Getting a Business Loan with Bad Credit
Bad Credit as defined by the Fair Isaac Corporation, FICO, is a credit score of 300 to 629. Having bad credit is a very common reason for small-business loan applications getting rejected by lenders.
This is because loan applicants with a poor credit score are considered to have a higher risk of defaulting on a loan. But, even with bad credit you can get a business loan from alternate lenders.
How to Get a Business Loan with Bad Credit?
Alternate loan providers or lenders offer small business loans to businesses that have a poor credit score. Some lenders may require a minimum credit score while others have no such requirements. Such lenders are more focused on the type of business you are in and its potential rather than just its credit history. They may consider factors like your business’s annual revenue, how long it has been operational and whether you have had any recent bankruptcies etc.
As a borrower you should consider the following things before choosing a financing option.
- If your business has a low credit rating the annual percentage is going to be high depending on how low the rating is and how much risk the lender is willing to take. This annual percentage will include the interest rates and other fees connected to your loan.
- Lenders may base the approval of your loan on the value of your invoices. If you have unpaid customer invoices you can get them turned into cash immediately through getting your invoices factored or financed.
- If you can, you should wait for some time before applying for a business loan so that your credit score improves and you can get much better options.
Business Loans for Bad Credit
Here are a few types of business loans that you can get even with bad credit.
Working Capital Loans
Working capital loans are a great option for finance when your business has a bad credit score as they are straightforward and are flexible enough to offer short or long-term loans with regular monthly payments. Working capital loans are also unsecured which means you don’t need to provide your business or personal assets as collateral.
Equipment financing is commonly used by businesses for recovery. This type of financing involves taking necessary capital funds from a lender to acquire equipment needed to improve business operations and profitability, and that equipment then acting as the collateral or security for the amount borrowed.
Business Line of Credit
Although this option is not technically a business loan, it is commonly used by many business owners to cover any unexpected costs and temporary budgetary shortfalls. The access to funds through business line of credit is instant, the interest is charged only on the principle amount borrowed and repaid amount is also available for any future borrowings if the line is revolving.
If none of the alternative options work for you and meet your needs, it is best that you wait till your credit score improves and then apply for a loan.