Getting a Small Business Loan With Bad Credit – How to Get it and What You Need to Do
Lousy credit score preventing you from getting a business loan? Find out here how you can still get your business loan approved even with bad credit!
How many of us have wished for an opportunity to come our way only to find it knocking on our door the very next day when we are least expecting it?
Picture this: One day, you’re dreaming of expanding your business, and suddenly space next to your shop becomes available for sale. It has happened to so many of us more times than we can count.
Often, taking advantage of opportunities like this might require you to get a business loan. But what if you have bad credit? Do you just pass up the opportunity?
Well, not anymore! Thankfully there are now several ways you can manage to get a loan with bad credit. Below are a few ways you can get started:
How to Get Approved For a Loan
Once you’ve decided to get a small loan, follow these steps to get loans for bad credit:
Look Into Your Credit Score, Explore Your Options
The first thing you should do is to check your business and personal credit score. Get copies of your credit reports and review them for any errors. If you find any, you can contact the bureaus and discuss any mistaken records you find.
It helps to know where your credit score stands, as this can help you determine what kind of loans you could qualify for.
Also, it’s smart to explore your options. Look for a loan that matches the amount of money you need, preferably for the lowest cost and a repayment term that best fits your financial situation.
Have a Business Plan Ready
Some lenders will want to know if you have a business plan ready or not when you’re applying for a loan. Even if they don’t ask for one, having a business plan is very smart.
To improve your chances of getting a loan with bad credit, you can provide collateral. If you cannot repay the loan, your collateral could be taken as payment by the lender.
It’s wise not to use personal assets as collateral for a business loan. If you put your home as collateral and your business fails, then you end up losing both your home and business.
What you can do instead is choose a loan that lets you use business assets, like outstanding receivables or equipment as collateral. That way, you can still keep your business and have a home.
Find a Reliable Cosigner
Wanting to get a business loan with a low credit score can be challenging, but thankfully you can find someone with a good credit score to help you out.
If they are willing, they can consign the loan for you and take on the loan payments’ responsibilities if you’re unable. However, you also need to make sure that they can afford to take on your loan payments and that both of you are on board with the arrangement.
Considerations Before Applying for a Business Loan
To improve your chances of getting approved for a business loan, you need to consider a few essential factors first.
The Types of Lenders
Conventional lenders have strict requirements for loan approvals. They require you to provide three years’ worth of financial statements, a business plan, and a complete multi-page loan application.
Other than that, they’ll also want to take a look at both your business and personal credit scores. That means you need to have a good credit history.
Since getting approved for a traditional bank loan can take a while given their requirements, in contrast, online or alternative lenders have lenient requirements.
For instance, they would want to check your business bank statements or ask you to connect them to your accounting software. Once they’ve reviewed that you’ve met their standard, they will approve your loan within minutes!
Your Personal Credit Score
To get approved for a traditional business loan, you’ll need a minimum credit score of 650. Any lower than that and the lenders won’t clear you for a loan. Even alternative lenders have a minimum credit score requirement.
If your credit score is over 500, then you qualify for a business loan from them. And if your score is higher than 600, then you’ll have more options available to you.
How Established is Your Business
Conventional lenders will ask for three years’ worth of financial statements and tax returns as part of your loan application. If your business is less than three years old, chances are you’ll have difficulties getting a loan approved from a traditional lender.
In contrast, alternative lenders are less strict about the requirements for how established your business is.
Instead, many of these lenders cater to growing businesses. So, you have more chances of getting a loan from alternative lenders than traditional ones if your business is new.
Getting a Business Loan That Fits Your Needs
You can check out the following steps that will help you to qualify for a loan with terms that meet your criteria in the future:
Keep Improving your Personal Credit Score
To get started, you can challenge any errors that might be on your credit reports and bring in any late payments now ASAP.
Paying your bills on time, not just loan and credit card payments, but your utilities, rent, and phone bills can improve your personal credit score.
Also, avoid closing unused credit accounts or creating new credit accounts. Either of these actions can negatively affect your credit score, and that’s what you need to avoid at all costs!
It also helps to work to pay down credit card debt and other circling credit. That means you need to aim to not use more than 30% of your total available credit.
Build Up Your Business Credit
Now that you’ve made sure that your business credit report is correct and late payments are up-to-date, you can start to work on building business credit. You can do this by using the credit you’re getting responsibly.
Remember that any business credit card you use, you’ll need to report your payment history to at least one of the three major reporting agencies in your area.
If you can manage to get trade credit with your suppliers, you can ask them to report to the respecting credit reporting agencies. Just by paying your bills on time, you can improve your credit score and convince suppliers to extend more credit over time!
Reevaluate Your Business Plan
Finally, reassess your business plan to find out if there are ways to increase revenues or cut costs. Either of these options can help to minimize the amount of finance you need.
If lenders have turned you down, try to get their feedback about your business plan and where you can improve, and what you need to change.
In conclusion, we’d like to say that it’s not easy to get a business loan with bad credit on your hands. But that doesn’t mean you should give up.
We hope the information we’ve provided can help you get back on your feet and get that loan. Remember, proper research can go a long way. You can get there!