A person might have bad credit for various reasons, ranging from having financial difficulty due to unemployment, to a mismanagement of funds, to medical bill or credit card debt. Regardless of the reasons, banks tend to look unfavorably upon the people with a poor credit score when they apply for a small business loan.
However, that does not necessarily mean that there is no chance of getting a loan at all from a bank or from other financial institution. In fact, you can still get a small business loan with bad credit, and while obtaining a loan from certain financial institutions might be difficult, one of the options discussed here should help you secure the loan you are seeking.
Understand Why You Have Bad Credit
The first step you should take before seeking to get a small business loan is to understand the reasons for your bad credit. Banks see anything below a credit score of 680 as being risky and poor, and will reject many applications based on the score alone. But if you have a good reason for bad credit and can explain those reasons to the bank representative, there is a chance you might still be approved.
Alternatively, you can take steps to improve your credit if possible. Some of the things that can effectively improve your credit score fairly quickly include
- Paying off credit card debt
- Examining your credit report for mistakes, such as incorrectly listed late payments, and getting the mistakes removed
- Contacting the credit reporting agencies to have them update account balances
- Consolidate your debt rather than have multiple debts
- Keep business expenses separate from personal expenses
Consider Bank Loans
A traditional bank loan may be the hardest to get with a bad credit score, but is not impossible. If you do manage to get approved for a small business loan, you should be prepared to pay a higher APR, and you will also need substantial collateral. And don't just take the loan because you are worried you won't be able to get funding anywhere else.
Pro tip: A high APR can be just as detrimental in the future as bad credit, so make sure you know what it is and whether you'll be able to make your monthly payments.
Research Alternative Lending Sources
Fortunately, today there are other lending sources than banks. Learn more about some of the following options to see if any of them works for you:
No Minimum Credit Lenders
Many lenders do not require a minimum credit score, yet each lender will have different criteria for approving loans. Some might require you to "sell" them your open invoices for a cash value, which can be used to continually fund your business. Others might require you to be in business for a minimum of one year and show a minimum amount of annual revenue. Research your various options thoroughly before committing to any one choice.
While a microloan is similar to a bank loan, microloans are a bit easier to acquire because the loan is smaller than what a bank might give. If you do not need a large sum of money for your business, you might consider visiting credit unions, the SBA and other financial institutions that offer microloans. Credit requirements for microloans are typically not as strict as for traditional bank loans.
Merchant Cash Advance
If you only require $10,000 or less for your small business, then a merchant cash advance might be an applicable solution. However, the APR is usually very high, so you must be prepared to make high payments... and make them daily. For more information about MCAs, click here.
A Term Loan From Friends and Family
Lastly, you might also consider acquiring funds from friends and family. Your network of friends and family might be more inclined to help you achieve your dreams and will not be concerned so much about your bad credit, especially if they know there is a good reason for your poor credit rating. Many small businesses and those starting up are finding a term loan from friends and family to be a much more viable option than other loan types, especially when poor credit is an issue.
If you are worried that your circle of friends isn't enough to provide you with the funds you need, consider using a term loan funding source such as Able. This social lending model is perfect for people with low credit because backers are used to offset the risk. Additionally, the friends and family you add to your network, the more potential exists for increased funding at a significantly lower APR than that of other lending sources, and repayment schedules can be customized to suit your needs.
Regardless of which option you choose for your small business loan, try not to ask for more than the amount of money you actually need. This gives you a better chance of being able to repay the loan on time, as well as increasing your chances of getting the loan. Asking for more than you need just gives you more debt, which may subsequently cause you more financial problems in the future.