It’s not an ideal situation. You might be a business owner considering applying for a loan, but you’re not sure if you can even qualify because your credit is, well, not good. Don’t worry. You can still obtain a business loan even if you have bad credit. It likely won’t be as easy or accommodating as it would be with good credit, but it’s possible. So, given that you’re in a somewhat compromised position, it will be important for you to work to strengthen other aspects of your business and become very educated on the business lending process.
So, are lenders referring to personal credit or business credit?
With businesses, especially smaller ones, it’s especially important for both the owner and the business to be in good financial standing because lenders look at the financial history of the individual and the company when considering a business for a loan. Your business’s financial history and current standing are helpful to business lenders when they consider granting you a loan. Business lenders also see the owner’s personal financial standing as a factor in assessing the risks when considering the applicant for a loan. So, it would be advantageous to start cleaning up your personal credit. That said, lenders are more concerned with business credit than personal credit, so there is no need to try and match your personal credit to your business credit.
Keep in mind that credit does not only pertain to credit score. Other factors could affect a credit decision. A high usage percentage of revolving debt is a major factor. Underwriting guidelines also look at the age of accounts, similar trade lines, the number of trade lines, and many other factors.
To start building business credit and protecting personal credit, your business will need to incorporate and obtain a Federal Tax ID number. Once your business has its Tax ID number, it is considered a separate entity to the IRS and state agencies; it can file its own taxes and register with a business credit bureau. Before you register, make sure that all of your business licenses are up to date and that you have a business phone number.
It may seem like lots of work to begin building separate business credit; however, the benefits of preserving your personal credit, increasing the credit capacity, and increasing the value of your business make it a smart choice.
When you’re ready to start the lending application process, consult with a small business funding professional, and be honest about your situation. Doing this will help your funding advisor seek out the best programs for your specific credit challenges.
What is a small business loan?
You probably already know what a small business loan is, but in case you don’t, it’s important to define it early on. A small business loan is initiated when a borrower (typically a business owner) borrows a sum of money from a lender based on a set agreement to repay that sum plus interest over some time. It usually takes money to make money, and small business owners often take out loans to get the process started. Several products make up the category of small business loans. The most well-known variety of loan for small businesses is an SBA (Small Business Association) loan. Although they are widely known, these loans only represent a small segment of the marketplace. Small business loans also include equipment financing, small business working capital loans, merchant cash advances, purchase of receivables, secured receivable funding, invoice factoring, term loans, ABL (asset-based loans, unsecured short-term loans, lines of credit and more.
What are the best small business loans for those who have bad credit?
The best way to answer this is to choose the product that is best for your business and not just choosing loans with the easiest qualifications. An experienced advisor will get you to as close to your goal as possible and craft a plan for your ideal growth trajectory. That said, it would not be a bad idea to consider some of the loans with less difficult qualifications. These are options like invoice financing, business lines of credit, and short-term loans.
How can I move past my bad credit and qualify for a small business loan?
The first and most important step is to have a well-managed cash flow while working to increase your revenue. As mentioned before, a business with strong financial health will have a much stronger case for a small business loan, even while the business owner’s credit may be less than ideal.
The second step is to make sure your business isn’t past due on any accounts. A business with a good credit track record speaks volumes about the stability of the company.
It is also vital to have realistic expectations. If you have bad credit, your first goal should be to qualify for the financially appropriate and realistic program. You may have to pay a little more in interest, but you are not just buying the money, you are also buying an opportunity to prove yourself and prove your business.
So, whether you’re holding off on getting a loan, or currently in a lending program, it would still be beneficial for you to keep improving your credit. Here are some basic tips:
- Promptly pay off any outstanding debts
- Be sure to pay your rent and utilities on time
- If you have any other outstanding loans, ensure that you are paying them promptly
- Once you are on financially stable ground, opening a business credit card – and making timely payments in full – can help build up your credit history
How do I go about getting a small business loan with bad credit?
There are highly reputable companies who help small businesses get loans despite said business’s bad credit. There are also unreputable companies who prey on businesses where the owner has bad credit.
As your search leads you to a funding source, do some research. It is best to not think of your business as less deserving of a good loan. You understand your challenges and strengths, and you will get a small business loan. The first step is to do some background research on the company. Next, make sure you are comfortable with the advisor. A good advisor can make a bigger difference than you may realize. A good company will help you meet your financial goals while helping to build you and your business a positive credit history.
It’s important to organize. Make sure to have all your documents organized and labeled. It is a good idea to prepare more documents than are initially requested. If a business lender asks for three business bank statements, have a few more than three organized and ready. It is also advisable to have other financials easily accessible and clearly labeled. These are things like bank statements, business tax returns, personal tax returns, profit and loss statements, balance sheets and aging accounts receivable reports. If you make the advisor's job easier, the advisor will have more time to spend advocating for your business. Also, underwriters and credit officers are impressed with businesses that have these kinds of documents available promptly.
Staying consistent and on top of the process is another important thing when applying with bad credit. If an underwriter feels you are taking too long to respond with documents or an explanation, he or she will be more likely to decline your application. You want to show the underwriter that you and your business are a low credit risk deserving of the loan despite a poor credit score.
Don’t let a good opportunity pass. We often urge potential clients to take a reasonable offer whenever a lender reaches out with one.
What is the role of bad credit in getting a small business loan? How can I use that information to my advantage?
In lending, ‘credit’ is mostly a reflection of a company’s financial past and present. The idea of credit is to quantify and gauge the financial responsibility and consistency of the merchant. Someone who is timely with making payments will have good credit, and therefore, have access to small business loans with accommodating terms and conditions. Someone who does not have good credit will not have access to premium loans.
The best way to use this knowledge to your advantage is by knowing your weaknesses and accentuating your strengths. It’s also advantageous to apply this knowledge to your research on what lenders are looking for with a particular loan option. For example, some programs are only concerned with meeting a minimum credit score threshold as a requirement of funding. While they focus on credit score, the details of the credit history that make up that number doesn’t interest the underwriter. On the other hand, there are other programs where credit score is irrelevant, but past dues on vendor accounts can be lethal. So, it’s important to know specifically what specific lenders are looking for, and how your business can most optimally meet those interests.
The timing of your application is also important. If you tend to put many expenses on credit cards and pay them off at the end of the month, make sure you apply before the credit card balances are too high. Your credit might look very different at the beginning of the month than it does near the end. To improve your odds of getting the best funding options despite credit issues, apply before your personal credit balances get high.
So, can I get a business loan with bad credit?
In short, yes. If you have bad credit, then it will be more difficult to obtain a loan with accommodating terms and conditions than it would be if you had good credit. If you’re in a compromised position with your credit, it is a good idea to research what specific lenders are looking for and to optimize your business’s financial strengths accordingly. Before you plan on applying for a loan, it’s ideal that you first do your best to clean up your finances. They don’t have to be perfect, but it doesn’t hurt your chances of landing a good financing program with a business lender.
So, don’t panic. If you have bad credit, you can qualify for a loan. If you have good credit, you’ll qualify for a better one. In any case, try to prepare and put your best foot forward.
Crestmont Capital has an array of options for your business’s needs, and we approve 95 percent of our loan applicants. Get an instant quick quote or contact us to find out which program suits your business.