Starting your own business requires having a plan. It also requires having enough cash on hand to keep your business afloat. The reality for small businesses is that for almost every business that opens there is one closing.
Only forty-eight percent of small businesses will survive beyond five years. Lack of finances is often given as the reason the business failed. If the owner has less than perfect credit they have an increased chance of being in the fifty-two percent that doesn’t make it.
The inability to raise capital after their doors open means finding business loans for bad credit. Without cash on hand, they are unable to plan for slowdowns or failed equipment or a hike in their rent.
Having access to capital is crucial to a business owner’s success.
Are you a business owner with bad credit? Keep reading to learn how to get the funding you need.
Is Good Credit for Business Owners a Necessity?
So you’ve decided to start a business. You have your start-up cash which you will probably exhaust getting your business up and running.
Chances are you’ll encounter unexpected expenses within the first few months. As a result, your earnings will begin to dwindle. As you begin to seek out options reality will sink in, it’s not that easy to get a loan.
Having good credit doesn’t mean that a business loan is guaranteed. To qualify for a loan through the Small Business Administration (SBA) can be difficult with the best of credit. Oftentimes the business has to have been operating for more than five years.
Additionally, an SBA loan can take months for approval. By then, some business in dire need of capital could close their doors.
If you are a business owner with not so good credit it is important to get your house in order. To apply for most loans you will need to have your business incorporated and a bank account in the business name. Make sure you have good records and are paying your taxes.
Now, let’s get into how to get small business loans with bad credit.
Understand Your Credit Rating
When looking for a business loan, creditors will look at your personal credit score and your business credit score. Lenders will look to see if your personal score exceeds 600.
Regardless if you are eligible for a loan, your interest rate will be based on your credit score. The higher the score the lower your interest rate will be. You will also get better terms overall.
Taking the time out to review your credit score ahead of time will help you prepare for the loan process. With the information, you can dispute inaccurate information. If there are small outstanding balances there is time to pay them off and raise your score.
Each year the three main credit bureaus are required to provide consumers a free copy of their credit report. Banks and credit card providers are also offering credit monitoring services to their customers.
To request your free report contact the agencies directly. It is important to get a report from each agency because the information could vary.
Equifax – www.equifax.com. P.O. Box 740241. Atlanta, GA 30374-0241. 1-800-685-1111.
Experian – www.experian.com. P.O. Box 2104. Allen, TX 75013-0949. 1-888-EXPERIAN (397-3742)
TransUnion – www.transunion.com. P.O. Box 1000. Chester, PA 19022. 1-800-916-8800.
Credit scores range between 300 and 850, depending on the agency. The data on your reports remain seven years following the date the balances are paid or written off. If you have ever filed for bankruptcy the information will remain for 10 years.
Build Banking Relationships to Get Business Loans for Bad Credit
Every community has local banks. These banks often have less stringent rules when it comes to approving loans. Once they get to know you and understand your banking habits, they may be willing to work with you.
The Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law last year. The act is beneficial to smaller local banks because it relaxes the rules of the Dodd-Frank Act.
With more flexibility, small business owners increase their chances of being approved.
Use your business banking account as leverage to get the bank to overlook flaws in your credit. Do not allow your account to go into the negative. Make regular deposits and pay your monthly business expenses through the account.
If you are using an accounting software program like Quickbooks, attach your business bank account. This way you will have a clear record of your business transactions.
Check to see if your business bank account offers credit card readers. Use one to make it easier for clients to pay faster. This will also improve your chances of getting approved for a loan.
Types of Business Loans You Can Get
You are probably thinking about what I can do if I need money now. There are options for business owners with an immediate need for operating capital.
Immediate business funding with bad credit is available. Here are some options.
Borrow From Family or Friends
Having bad credit could be a result of numerous things. It does not always mean that you are a poor credit risk. Job loss, divorce, illness, and the death of a spouse can leave a person in financial despair.
As noted above, it can take seven to ten years to get your credit score to a healthy level. Friends and family know you personally and have a better insight into your creditworthiness. If they see you are working hard and your business is a good investment, they may be willing to give you a loan.
Treat the transaction the same as you would with a bank. Draw-up a contract with terms and conditions. Have the document signed and notarized by all parties.
Treat your family and friends with respect and repay the money on time.
Take Out a Home Equity Loan
Your home is your biggest and best asset. Depending on how long you have been in your home, you may be able to take out a home equity loan.
Because your home is used as collateral for the loan this is an option to consider.
There are things to consider when taking out the equity on your home when you have bad credit. You will extend the repayment period on the home. Your interest rate will most likely increase which means higher monthly payments.
The upside to borrowing the money from your home is that you may have additional money available. The time to repay the money is extended over thirty years. Even with a higher interest rate, you will still be paying less than what you would with a business loan for bad credit.
Get a Collateral Loan
Businesses that own property, equipment, or vehicles can use those items to secure a collateral loan. The collateral is used to secure the balance of the loan. Once the loan is repaid the lien is removed from the property.
The upside to a collateral loan is you get immediate access to the money you need for your business. The downside is if you default on the loan you will place your business in a worse predicament.
The loss of a vehicle, building, or equipment can have a tremendously adverse effect on your business operations. If you can’t afford to lose it, don’t use it to secure a loan.
Borrow From Your Credit Card Balances
Most credit cards offer users the option to do cash advances on their available balances. In some instances, you can withdraw the full credit limit on the card.
A credit card in good standing may also be eligible for a credit line increase. Some providers have an option on the credit card holders account page to request an increase. The answer is immediate.
If you have personal or business credit cards you can go to any financial institution and do a cash advance. Most likely your card services provider will charge a cash advance fee for the transaction. You may also have a separate interest rate for the advance.
Review the terms and conditions of the account to calculate how much the advance will cost. With credit cards, you do not have term limits to repay your outstanding balance. Keep in mind the longer it takes you to pay off the balance the more costly the loan will become.
Seek Hard Money Investors
Hard money loans are an option for general contractors or small businesses dealing with real estate ventures. The borrower is required to use real estate property to secure the loan. The property can be land, a single or multi-family dwelling, or commercial property.
The only type of property the borrower cannot use is one in which he resides.
Hard money loans are short-term loans that are repaid within a year. Under special circumstances, the borrower may be able to extend the repayment period for up to five years.
The special feature of these types of loans is that the initial payments are interest only. At the end of the loan, the full balance is due.
The reason hard money loans work well for those in the real estate business is that these deals have short turn arounds. A year is more than enough time for a property to sell or the business owner to have cash flow.
There may be opportunities for other forms of hard money loans. You would need to check with the investors to see if your situation is right for them.
Borrow Against Your Outstanding Receivables
Slow paying clients can be a huge problem for small business. In businesses where services are provided before the money is collected, late payments can be detrimental.
Subcontractors may not be able to start their next project because money is not flowing in quick enough. General contractors can have up to 90 days to pay an invoice. If they do not have their money from the client it could be difficult to pay the subs.
In these instances, an accounts receivable financing can help. These are short-term loans based on the number of outstanding invoices the business has. The business is still required to make payments but they are usually interest-only.
The downside to accounts receivable loans is they can create a cycle of dependency. Similar to payday loans, the borrower never really catches up. Meanwhile, they lose money on interest and fees.
If you decide to go this route do a comparison. A lot of lenders offering this option require weekly payments. Once the outstanding invoices are paid, the borrower pays the balance of the loan.
Online Short-Term Business Loan
Online Short-term business loans are becoming more popular. These loans are also presented as working capital loans. They are a popular option for business owners with bad credit.
The loan process is faster than applying for a traditional loan. You will also require less proof showing your ability to repay the loan. The lender will need proof of your existing bank account and payments will be automatically drafted from the lender’s end.
This is another lending option that could require weekly payments. Because it is a short-term loan the full amount must be repaid in less than a year. Sometimes the lender may want the balance paid within a few months.
Lenders advertise that loans can go as high as $250,000, although they are designed to resolve short-term cash flow problems. In some cases, the minimum loan amount can be as high as $50,000. With weekly or semi-monthly payments it could be a debt trap for young or struggling businesses.
Interest rates on these loans tend to be on the high side and will vary based on time in business. They will also take a look at your annual income.
Work to Improve Your Credit Worthiness
Business loans for bad credit are possible but come with a cost. Using the information in this article not only gives you options but provides information in improving your creditworthiness.
If you want to legitimize your business and strengthen your financial portfolio you can start today. Click here to learn the advantages of legalizing your business.