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Getting a Business Loan With Bad Credit
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Getting a Business Loan With Bad Credit
Getting approved for a business loan can be challenging, especially if you have bad credit. However, there are still financing options available even if your credit score is less than ideal. With some strategic planning and preparation, you can improve your chances of qualifying for the funding you need to start or grow your business.
Understanding Business Loans for Bad Credit Borrowers
Many traditional banks and lenders are hesitant to approve loans for borrowers with poor credit due to perceived higher risks. However, the Small Business Administration (SBA) offers specific loan programs aimed at bad credit applicants, such as the SBA Express Loan and Community Advantage Loan. There are also alternative online lenders like Kabbage and OnDeck that may approve loans for those with FICO scores below 650.While these loans can offer much-needed financing, it’s important to note that bad credit business loans typically have higher interest rates and aggressive repayment terms compared to conventional bank loans. Be sure to shop around and compare all options to find the best rates and terms for your situation.
Steps to Improve Your Chances of Loan Approval
If your credit score is poor, taking steps to improve it can significantly help your chances of getting approved for a small business loan:
- Pay down balances and reduce debt: Lenders view high balances and maxed-out cards negatively, so pay down cards and loans as much as possible.
- Check reports for errors: Errors on credit reports can drag down your score, so review all reports for inaccuracies and dispute any errors.
- Avoid new credit inquiries: Each application triggers an inquiry, which can ding your score temporarily. Only apply for credit you need.
- Become an authorized user: Ask a family member with good credit to add you as an authorized user on a credit card. This can help demonstrate responsible usage.
- Use business credit cards: Having credit cards in your company’s name can help build your business credit profile. Use them responsibly.
Building your business credit over time demonstrates that your company is creditworthy regardless of your personal score.
Types of Bad Credit Business Loans
There are several different loan options to consider even if you don’t have the best credit:
SBA Loans
As mentioned previously, the U.S. Small Business Administration guarantees certain loans targeted specifically to applicants with poor personal credit. The SBA Express loan offers faster approvals and lines of credit up to $25,000. For larger loan amounts up to $350,000, the Community Advantage Program can work for those with credit scores below 650.
Alternative Loans
Online alternative lenders like Kabbage, OnDeck, and Fundbox use criteria beyond personal FICO scores to qualify applicants. They evaluate business performance metrics like cash flow, sales, longevity, and other data sources. These loans offer quick access to capital but have higher costs.
Peer-to-Peer Loans
Websites like LendingClub and Prosper allow individual investors to fund business loans. By bypassing traditional banks, peer-to-peer loans can offer more flexibility for bad credit borrowers. However, investor criteria varies person-to-person.
401(k) Business Financing
For existing businesses with retirement savings, owners can use their 401(k) funds to invest in their own company without early withdrawal penalties. While risky if the business fails, this capital allows 100% financing approval regardless of credit.
Home Equity Loans
If you have sufficient equity built up in your home, a home equity loan or line of credit can provide funds for business purposes. These products use home collateral rather than credit scores for approval criteria.
Personal Loans
Unsecured personal loans from online lenders like SoFi or credit unions can supply capital for starting certain home-based or online businesses. Approval decisions emphasize steady income streams over credit scores.
Improving Your Chances of Approval
Beyond choosing the right loan product, you can take other steps to strengthen your loan application and improve your chances of getting approved with poor credit:
Highlight Revenue and Cash Flow
Since alternative lenders focus heavily on business performance, emphasizing steady cash flow, revenue growth, and healthy profit margins helps overcome low scores. Provide detailed financial statements and projections to showcase your ability to repay debts.
Put Up Collateral
Secured loans backed by real estate, equipment, investments or deposit accounts tend to have better approval odds for risky applicants. As an added bonus, secured loans often feature lower interest rates as well.
Bring on a Cosigner
Asking a business partner, investor or family member with good credit to cosign on the loan can significantly boost your chances of success. Their solid credit record helps offset negative factors.
Limit Loan Request Size
Ask only for the loan amount you realistically need for your business situation. Approval odds on giant loan amounts are slim even for applicants with good credit and strong finances. Think lean.
Highlight Experience and Skills
Emphasize your management expertise, industry track record, high customer satisfaction, supplier relationships and other strengths to help overcome shortcomings in your personal finances.
Final Tips for Getting a Bad Credit Business Loan
- Be realistic about the loan sizes and terms you can qualify for based on your unique situation. Approval for a $100K unsecured loan is highly unlikely.
- Apply with several alternative lenders to compare rates and fees. Don’t assume one will be cheapest.
- Be prepared to provide tax returns, bank statements, business plans and other documentation to verify application details.
- Consider consulting a loan broker to access lenders you can’t find on your own. Brokers have relationships with dozens of capital sources.
- Highlight how the loan proceeds will help your business expand and become more profitable to boost confidence in your ability to repay the debt.
- Be completely transparent about past credit issues and have a plan to prevent future financial problems so lenders understand you’re addressing problems proactively.
The bottom line is that while getting approved for financing with poor personal credit presents challenges, all hope is not lost. Come armed with a viable business plan, be transparent about your situation, back up your abilities, and explore specialized lenders willing to look beyond credit scores alone when making decisions. If one lender denies your application, keep pressing forward. Where there’s a will, there’s usually a way.