, getting financing for your new small business can be quite difficult. There are a lot of benchmarks that you have to qualify in order to get traditional, formal business finance or loans.
It can get even more difficult if you’re just starting out yourself and don’t have a lot of credit history. Or worse, you have a bad credit history. Traditional lenders are unwilling to lend to borrowers with a bad credit history since it makes them a risky investment.
But, there are several loan and financing options available for businesses with bad credit that you can apply for right now. In this article, we will guide you through everything you need to get approved for a bad credit business loan, and the types of business loans for bad credit that you can apply for right now.
What is Credit Score and why does it matter?
The Credit score is a number that determines your creditworthiness. It can lie between 300 and 850. The higher the score, the better you look to your potential lenders. For them, you are a safe bet.
Lenders use the credit score as a metric for measuring and determining risk. The lower your score is, the riskier you and your business appear as borrowers.
Traditional lenders like banks often require you to have a credit score of 640 or above to get your application approved. This isn’t the only factor considered in your application but it provides a definite benchmark excluding all the other factors.
If your business has been operating for less than a year, only your personal credit score will be considered. But, generally, your personal credit score is tied to your business, even after you’ve established a business credit profile.
If you want to a loan with good terms or think you’ll apply for more funding in the near future, you need to display that you’re a responsible borrower. A good credit score is the first sign of a responsible borrower.
Factors affecting your Credit Score
The main factors that are considered in the calculation of your credit score are as follows:
- Payment History: This factor accounts for 35% of your credit score. Your payment history is the record of whether you’ve paid your bills on time or not. Creditors report your payment activity to the major credit bureaus, typically every 30 days. Missing out on any bills negatively affects your credit score.
- Amount of Debt: This accounts for 30% of your credit score. That debt is also called your credit utilization ratio. It is calculated by comparing how much debt creditors have extended to you, to how much of the credit you’ve used. Let’s assume you have no loans and a single credit card with a $400 balance and a $1,000 credit limit, your credit utilization rate is 40%. It’s best to keep your credit utilization to 30% or less.
- Credit Age: This accounts for 15% of your overall score. While considering your credit age, lenders look at the age of your oldest account and the average age of your combined accounts.
- Credit Mix: It accounts for 10% of your score. Revolving debt and Installment debt are the two main types of credit accounts that go into that mix. Your credit score is the best when you have a healthy mix of both.
- New Credit: This accounts for 10% of your score. It factors in how many new accounts you have, how many new accounts you have applied for recently, which result in credit inquiries, and when the most recent account was opened.
What can you do to improve your credit score for future loans?
There is no denying that you can get a business loan with bad credit, and we’ll cover that below. But, to get loans of higher amounts on better terms, you’ll need to improve your credit score. There are certain general principles and guidelines that you can follow to gradually improve your credit score. We are listing some such guidelines here.
1. Make timely payments
Lenders are interested in knowing how reliable are you in paying your bills. They use that as a predictor of how likely are to make your regular future payments.
Avoid making late payments at all costs and bring any outstanding balances up to current as soon as possible. Timely payments show that you are a reliable borrower and improves your credit score.
2. Maintain a low outstanding balance
Keeping your outstanding loan and credit balances low is great to improve your credit score. We understand it won’t be possible when you take out a large loan but it’s a good practice to pay off your other debts before you take out another.
The credit utilization ratio is the amount of credit you utilize compared to the amount of credit available to you. You can calculate your utilization ratio by adding up all of your debt and dividing it by your total available credit. Typically you want it to be below 30% to improve your credit score.
3. Avoid multiple lines of credit
Minimizing the number of new credit lines or loans you take out within a short period of time is the easiest way to improve your credit score. Applying for credit requires a comprehensive inquiry in your credit report and it can be detrimental if it happens too often.
Unnecessary lines of credit may also lead to excessive spending which can make it difficult to maintain timely payments. So, only apply for new loans or take out new credit lines only when absolutely necessary.
4. Separate Business and Personal Expenses
If you have bad personal credit, it will be advantageous to separate and establish a clean credit history under your business name. You can simply get a business credit card and apply for regular purchases like office supplies. If you keep up with your payments and maintain a low balance, soon you’ll have a good business credit history to leverage.
How to get approved for a business loan with bad credit?
If you have bad credit, there are a few steps you can take to improve your chances of getting a business loan. Let us take a look at what you can do.
1. Understand your credit position
You’re only allowed one free credit report per year so you should get yours. This report will include some supplemental scores which will give you a better understanding of your current position. Look into your personal as well as business credit scores if your business is older than a year.
2. Research your options
You should look for a business loan that will give you the amount of money you need at the lowest cost and has repayment terms suitable for you. At GConnectPro, we can help you find the best bad credit business loan options that are right for you and your business.
3. Prepare a Business Plan
Some lenders require you to include a business plan as a part of your loan application. Irrespective of the requirement, it is a smart move to formulate and write a business plan.
A well-thought-out business plan will help you avoid money and financial management mistakes. It’ll instill more confidence in the lenders in your abilities.
4. Provide Collateral
Providing collateral improves your chances of getting a business loan if you have bad credit. If you fail to repay the loan, the lender will take the collateral and sell it to get the remaining amount.
You should avoid using your personal assets as collateral for your business loan. Instead, pick a loan that lets you use business assets like equipment as collateral.
5. Get a Cosigner
Adding a cosigner means that they are willing to share responsibility for the loan with you. You want a cosigner to have good credit and the ability to cover payments if you’re unable to keep up with them.
6. Apply for a lower amount
Applying for a funding amount that is in consonance with your business plan and current financial position is important. It’ll increase your chances of getting approved and also make repayment easier on you. It’s a bad idea to burden yourself and your business with more debt than is necessary or more than you can handle.
Types of Small Business Loans for Bad Credit that you can apply for right now
It is difficult to get traditional bank loans with bad credit. But you still have options! Fortunately, there are many other financing options for businesses with bad credit. The trick is the find the right type of bad credit business loans that suits your situation. Here are a few types of small business loans for bad credit that you can apply for:
Business Credit Card
Although not a loan, a business credit card can help you obtain the financing you need without the cumbersome loan approval process. The required credit score varies with every card provider. So you’ll be able to find a business credit card that will work with your current credit situation. You should use them for financing small amounts since they carry higher interest rates than other types of financing.
A credit card not only gives you access to capital but can also help improve your business credit score. If you make timely, regular payments and maintain a low balance, it’ll improve your business credit score. Ensure that you choose a business credit card that reports your payments to major credit reporting agencies.
Business Line of Credit
A Business Line of Credit, like a credit card, is a revolving credit. This means you can use the funds up to your approved amount, then repay what you’ve used to make the funds available again.
Business owners often opt for a business line of credit when they need working capital for expenses such as payroll and inventory. Click here to learn more about the Business Line of Credit.
Small businesses having unpaid receivables can turn them into cash using invoice factoring. Factoring companies buy your unpaid invoices for a percentage of their value. They then collect payment on the invoices from your customers and pay you the balance of the invoice minus the factoring fees. The value of your invoices is the primary consideration for the factoring company, not your credit score.
Click here to learn more about Invoice Factoring.
Although similar to Invoice Factoring, Invoice Financing has some fundamental differences.
The financing company advances you the value of the invoices, instead of buying your invoices. It is your responsibility to collect payments from your customers and paying back the loan and any related fees.
This type of loan is used to finance the purchase of equipment using the equipment itself as collateral. This helps to keep interest rates relatively low, although those with bad credit will likely pay more interest. Click here to know more about Equipment Financing.
Merchant Cash Advance
Merchant Cash Advance helps small businesses get small-term cash advances based on the future card sales of the business instead of collateral. This is suitable for businesses that accept a high volume of credit card payments.
The lender advances you a fixed amount against your business’s future credit card sales. Then they collect a percentage of those sales from you every day. With this, you won’t have to make a large payment on a day with slow sales since payments are based on sales.
Click here to know more about Merchant Cash Advance.
Microloans are usually provided by non-profit organizations and range between $500 and $10,000. These loans are primarily intended for business owners living in underprivileged communities or for those who run socially responsible businesses.
Your business’s goals must also align with those of the nonprofit. Poor credit isn’t a deal-breaker for microloans. However, the lender may require you to get regular business counseling or take business classes as a condition for approving the loan.
Irrespective of your credit score, business history, or current financial state, the best thing you can do to improve your chances of being approved for funding is to be prepared in advance. Do your research, go through your lending options, and review your business plan and financials. This will not only help you select the right business loan but also will ensure that you can approach any lender with confidence and the documentation necessary to be approved.
At GConnectPro, we can help you get business loans for bad credit quickly. Get in touch with us today to learn more!
Author Bio: Serina Johnson is a Financial Adviser and Writer with Global Connect Pro Financial. She specializes in Business finance and is an accomplished writer & adviser. She regularly writes on subjects like Business Loans, Business Finance, Alternative Finance, Budgeting and Forecasting, Expense Management, Cash Management, Taxes, and more. Having been a part of our team for over 3 years now, we trust her expertise in finance and accounting. With Global Connect Pro Financial, Serina is an expert at Business Finance and Financial advice and helps businesses of all sizes raise funds for a variety of purposes.