Types of credit – Business vs. Personal
First, when we’re talking about struggling credit, we are usually referring to personal credit. Your personal credit score is actually an important part of the business loan application.
Securing a loan from a bank is very difficult, and only top-tier borrowers are qualifying. That means if you have bad credit, it’s not an option. It’s best to have a credit score over 700 if you’re thinking about applying with a bank.
What are Lenders Looking for?
Credit score isn’t the only thing lenders are looking for, so let’s take a look at some of the other things they’ll be looking for. Remember, even if you have bad credit, being strong in other areas can help you alot and can lead to being approved for the loan you need.
1. Annual Revenue
A very important part of your loan application is your business’s annual revenue. The more, the better. This indicates to lenders that business is good and it helps set expectations for loan size. As a general rule of thumb, companies qualify for around 8 to 12% of annual revenue. It is possible to qualify for more, but using this as a general idea is a good way to start thinking about how much you will qualify for.
After looking at revenue, lenders tend to look at profitability next. If you’re company is bringing in a million dollars a year, but has 1.2 million dollars in expenses, lenders will see that you are not profitable and probably can’t take on another debt obligation. Some online lenders aren’t too concerned about profitability, but taking loans from them can be very costly with regards to the interest rate.
3. Current Debt
Lenders also want to see who else you have been borrowing from. If you are currently paying back a small business loan, you might have trouble qualifying for another loan. This is because most lenders don’t want to take a “second position” to another lender. Most lenders will put a UCC lien on your business, meaning that if you go bankrupt and your assets are liquidated, this lender will be compensated for your remaining debt to pay off as much of the loan as possible. If a new lender takes second position to someone else, it means they will not get paid until the lender in first position is completely paid back. For some lenders, taking second position isn’t an issue. For others, if the debt is almost entirely paid off, then it won’t be a problem. But for some, they won’t consider taking second at all. If you currently have outstanding debt, be prepared to talk about this with lenders.
4. Cash Flow
Lenders want to know how well you manage your cash flow — and how much cash you tend to keep on hand. Almost every lender will want to see at least 3 months business bank statements to verify this. If you have a history of non-sufficient funds, you might want to wait a few months before applying so you can take some time to cautiously manage your bank account, making sure it looks lender-friendly.
5. Past History
Past history is one of the main things lenders look at when they pull a credit report. If a lender is doing a “hard pull” and wanting to look at a physical credit report, it’s because they want to know what has happened in your financial past. Have you had a bankruptcy? If so, this isn’t a non-starter, but some lenders will want you to be a few years out from this. Have you had a foreclosure? Do you have a tax lien? How have your payments been made (on time, 30 days late, 60 days late, etc.) Any other red flags on the report? If you have a potential red flag on your report, don’t panic. These aren’t necessarily the end-all be-all, especially for lenders who usually work with poor credit. No matter what, be prepared to talk through these things if you know they can be found on your credit report.
Where to Find Bad Credit Small Business Loans
Now that you have a decent understanding of your bad credit small business loan options, where can you find these said options?
To start, know your best options are going to be online.
If you have a 640+ credit score, please note your options, such as medium-term loans or SBA loans, do not count as bad credit small business loans, as these loan products have the potential for single-digit interest rates. We tend to classify bad credit small business loans as products that borrowers with a 640 or below credit score can qualify for.
1. Collateralized Loans
One of the best ways to offset a bad credit score is by having some form of collateral to offer lenders. But, we don’t mean your house.
If you are needing a loan to finance an equipment purchase, keep reading. With equipment financing, you can use the equipment you are purchasing to collateralize the loan. And again, since there is collateral, it helps offset a bad credit score. However, equipment loans are the hardest loan to qualify for of the options listed in this section, as they will most likely require a 600+ credit score.
Equipment loans operate very much like a car loan. You are advanced the sum you need to purchase the equipment, and then pay back the loan, plus fees, over a set period of time. And, the best part is that you own the equipment once it’s fully paid off, which makes this a better solution than renting or leasing equipment.
2. Short-Term Loans
Short-term loans are unusual in their nature as they are usually 3 – 18 months in length and are paid back with daily ACH payments. By daily, we mean all business days, not including bank holidays. Short-term loans often have short applications and pretty fast times to funding, so if you need cash fast to act on an important business decision, a short-term loan could be a great fit.
How to Get Out of Bad Credit
Although bad credit small business loans are a good solution right now, especially if your business needs working capital to grow, don’t resign to accepting them in the future. Chances are your business will have working capital needs down the road, but when you find yourself in this position again, set a personal goal to have graduated to a lower cost loan product by that time. And the good news is, by taking on this loan, you are upping your chances of qualifying for a better product in the future, as you’re building credit. That being said, if you do want to graduate to a lower cost product, you need to be a very responsible borrower. Here are some things you must accomplish in order to graduate:
- Pay on time.This is the most important step. Not only will this build a good relationship with that lender, but these on-time payments will have a great effect on your credit score.
- Build up your total bank balance.Like we said above, your average bank balance is something almost every lender will care about. If your goal is a lower cost loan, then spend some time padding up your bank balance and making sure you don’t have overdrafts.
- Sign up for a credit monitoring service. Don’t just assume your credit score is approving — ensure it. By signing up for a free credit monitoring service like Credit Karma, you can make sure your score starts crawling up. Even better, Credit Karma breaks down where your score needs help, so you’ll walk away with other tips to get your score up.
- Stay in business.This one may seem obvious, but it matters. The longer you are in business, the better loan options you will have. In fact, if nothing else changed about your loan application except your time in business, that alone could unlock a few new loan options.
These are just a few ways you can prep yourself for a better option next time around. Of course, there are other things you can focus on, such as building your revenues or becoming profitable, but chances are, as a savvy business owner, those are always at the top of your list.
As you can see, there is a whole new world of bad credit small business loans out there. If you are ready to apply for a loan, the best thing to do is make sure the rest of your loan application, outside of the credit score, is in tip top shape. Once you’ve successfully prepared, try starting with lenders who offer the loan products highlighted. If you find you are unable to qualify, try following the steps provided above on “graduating to a lower cost product.” If you are able to achieve a few of these things, that should help you qualify in the future.
If you are denied for a loan, be sure to ask the lender why. Their feedback will allow you to see what areas of your application need improvement, and help you focus your energy on improving the area that is holding you back. After all, it may not be your credit score.
On a final note, before you start your loan search, make sure you understand that more often than not, bad credit small business loans can be very expensive. Unless you have strong business revenues or are very profitable, you may only qualify for extremely expensive products. Before committing to any loan, be sure you can afford it. Don’t assume a loan will get your cash flow machine working again, and help pay for itself. You don’t want to commit to a loan you can’t afford, and end up hurting your credit score even more.
Nowadays, bad credit won’t stop you from finding working capital for your business. If you work hard enough, you can find a great bad credit small business loan, and with time, work up to a small business loan that requires great credit.