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Is it Possible to Get a Small Business Loan with Bad Credit?

In the business world, opportunities and challenges often come when you least expect them.

The next-door space may suddenly become available, giving  you an opportunity to expand your business. You’re excited about the possible new venture, but you need capital.

Alternatively, you may be hit with a lawsuit or an unexpected tax bill, requiring you to divest a big sum of cash to keep your business afloat.

However, you may have bad credit that prevents you from getting financing when you need it, which can shut the door to exploring new opportunities when they knock or settling unexpected bills when they arise.

So is it possible to get a small business loan with bad credit? There are several ways that you can access a small business loan even with bad credit.

Understanding credit score

What is a credit score?

A credit score (or credit rating) is a number that reflects the ability of a consumer to repay their debts. Different countries and financiers use various models to determine your credit score. Here is a simple guide that shows how countries score credit.

Generally, financiers will look at your payment history, credit history, defaults, and any amounts owed.

Lenders use your credit score as their metric for measuring the associated risk when giving you financing. Therefore, the lower your score, the riskier your business appears.

Traditional lenders (credit unions and banks) look for a high credit score before providing any financing.

For businesses operating for less than one year, the financial institutions use your credit score to consider your application. It means, for worse or better, your personal credit score becomes tied up to your business. As such, during a loan application, both credit scores are considered.

But after your company operates for at least a year, some lenders may weigh one credit score heavier than the other, thus affecting your overall score.

What is considered a bad credit score?

Although there is no official start to a bad credit score, it’s advisable to keep your credit score high. Staying under a certain number, depending on your country, is considered high risk, which means accessing loans at the highest interest rates.

How does having a bad credit score affect your borrowing?

Consumers with higher credit scores enjoy the best loan terms and lowest interest rates.

On the other hand, those with a lower score risk not being able to access loans and attract higher interest rates.

In other words, the lower your credit score, the riskier it becomes for the lender to give you financing.

How can a small business get loans with bad credit?

If it’s not an emergency, consider improving your business credit score before applying for a loan. You can do this by paying your business bills like credit cards on time, reducing the credit card limit to 30% and below, and by avoiding applying for a new credit unit.

1. Prove you’re creditworthy

If your need for a loan is urgent and different financiers have turned you down, you can prove your creditworthiness by providing documents like:

Tax returns for the last two years

Your other income channels, including job history and salary, accompanied by your pay stubs

List of your assets like property, home, and car

List of any unsecured debts like student loans, credit cards, and medical bills

Bank statements for savings, checking, and deposit accounts

Note, you don’t need all these documents, but with a poor credit history, they play a crucial role in demonstrating you are creditworthy.

2. Provide collateral

Providing collateral can highly improve the chances of getting a business loan, even with bad credit.

This is because even if you fail to repay the loan, the financier may use the collateral as payment. However, avoid using your assets like your home as collateral for your business loan in case your business fails, you may end up homeless as well.

Instead, opt for business assets like outstanding receivables or equipment as collateral.

3.Pursue borrowing from merchant cash advance

If traditional lenders such as banks have rejected your application, you may opt for financing from merchant cash advance.

A merchant cash advance provides business financing to you small businesses in exchange for receiving a certain percentage of your business credit card sales.

This means even with a low credit score, you may qualify for a small business loan.

4. Find a cosigner

Find a family member, friend, or business partner to cosign as your guarantor with a good credit score.

It means he or she will take over in case you can’t afford to make loan payments.

Make sure both parties are well informed and comfortable with the arrangement.

5. Opt for a short-term line of financing

Short-term credit, including using credit cards, may give you quick access to finance. However, watch out for interest rates to avoid getting into further debt and possibly lowering your credit score even further.

6. Invoice factoring/financing

Small businesses may opt to use their unpaid receivables to get financing.

Factoring companies buy unpaid invoices at a certain invoice percentage, typically around 80-85%.

The lender collects the invoice payment from your customers and gives you the balances less the factoring fees. As such, the value of the invoice becomes the considering factor and not the credit score.

On the other hand, for invoice financing, the financing company advances your company a certain amount while valuing the value of the invoices. The business owner should collect the customers’ payments and then pay back the lender’s loan plus other related fees.

7.Consider equipment financing

Regardless of your bad credit score, you can opt for equipment loans to improve your business. With these loans, the equipment becomes the collateral.

Business loans with bad credit scores: qualifying is possible

Don’t let a bad credit score stop you from achieving your business dreams. With the above steps, regardless of their process, you can qualify for a business loan. However, it is advisable to work on raising your score so you can enjoy lower interest rates and faster financing.

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