HOW CAN I GET A BUSINESS LOAN WITH MY BAD CREDIT ?
As per FICO if your credit score lies between 300 and 629 points, is termed as a bad credit score.
If your credit score falls between this ranges your business loan application is likely to be rejected by a traditional banker or lender because credit score is used as the primary decision making factor by them. As such, if your credit score is bad these, traditional financial institutions and lenders won’t even bother looking at your revenue or financials eventually the entire process stops there and you’re denied.
It is an established fact that for most of new business owner lack of funds is the biggest roadblock in their endeavour to grow their business. No doubt a bad credit score is trauma for getting business loan from conventional sources there is still hope to arrange for fund from alternative sources. There are different categories of funding programs and solutions available which give opportunities to expand your business.
These alternative lenders do look at your credit score but are not as critical as banks. They are interested in the creditworthiness of your customers.
Now, that you have decided to apply for a business loan this time for you to must have a look at your business and thoroughly review the need of the funding, flow chart of your income and expenses for the whole year. A holistic analysis is essential to know the exact requirement of the funding so as not to borrow too much or too little. Eventually ensure to include fact based project revenue in your overall plan. These loans cannot be used for is paying off personal debt or making personal purchases. Having a clear division between personal and business expenses is a must!
This will empower you to manage your finances better and subsequently will build your credibility with your lenders.
In spite of your bad credit score you can avail business loans from alternative funding solutions. Some are listed below:
1. Merchant Cash Advances
Merchant cash advances are suitable for business owners who have a steady flow of credit card transactions. A merchant cash advance is a short term loan provided in exchange for a percentage of the company’s future credit card sales. Restaurants and retailers are two common types of businesses that use merchant cash advances.
Merchant cash advance providers evaluate risk and weight credit criteria differently than a banker. An MCA provider looks at the daily credit card receipts to determine if the business can pay back the funds in a timely manner. Basically, a small business “sells” a portion of future credit card sales to acquire capital immediately.
These types of loans give business owners access to fast cash regardless of their credit score or collateral. Some lenders will have the funds in your account in less than two days. However, you can expect higher interest rates than those of a loan from a traditional bank.
For instance, if a company needs to borrow $20,000 to cover some unforeseen expenses, a merchant cash advance lender can provide it and then will take a portion of your credit card sales until $24,000 is paid. The advantage of this type of borrowing is that if your company has a good day at the cash register, a bigger portion of the debt is repaid. But if you have a slow day, the amount of repayment is less.
If you are in the early stages of funding your business, but have been turned down by banks due to your bad credit score and don’t have collateral to secure traditional financing;
Microloan can be a good option for your businesses if you need $50,000 to meet everything from startup costs, expansion, equipment, and marketing to achieve your goals
Several of these loans are available through microlenders who are often non-profit and/or community-based. These work with and monitored by the SBA (Small Business Association),
Of course, there are also micro lenders who receive their funding from governments instead of the SBA, and others who operate through philanthropies.
Generally, the interest rate ranges between 8 and 13 percent with some exceptions, making the rate slightly higher than the average for a traditional business loan but substantially lower than most credit card rates.
The loans are structured so that they are fully repaid within six years, helping to ensure the business owner doesn’t get locked in debt.
Microlenders do review credit, they tend to be more likely to look at the “big picture” when it comes to your business as opposed to just basing their decision on your credit score. Most Microlenders want to talk to you and understand your plans. Having your marketing efforts mapped out, as well as details on your monthly expenditures will help them get a better idea for what you’ve been able to accomplish so far and what you need in terms of financing to grow.
Some top U.S. microlenders are:
- Grameen America
- Opportunity Fund
- Accion New Mexico
- Justine Petersen
- CDC Small Business Finance Corp
- Valley Economic Development Corp
- Empire State Certified Development Corp
- Main Street Launch
- Kiva U.S.
- Pacific Community Ventures
- Excelsior Growth Fund
- Business Center for New Americans
3. Invoice Factoring
Invoice Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.
Invoice factoring has a different set of requirements that do not encompass your potential poor credit. As such, Invoice finance is a good option for those with bad credit.
This means if you are owed money by clients, you can access close to the full amount from a lender within a short time. The lender is paid back his money along with pre agreed fees once the customer pays. Once your invoices are factored, it is the factor that collects the money directly from your customer, and forwards you the amount of the invoice minus a factoring fee.
Besides Factors have a deep knowledge of specific industries and can provide you with so much more in addition to advance payment of your invoices. They will help manage your accounts receivable and make sure your customers continue to pay regularly as well as promptly on each invoice.
Additionally, factoring does not create any supplementary debt, as factoring is not a loan, it is a purchase of your open invoices. You have the flexibility of choosing which invoices need factor.
4. Split Funding
In fact split funding is not a business loan, rather it is a purchase of your future credit card sales done at a discount. Split funding, also known as a merchant cash advance, remits (or deducts) a percentage of your daily credit card sales to repay the loan. This makes them great for businesses whose cash flow fluctuates, making it difficult to make consistent, on-time monthly payments throughout the year.
Split Funding is perfect for retail businesses that accept credit cards. Here a set percentage is taken out of every credit card sale in order to pay back the advance, loan repayments never become unmanageable and there’s no maturity date. Subsequently allowing business owners to focus on their business rather than worrying about payments. If your business has a regular flow of credit card sales, this may be the perfect alternative loan option for you.
When business is good a larger amount is deducted. However, when cash flow is down, that amount is smaller, helping your business adapt with your fluctuating cash flow.
5. Equipment Financing
Equipment financing is the use of a loan or lease to purchase or borrow hard assets for your business. This type of financing might be used in these situations:
- You need expensive equipment, but can’t afford to (or don’t want to) purchase that equipment up-front,
- You need to replace your equipment frequently because it has a short lifespan or you always need the latest in technology, or,
- You need some combination of the above.
Financing methods include equipment leasing, SBA and other government loans, as well as sale-leaseback wherein the collateralized existing equipment to raise cash for additional purchases.
Procedure to get equipment is least cumbersome as compared with commercial and industrial loans. Perhaps most lenders want to see and discuss two years of financials, which startups incidentally could not produce.
6. Business Credit Card
If you qualify, open a business credit card, make small purchases, and pay the card off on-time and in full for several months. This will help establish a track record of prompt payments and will build your credit rating as well.
7. Online lenders
There are several Online Lenders who offer right type of loans to even those business owners whose credit score falls in bad category. Nevertheless, they will also report your payments to credit bureaus
Some online lenders offer the right types of loans for those business owners with bad credit. They will also report your payments to credit bureaus which sequentially, raises your credit score as long as you make your payments on time.
In reality loans by online lenders are associated with more risk for the lender causing tending higher interest rates for this types of loans compared to traditional term loans.
In the US there are several prominent Fintech Marketplace companies serving online business loan needs. These companies have sophisticated software that evaluates your actual financial requirements thus helping you to select perfect match for your particular debt requirements.
Having said that all, understand your use of proceeds so you have a good idea of what type of debt financing “product” you are shopping for and understand Fintech ethics issues. Henceforth, you’ll be ready to start shopping.
Some Online Business Loan Lender noted below:
- Quickbooks Financing
- Street Shares
- Able Lending
- Bond Street
- Credibility Capital
- The Credit Junction
- Funding Circle
- Lending Club
8. Secured loans/ collateral loans
Secured loans, also known as collateral loans, are backed by a borrower’s asset. If you own something that can be used as collateral you can apply for a Secured loan.
Collateral has the tangible value that the lender can sell if you default on the loan repayment. With your business at stake, it is an added incentive for you to repay on time, which will ultimately boost your future business credit. Nevertheless, the lenders do not accept the full monetary value of your asset as security, they usually discount it. So you will need to deposit a collateral that is worth more than the business loan.
If you have any or more of the following assets you can certainly qualify for a collateral loan:
- House or home equity
- A car, vehicle, or even a boat
- Stocks or other investments
- Savings in banks including any form of saving certificate
- Future pay checks
In spite of the fact that collateral loans could be the least convenient decision for any business owner to take but it is most creative way for offsetting your bad credit. However, note that lenders do not accept the full monetary value of your asset as security, they usually discount it. So you will need to deposit a collateral that is worth more than the business loan.
The lower risk associated with a secured loan often results in a lower interest rate than an unsecured personal loan would carry. A lower interest rate offers big savings in the long-run. Not only with lower monthly payments, but also less total interest paid over the life of the loan.
Further, keep in mind that some kinds of secured loans are riskier than others. So make sure you shop around, do your research, and responsibly repay secured loans to avoid losing your collateral asset.
Our Candid Suggestion is In Spite Of the Easy Availability of Secured Loan Think Twice about Using Collateral for a Secured Loan.