When doing research for getting a business loan, you may come across statements that say you need to have good credit to get the best rates possible with low monthly payments. However, what do you do if you do not have good credit? Having bad credit can occur because maybe you do not have enough credit history and do not use credit cards regularly or you could have a high debt to credit ratio. Whatever the reason is why you have bad credit, there are still some financing options available to you.
Why Your Credit Score is Important
Your credit score is a big factor when lenders are determining whether to approve or deny your business loan application. Lenders look at your personal credit score to see how reliable you are at making payments, if they have been made on time, and much more. The most common model is the FICO score and a low FICO score is usually a score of 300-629 which is what “bad credit” refers to.
Financing Options to Consider
Below are the financing options you can consider to secure a small business loan with bad credit.
Using an Investor
Any kind of business can have an investor, but they are more popular with restaurants and tech startups. Investors will have equity in your business and will be involved in the decision-making process of your business so you will need to be able to work with the investor and share each other’s ideas for the business. Investors can help you bring different ideas with their experience to help you grow your business faster than you could on your own.
Small Business Loan
There are plenty of lenders who offer loans for people with poor credit. Instead of looking at your credit score, they assess your ability to pay back the loan. To do this they will ask paperwork such as proof of income and how long your business has been operating. If you can prove that you are going to be able to pay the lender back on time, you will be able to qualify.
Business Credit Card
Another option to consider is using a business credit card for purchases. This will help you establish a credit history and show you are making timely payments. Interest rates on credit cards can be high so it is important that you pay off your balance or else the interest will be added to that balance and end up costing you more money.
Merchant Cash Advances
Merchant cash advances offer a lump-sum loan in exchange for a percentage of future credit and debit card receivables. This type of financing is more expensive since they tend to have high interest rates, so it is not suitable for every business.
Ask Family or Friends
If you need funding, you can also opt for asking family or friends to invest in your business. If you have a good relationship with them and they have the funds to help you, they are probably willing to help you out. You can also use crowdfunding platforms like Kickstarter or GoFundMe to help raise money for your business.
How to Increase Your Chances of Approval
There are a few steps you can take to improve your chances of getting approved for a business loan if you have bad credit.
By providing collateral, you will be able to improve your chances of approval because the lender will have less risk when working with you. There are two options you can choose:
Invoice financing: lenders are more willing to approve you if you have unpaid customer invoices by determining the value of them.
Equipment financing: if you need financing for purchasing new equipment, equipment financing would be the right choice for you. The equipment you finance serves as collateral for your loan. If you do not make your payments, the lender will use the equipment to recover the loss.
Use a Co-Signer
A co-signer can sign the agreement to help you get the financing you need. The co-signer must have good credit and steady income who will be able to handle the loan payments if you are not able to.
Improve Your Personal Credit
If you are not in a rush to get capital for your business, you can work on improving your personal credit score. Some of the ways you can start to improve your credit is by making payments on time, keep your balance low, and monitor your credit score for any mistakes or suspicious activity.
Having good credit makes it easier to get approved for a business loan but there are still many options to look into if you do not have good credit. Knowing the options that are available to you gives you the freedom to explore the one that is right for your small business.