Can I get a small business loan with bad credit?

You Can Get a Small Business Loan Even with Bad Credit

One of the most common questions we get from new prospective clients is ‘can I get a small business loan with bad credit?’ The short answer is you absolutely can get a small business loan even with bad credit. Now, of course, you want to secure the best possible product and terms for your business. Understanding what lenders look for, the best way to position your business and how to best approach the business loan process are vital. Keeping in mind that our entire goal is to get your small business a loan without being hurt be a bad credit hurdle.

The set of first thing to understand for the context of this blog are some key word definitions.

What do lenders mean by credit? My personal credit? My business credit?

Credit is specific to the product which your business requires. For example, equipment finance is heavily driven by the personal credit of the guarantor. This is a roadblock for many business owners. However, there are corp only programs that potentially provide a path to financing. If we are referring to working capital, there are programs that do not look at the credit of the business owner.

At the same time, keep in mind that credit does not just pertain to credit score. There are other factors that could effect a credit decision. A high usage percentage of revolving debt is a major factor. Underwriting guidelines also look at age of the accounts, similar trade lines, the number of trade lines, and many other factors. Business credit score and history are not commonly known by most business owners. It would be a surprise for many to find out that there is not a direct correlation between bad personal credit and bad business credit. Small business loans are generally more concerned about business credit.

What is a small business?

That is a great question and a difficult concept to define. Small business is commonly defined by number of employees or annual revenue. For purposes of small business loans, we define small businesses as business with less than $50 million in gross annual sales, with the average client generating between $1-10 million in gross annual revenue.

What is a small business loan?

There are several products that make up the category of small business loans. The most well-known type of loan for small businesses is an SBA (Small Business Association) loan. These loans represent a small segment of the marketplace. Small business loans also included 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.

How do I overcome bad credit and get a small business loan?

The obvious answer will be consult with a small business funding professional and be honest about your situation. This will help your funding advisor seek out the best programs for your specific credit challenges.

What are the best small business loans for bad credit?

The best way to answer this is choose the product that is best for your business and not just the easiest to qualify for given your credit. A talented advisor will get you to as close to your goal as possibly, as well as put you on a plan to get completely to where you want your business. Building up business credit is a great way to heal credit problems. Also, keep in mind, business funding that allows your business to grow, will result in an ability to better address past personal credit issues. As your personal credit improves, and your business credit increases, more loan products will become available to your business. The first step is the initial funding. A great growth loan that isn’t focused on personal credit score will help you overcome bad credit and start to improve your credit.

What steps should I take to get past my bad credit and qualify for a small business loan?

The biggest step is to have a well-managed cash flow and focus on upward revenue trends. A business with strong financial health will have a much stronger argument for deserving a small business loan even with the business owner having bad credit.

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 a respectable 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.

Make sure you don’t waste your time applying for loans where your credit does not fit within the approval box. If you have too many inquiries about funding, your chances of funding can decrease. You also don’t want to spend weeks going through every lender until you get an approval. Your advisor will be able to help you navigate through this area.

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 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 your homework. It is best to not think of your business as less deserving of a good loan. You understand your challenges (bad credit) and your strength 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 build a positive credit history.  A great company will also look past your credit score and get to know you, as well as your business. You deserve great!

It is crucial to be organized. Make sure you have all your documents organized and labeled. You should prepare more documents than are initially requested. If you are asked for three business bank statements, have 12 organized and ready. It is also advisable to have other financials easily accessible and clearly labeled. This list includes not only bank statements but business tax return, personal tax return, Profit & Loss Statement, Balance Sheet and Aging Accounts Receivable Report. If you make the advisors job easier, the advisor will have more time to spend advocating for your business. Also, underwriters and credit officers are favorably impressed with business that respond quickly with professionally kept records and documents.

Make sure to stay on top of the process. If an underwriter feels you are taking to long to respond with documents or an explanation, the underwriter 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 bad credit score. You also want to know that the advisor understands everything about your situation accurately and therefore can do a better job advocating on your behalf.

Do not let a good opportunity pass. We too often warn potential clients that they are making a mistake in passing on a funding opportunity only to have our warnings ignored to the peril of the merchant. The next month, that same merchant will get declined for a small business loan or get approved for a program with worse terms. If you have credit challenges and you are offered a program that is fair, it is not in your best interest to continue shopping for a better offer. You are better able to dictate terms to the lender or bank as your credit increases. At the same time, your small business deserves a fair small business loan based on the work product of the company despite any credit problems for the business owner.

What is the role of bad credit in getting a small business loan? How do I use this knowledge to my advantage?

There are different definitions of bad credit. For some people this is a reference to credit score. For other people this is a reference to how good someone is at paying their bills in a timely manner. The idea is to quantify and gauge the creditworthiness of the merchant. For example, a merchant who just went 90 days late on a mortgage holds a very different negative credit history than a merchant who has an unpaid collection account that is over a decade old.

The best way to use this knowledge as an advantage is by knowing your weaknesses and accentuating your strengths. For example, there are programs that are only concerned with meeting a minimum credit score threshold as a requirement of funding. However, the details of the credit history that makes up that number doesn’t interest the underwriter. There are other programs where credit score is irrelevant but past dues on vendor accounts can be lethal. Make sure you know your issues completely.

The timing of your application is also important. If you tend to put a lot of 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 on the 1st, 10th, 15th, 20th or any other day of the month. To improve your odds of getting the best funding options despite credit issues, apply before your personal credit balances get too high.

Can my business qualify for a small business loan even though I have bad credit?

Yes. It is important to look past the concept of credit score. A bad credit score can be the results of bad timing or any other number of factors. A strong company with strong financials and a business owner with bad credit is more likely to get a small business loan than a business owner with an 800 credit score and poor revenue or cash flow.

The first piece of advice is to separate the psychology as a business owner looking for a small business loan and an individual looking for consumer credit, such as a credit card, mortgage or car loan. Start to think in terms of obtaining credit for your business. When you apply for a credit card, you are not asked to provide financial documents. Not many people keep a personal balance sheet. The best indication of credit worthiness is the credit history and depth of the credit for the potential borrower.

On the other hand, a business application requires supporting bank statements. This is due to the fact that cash flow and money management area great and more accurate indicator of the creditworthiness of the business. In addition, good business credit will make up for bad personal credit while bad business credit needs funding to re-establish your business credit history. These data points are more relevant than consumer credit when underwriting an application for a small business loan.

Bad credit won’t prevent your business from obtaining a small business loan. Bad credit without a plan will prevent your business from reaching its greatest possibilities. Each small business loan should be applied for keeping in mind the strengths and challenges of your credit situation. There are not two identical small business loan program guidelines so be careful to make sure the program for which you apply is favorable to your strengths. Furthermore, make sure you are not applying for a program that prohibits certain items in your credit history. As long as each funding is building block to a better funding, your funding terms will improve. As your business growths, your credit will improve. Bad credit is not going to stop you from obtaining a small business loan. A small business loan might actually be the best way to improve your bad credit.