As a small business owner or entrepreneur, there is a good chance you will be looking for funding at some point in your business. For some businesses it is a natural step they take but for others it is to help them with their struggles with bad personal credit.
The good news is that just because you have bad credit does not mean you cannot get financing. It is not easy and will be an uphill battle, but it is possible. Today there are more alternative lending options for business owners in that same situation.
The best thing you can do before applying for any loan or any type of funding is to research and plan. The more you know about how your credit impacts your chances and what options are available to you the better off you will be.
Why Your Credit Matters
Lenders look at your credit score to measure risk. The lower your score is, the riskier you and your business appear to be.
Traditional lenders such as banks and credit unions, look for a minimum credit score of 650 or higher before approving the application. For businesses that have been in operation for less than a year, your personal credit score will be the only thing that is considered. Your personal credit score is typically tied to your business, even after you have established a business credit profile. This means that both credit scores will be considered in a loan application if you have been in business for more than a year, with specific lenders weighing one profile more heavily than the other.
If you want to get a loan with better terms or think that you will apply for more funding in the future, you need to demonstrate that you are a responsible borrower. Acquiring and paying off a loan will play into improving your credit. But to improve your chances you might want to consider implementing the following ideas.
Make payments early or on time
Lenders are interest in how reliable you are when you pay your bills as it helps them see how likely you are to make future payments. Avoid making late payments as much as possible and bring any outstanding balances that you might have. You will not be able to eliminate late payments from your record right away, but you should do what you can to show that you are responsible, and lenders can trust you with their funds.
Maintain a low outstanding balance
Keeping your loan and credit balance low is a good way to avoid being labeled with bad credit. When you take out a large loan it is not possible, but it is a good strategy to pay-off or reduce any other debts you have before you take out another one. There is no magic number to keep your chances at a ratio the lenders will look at.
Your credit utilization ratio is the amount of credit you utilize compared to the amount available to you at a given time. To calculate your utilization ratio, you add up all of your debt and divide it by your total available credit. You will want to sit somewhere below 30% to improve your credit score.
Do not open multiple lines of credit
To improve your credit, you can minimize the number of lines of credit or loans you take out within a short period of time. Applying for credit requires a hard inquiry on your credit report and it can be detrimental if it happens too often and will stay on your history for two years or more.
Also, if you have unnecessary lines of credit available it might lead to excessive spending which can make on-time payments difficult to maintain. Only apply for new loans or lines of credit if needed.
You need to separate your business and personal expenses because they will be looked into when applying for a business loan. As your business becomes more established, your business credit history will carry more weight. If you have bad personal credit, it will benefit you to separate and establish a clean credit history under your company name.
Build your team
Lenders want to look at the combined credit history and collateral for everyone with a financial stake in a business. Look to adding credible business partners to your team with a clean track record. This will improve your creditworthiness and you can get mentors to help you manage your business.
How to Get a Business Loan with Bad Credit
There are several steps you can take to improve your chances of getting approved.
- Understand your credit position
- Provide collateral (unpaid customer invoices, personal assets, cash or savings)
- Add a co-signer
- Review eligibility requirements
- Apply for a lower amount of funding
Type of Business Loans Available for Bad Credit
Here are the most common lending options that are available for bad credit.
- Traditional bank loans
- Merchant cash advance
- Business credit card
- Home equity line of credit
- Revenue-based loan
- Friends and family
The Bottom Line
The best thing you can do to improve your chances of being approved for funding is to prepare ahead of time no matter what your credit score is or current financial state. Do your research and review your business plan and financials to ensure a loan makes sense for you right now.
No matter what option you choose, you need to get your plan in order for investors to increase your chances of getting funding. Make your plan clear and concise so that you can get approved even with bad credit.