Defining Bad Credit
Perhaps you may have heard about credit rating or credit score from lenders. But what is bad credit? How do you definite it? According to FICO, a person has a bad credit if the score falls in between 300 to 629. As banks and lending companies factor in risks, many would reject business loan applications. All the more if the borrower has a poor credit score as it is considered to be a high-risk loan. Even if you have a bad credit rating, you still have alternative lenders who are willing to provide you with the loan you need. The only thing is that you may not have a lot of options.
How to Get a Business Loan?
Most lenders require borrowers to have a minimum personal credit score while there are also a few lending companies that don’t require any minimum credit score. These lenders focus on your business compared to your personal credit rating. However, it is important to keep in mind that lending companies consider a wide range of factors including annual revenue, cash flow, and number of years your business is in operation to name a few.
For borrowers, there are options that you may have to consider prior to selecting a financing option. Firstly, if you have a really low credit score, you should expect that you will have to pay higher interest rates and fees. This is a no-brainer, especially since lenders will still factor risks in the event that you fail to pay back the loan. If there are customer invoices that are still not paid.
What Lenders Consider when Approving Funding
Lenders consider different factors when underwriting business loans. Even if you have a poor credit score, there are still factors that can affect your funding options:
- Cash Flow: Lenders will have a look at your cash flow as they want to see how well you manage your finances. They will evaluate how much cash you have on hand. At the end of the day, the concern of the lender is whether you will be able to pay the loan. That is why it is important for them to see that your business is making money.
- Annual Revenue: This is considered to be one of the most important factors that lending companies to consider when you apply for a loan. They look at your annual revenue. If you have more revenue, it puts you in a better position in terms of your funding options. When a business is generating revenue, it means that the business is doing well and you are seen as capable of paying back the loan.
- Profitability: In addition to annual revenue, they may also look at the profitability of the business. This may not be the major factor that lenders consider in order for you to qualify for a loan. But for bad credit business loan, this gives you better chances.
- Debt Obligation: Aside from cash flow and revenues, they also look at your current debt obligation. A business that has a lot of outstanding debts is considered to be higher risk. So, if you still have a business loan that you are currently paying for, it might be a bit difficult for you to get a second loan application. Taking a second position as the lender can be troublesome for lenders especially when they don’t feel confident that the business owner can repay the loan.
Steps to Getting Bad Credit Business Loans
When you are searching for a business loan and your personal credit rating is not that good, there are certain steps that you have to undertake in order to get the funding that you need for your business.
Look for Online Lenders
Getting a loan from a bank is the most common option among business owners. But if you happen to have a poor credit score, this option is just not available to you. Of course, you can always try and submit your application but banks and other traditional lending companies are quite strict when it comes to a loan application. They look at your personal credit score as one of the main criteria as to whether they will grant or reject your loan application.
It gets more difficult for small business owners. In fact, even businesses that have good track records may still face challenges in securing a business loan, all the more for a small business owner. Many of these banks require you to have at least 700 credit score, on top of that additional criteria that you have to satisfy in order to qualify for the loan application.
This explains why bank loans may not be the option for you. That is why most people and business owners turn to online lenders. Most bad credit business loans are actually offered by online lending companies. It is not that they don’t look at your credit score. They just have a different set of criteria which you may be qualified for.
- The application process is quite faster compared to banks. This means you don’t have to wait for weeks or even days just to know whether your loan is approved.
- In terms of criteria, it is easy to qualify for an online loan. Online lenders are not as strict and rigid as banks when it comes to requirements.
- Since it is easier to get an online loan, you should expect that it is much more expensive to have that loan compared to banks.
- There are also different types of business financing depending on what you are looking for.
Using a Collateral for Business Loans with Bad Credit
Same as personal loans, if you have a poor credit score, you can actually offset your bad credit score with collateral. Having collateral is a good way for lenders to categorize your loan application as less risky. This type of loan is also known as a secured business loan which is a great option for those who don’t have that stellar credit store.
When getting a secured business loan, here are important things that you need to keep in mind:
- If you need the money for starting up your business, make sure that you have a solid business plan so you know how much funding you need and how you can repay. As much as you have the collateral to back up your loan application, you don’t want to default on your loan.
- Prepare all of the necessary documents requested by the online lender. The set of requirements different. Ask for the checklist of requirements prior to loan application.
Types of Collateral You Can Use
If you intend to apply for a secured business loan, there are actually different types of collateral that you can use. These include the following:
- Assets: For personal loan application as well as business loan applications, real properties can serve as collateral. From real estate properties to cars, in the event that you fail to pay back your loan, the lender can use these properties.
- Inventory: Another type of lending is where inventory is actually used as a collateral. In the event of default, the lender will seize the inventory of your business as a debt repayment.
- Equipment: Same with real properties and inventory, the lender can also seize your equipment in case of default. Equipment can be collateral especially those that are expensive.
- Invoice Financing: If you have invoices for clients that are also businesses, you can use invoice financing as a loan product. When your client pays back the invoice, you get to receive the remaining percentage minus the fees. Lenders can actually give you about 80% of the outstanding amount of the invoice.
How to Apply for Secured Business Loans
The requirements for secured business loans may vary depending on the lender. They accept collateral and have your loan approved even if you have a poor credit score. But you also need to keep in mind that lending companies differ when it comes to how they function and operate. They vary when it comes to the type of collateral they accept. Take the time to check and gather more information.
Pros and Cons
Having this kind of business loan has its share of pros and cons.
- Pros: As long as you have a collateral and you submit the other documents required from you, there is no need to worry as to whether your application will get rejected. Plus, your credit score is not a major factor.
- Cons: Since there is collateral, the lender can seize the asset or the collateral in lieu of the unpaid debt. In the event of default, you will lose the asset.
Short-Term Business Loans
Short term loans have a time period ranging from 3 to 18 months. This is a familiar loan structure for many where you have to pay ACH payment every day. The borrower has to make daily payments on business days excluding bank holiday. The thing with short-term business loans is that they may be relatively easier to get. But the downside is that it is much more expensive. The APR is higher and when you have to pay on a daily basis, it can negatively affect your cash flow.
So why are there still businesses that prefer to have short-term business loans? This might be an expensive loan. Then again, there are times where you just need extra funds. And since it is very easy to apply for one, it makes it an ideal business loan for bad credit.
How to Apply for Short Term Business Loans?
One of the main reasons why many business owners opt for short-term business loans is that it does not take that effort to apply for one. They have short application and you get to have your money fast. If there is a need for you to have fast cash and you really need money for a business decision, this is a good choice. If you have a really bad credit score, you can still get a short-term business loan.
Building Good Credit
When you have good credit, you get to have more loan options. You also don’t have to settle having to pay for expensive rates and fees simply because you no longer have other options. This puts your business in a much better position.
Here are some things that you have to do in order to have good credit and have affordable financing for your business.
- Always pay on time. This is a very important step. When you pay on time, you create a good relationship with the lender. Not only that, having on-time payments can also positively affect your credit score.
- Work on improving your cash flow. When your business is doing well, you can pay back your loans which translates to you improving your credit rating.
- Build up your net bank balance. Business needs a loan. But to have a low-cost option, you need to have a good credit score and you also need to have a good amount of cash in the bank.
- Monitor your credit rating. Take the time to monitor your credit rating so you know if your credit score is improving.
- Focus on your business. By having a good business, you can generate more revenues and you can stay in your business for years. That way, you get to have better financing options.