It can be quite challenging to get a loan as a business owner with a bad credit score. Unfortunately, bad credit seems to follow people around like a bad penny, and it affects how likely you are to get financial assistance when starting a new business or expanding an existing one.
However, there are options for people with bad credit, and they don’t need to despair at the thought of their bad credit. In this article, we’ll look at these options so you can give your business a fighting chance in growing into something you can be proud of.
1. Know Your Credit Score
Before you can even start applying for a business loan, you need to know what your exact credit score is. That way you can plan your next steps with more accuracy.
You can check your business and personal credit scores by obtaining copies of your credit reports. It is suggested that you should closely review the reports in case there are any mistakes. If you find errors, contact the credit bureaus and dispute them.
Here’s a quick look at how credit scores are viewed:
|599 or less||Bad Credit|
If your credit score is below 600, you have bad credit, which could have been caused by many things. Defaulting on payments, filing for bankruptcy, missing payments, closing credit card accounts, and foreclosures can all lead to bad credit scores.
2. Have Your Business Plan Ready
Once you know your credit score, you can go ahead and start planning your approach to getting financial assistance for your business. The first step should be creating a good business plan. If you want to impress a lender enough to give you money, a business plan will go a long way.
Although it’s not necessary, having a business plan is smart because it can show lenders that you’re giving your business a lot of thought. Generally, bad credit happens because of bad decisions or poor planning (it can happen to anyone!), and having a well-thought-out business plan will show that you won’t make the same mistakes again. It instills a bit more confidence in you and your hopes for your business.
If you’re not sure how to create a good business plan, you can look up templates on the internet and use them to write out yours.
3. Have a Cosigner
It is a really good idea to find someone with a good credit score to cosign on your loan for you. A cosigner guarantees to take over the payments of your loan if you can’t do so yourself, and that will increase your chances of getting approved.
Keep in mind that your cosigner needs a good income in addition to a great credit score to offset lender risk. If the person does not have the necessary income to make the payments, this option will not work.
4. Forget about Bank Loans
Unfortunately, you can’t count on bank loans when you’ve got bad credit. Bank financing isn’t as commonly available for businesses as it used to be, and business owners with bad credit are least likely to receive support.
Banks aren’t keen on lending money to people with bad or no credit as it feels like too much of a risk for them. No matter how long you’ve been with your bank, they aren’t going to help you bring your business dreams to life, unfortunately.
5. Try a Business Line of Credit
You could consider going for a business line of credit. This is a kind of loan for new businesses and can provide you with the boost you need to get off to a great start.
You can get approved a certain amount of credit that you can use as needed. And once you’ve managed to pay back the borrowed amount, you can borrow the same amount again, if necessary.
In many cases, lenders are a lot more lenient with credit scores than banks, so this is definitely an option to at least look at. If you are interested in knowing more about how to get a business line of credit, try first to understand your chosen lender’s qualification criteria, loan conditions, interest rates, and fees.
6. Consider Online Lenders
Online lenders offer fast and flexible financial assistance to online businesses. While banks base what they lend on credit rating, web-based lenders will look at other data to determine if you qualify.
Your online ratings and social media engagement are some of the factors that are taken into account. This is a new form of help for businesses but it’s fast becoming very popular.
7. Credit Cards Are an Option Too
Typically, credit cards are much easier to get than any loans, which is why they’re a viable alternative if you’ve got bad credit. But, you have to keep in mind they also come with higher interest rates.
It would be best to go for a business credit card with caution in mind to avoid further debt problems in the future. If you want to use one, do so by planning your spending very well and not going over your budget.
8. Look at Merchant Cash Advances
Merchant cash advances are another option you can look at if you’re limited by bad credit. These can provide your business with funds in exchange for a share in your future sales. Basically, the lender is putting faith in your business’ probability to earn money in the future.
Merchant cash advances are generally seen as short-term solutions for restaurants and retail businesses.
9. Important Factors To Keep In Mind
There are a few things you need to remember that could affect your chances of getting approved for a loan.
The type of lender and its conditions all vary so you may not get approved for a loan from one but have a better shot at another.
The age of your business is also important and a business younger than three years might have a tougher time getting funding. With that said, there are many lenders who cater specifically to new businesses, so you should find a solution that will suit you and your business perfectly.
Getting a business loan when your credit score isn’t looking too good might seem impossible, but it’s not the end of the world. There are ways you can prepare to stand a better chance as well as some alternatives to consider. Use what you’ve learned here to obtain the financial aid you need to kickstart your dream business!