How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

Author: Brad Nakase, Attorney

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Linda is the owner of a shoe store in Los Angeles. Unfortunately, Linda is not the most responsible person when it comes to paying her bills on time. The result is that she has a poor credit score. Worse, Linda is in need of a loan for her business. Because she needs to afford inventory, Linda is hoping to be approved for a traditional loan. Unfortunately, because of Linda’s low credit score, she is afraid she will not be approved for a business loan. Linda wonders whether there is anything she can do to convince lenders to give her a loan.

This article will review several tips on how to get approved for a business loan with poor credit, while at the same time improving one’s business credit.

  1. Look Up Business Lender’s Credit Score Requirements

When a business owner decides that he or she is interested in a loan, then the first step requires them to research which lenders offer business loans for borrowers with bad credit. This is an especially important step for borrowers whose credit score is under 500. Some online lenders are less strict about this, but if a business owner’s credit score is less than 500, then it may discourage lenders from working with them.

Lenders may also be worried about working with a startup company, let alone one with bad credit. This means that it may be difficult to qualify for funding with a limited credit history. Rather, a business owner in this situation may wish to wait until his or her company has been in operation for a longer period of time. This would allow the owner to grow his or her credit history as well as prove the company’s legitimacy.

It is not worthwhile applying to a lender if the business owner does not meet their minimum requirements regarding credit score. Rather, it would be better to think of wats to build business credit and submit an application for a loan after the credit score has improved.

If a business owner needs funding immediately, then it may be worth finding a small business lender with a lower credit score minimum.

  1. Create a Business Plan

When a business owner applies for a small business loan while suffering from a low credit score it may be helpful to offer the lender a clear business plan. By sharing a business plan, a business owner can help convince the lender that he or she can repay the loan on time and in full. The business plan should have the following information included:

  • Monthly sales earnings
    • The business loan lender will want to have evidence of the company’s current monthly sales. This may also show improvement in a company’s finances over time. Even if a business owner’s credit is not great, a lender may be more willing to work with them if they see that their sales are increasing steadily. But if a company’s sales are unpredictable or low, then the lender may not feel comfortable with offering a loan.
  • Use of Funds: This section should explain how a business owner plans to use the loan. For example, maybe a business owner needs to buy new equipment. This reasoning should be included in the business plan, along with an explanation of how additional financing will benefit the business’ finances down the road.
    • Let’s consider the equipment example. A business owner could explain how he or she will be able to help more customers, thereby generating more sales. This information could convince a lender to take the risk, even if the borrower does not have a great credit score.
  • How the Loan Will Benefit the Company: If a business owner can demonstrate that business funding will improve their company’s sales, then he or she is more likely to be approved. When the owner has more capital, it will be easier to pay back the loan, which is the main concern for most lenders.
  1. Expect to Get a Higher Interest Rate

When a business owner with bad credit applies for business funding, he or she should take into consideration the lender’s offering rate. If the business has a low credit score, then this could mean the lender offers a higher interest rate than a business with a good credit score would receive. This is because the lender considers the owner with the poor credit score to be a high-risk customer. The lender worries the borrower may not pay back their loan on time or in full.

Because of this, a business owner should think about whether he or she will be able to pay back the loan on time and in full. If the owner does not believe that he or she will realistically be able to afford the loan payments while keeping the business functioning, then it may be better to wait a while before considering a loan.

It is important to remember that a business credit score will not improve if the owner misses loan payments. Therefore, if the owner believes the terms and rates will be hard to manage, then it may not be the appropriate time to apply for a loan.

  1. Try to Improve Credit Score

If a business owner is determined to get a business loan in spite of having a bad credit history, then he or she should focus on improving their credit score prior to contacting a lender.

The business owner will first need to study his or her credit report to know their score and check if there are any mistakes. If there are mistakes, then the owner should be sure to report these to all credit bureaus who will adjust the score.

It is important to understand that it is impossible to improve one’s credit score overnight. Getting a better credit score involved creating healthier spending and financial habits that prove one’s responsibility to credit bureaus over a long period of time. Obviously, waiting can prove difficult for business owners who need the capital right away. However, this is their best bet going forward.

If a business owner does not need the capital immediately, then they should focus on raising their credit score prior to applying for a loan.

  1. Consider a Merchant Cash Advance

If a business owner has a low credit score but is still interested in business funding options, then he or she should think about applying for a merchant cash advance.

A merchant cash advance is a kind of business funding that is different than a small business loan. When a business owner takes out a cash advance, he or she will get a lump sum of cash in exchange for the provider getting a percentage of the owner’s credit card sales. This means that even if a business owner’s credit score is poor, he or she should still be able to qualify by proving that they have consistent credit card sales.

During the application process, the funding provider will want to see many deposits in small amounts. Thus, a poor credit score may be ignored if an applicant meets this requirement.

A major benefit of cash advances is that a business owner’s remittance is based on credit card payments. This means that if a business endures a slow month in sales, the repayment amount will be smaller than during a busy period of time. A lot of business owners prefer this because they can meet their obligations without set terms.

  1. Ask Family and Friends for Money

If a business owner is in a tough spot and desperately needs financing right away to keep their business running, then it may be worth asking a friend or family member for a loan.

It is generally not recommended to take a loan from a loved one. However, if someone is willing to loan money to a business owner until they are able to apply for financing, then it will be possible for the business owner to improve their credit in the meantime. Once the business owner’s credit score improves, he or she can apply for a business loan or line of credit.

  1. Pay Bills on Time

Paying bills on time is one of the easiest ways to improve one’s credit score. Late bills are one of the major reasons why a credit score may be low, so paying bills on time should be a priority. Below are some tips on how to remember to pay bills on time:

  • Create a monthly calendar reminder: if a business owner constantly misses deadlines, then it may be a good idea to set up calendar notifications that will remind him or her of due dates. This way, the owner will be warned ahead of time about due dates.
  • Improve budget: If a business owner is paying bills after their due date because they have low cash flow, then they should focus on improving the business’ budget. This can help reduce overspending.
  • Make Use of Apps: there are many apps that can help business owners manage and pay their bills. Some helpful apps include TimelyBills, Bills Monitor, and Mint.

By using these tips, it will be easy for a business owner to pay their bills on time, thereby improving their credit score for a future loan.

Conclusion

It is important not to get too discouraged when going through the process of applying for a loan while having a bad credit score. There are always alternative lenders who provide loan options for business owners with a poor credit history.

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