Starting a small business is exciting and stressful. You need to outshine the competition and make sure your company succeeds for years to come.
Unfortunately, approximately 66 percent of small businesses fail in the first ten years of operation. The exact reason varies from company to company. But for many, it’s because they simply run out of money.
The main obstacle for small business owners is getting reliable funding and financing to grow their business for years to come.
Your initial startup loans may not be enough to help you grow your company. Worse, those initial loans might have caused your business’s credit score to drop.
Does bad credit mean you can’t get a loan? Not necessarily. It just means it’s a bit tougher to find the financing you need at an interest rate you can afford.
But don’t worry! In this guide, we’ll go over everything you need to know about getting business loans for bad credit so you can still get the money you need to boost your business.
Understanding Business Credit Scores
Business credit scores are very similar to personal credit scores. They can go down when you’re behind on payments or have high amounts of debt. But they can go up if you start repaying those debts.
But they don’t follow the same numbering system.
Personal FICO scores follow a range of 300 to 850. And anything below a score of 500 falls into the bad credit zone. The lower your score, the harder it will be to get a loan or line of credit.
When you’re first starting out, banks typically use your personal FICO score to determine your business loan options. But after being in business for a while, your company will develop its own credit score.
This score’s rage is from zero to 100. Businesses with scores of zero have essentially no credit. Those with scores close to 100 have great credit and will have access to better interest rates and loan options.
Banks Will Look at Both Business Credit and Personal Credit
Unless you’re a large company, your business credit score won’t likely be enough to earn you the best loans possible.
In fact, for many small business owners, their personal credit scores get used in the financing decision just as much as the business credit. Why? Because small businesses have more of their personal money tied up in the company.
This means if you have a low business credit score but a high personal credit score, banks may see you as a more favorable applicant. It shows them that you’re a responsible borrower and are more likely to make payments on time.
But if you have both low business and personal scores, you might find it more difficult to get the right loan.
Check the Minimum Scores Required
Different lenders will have different minimum credit score requirements. But for small business owners, most prefer a minimum personal credit score of 640. This will give you access to the widest range of options.
But some lenders are more forgiving and will consider loans for people with scores around 500. The difference will largely be in the interest rate you’re charged and the length of the loan term.
Remember, higher interest rates and shorter loan terms mean higher monthly payments.
So, how can you find out what the credit requirements are? Ask! When applying for financing, always ask for clarification on terms you’re unsure of. Understanding the minimum requirements of each loan you’re interested in can help you decide which loans to apply for in the first place.
How to Improve Your Credit Score
Bad credit is not a death sentence for your business’s financing options. It’s just a challenge that can be overcome. Before you start looking into business loans for bad credit scores, first try improving your current score. Here are a few things you can do.
Start Paying Down Personal Debts
If you’re a small business owner with low personal credit, it’s only going hurt your financing options. When possible, shift your focus to repaying your personal debts.
Make more than the minimum required monthly payments. Stop relying on credit cards to fund purchases, and find a way to cut personal expenses. The less money you spend each month, the more you can use to pay down personal debts.
As your personal credit score goes up, your small business credit score will follow. It just takes time.
Pay Bills on Time
Missing the occasional utility bill payment can cause your business credit score to drop. Start checking on your bills’ due dates and make a habit of paying them on-time each month. If you need to, set up reminders on your email or cell phone to make sure you make payments on schedule.
Increase Credit Limits
You have a business or personal credit card, right? Well, if those cards have low limits, you’ll use a large amount of your available credit on regular purchases.
The more of your available credit you use, the higher your credit utilization rating will be. This can lead you to a lower credit score quickly. Instead, ask your credit issuer to increase your credit limit.
The more available credit you have, the better your score will be, even if you plan to never use the full amount. If you are staying on top of your monthly payments, most lenders will raise your limit as frequently as every six or twelve months.
Stay on Top of Checking Your Score
Your credit score can change quickly. Any factors that change your score will show up on your credit report.
Most of these will be legit, but some may be errors. The sooner you catch and report those errors, the better your score will be.
Get in the habit of checking both your personal and business credit scores at least once a month. If you notice any errors, dispute them immediately.
Explore Available Business Loans for Bad Credit
Building your credit score up takes time. But that doesn’t mean you won’t still need financing before your score increases. And there are options out there.
Accounts Receivable Lines of Credit
Accounts receivable lines of credit allow you to borrow against the invoices you send to customers. The lenders look at the performance of your business and the profits you bring in each year to determine how much credit to offer.
Once extended, the line of credit matches your business’s performance so you don’t have to worry about overdrawing the credit line.
As your customers pay their invoices, those payments go directly to the accounts receivable line of credit. Think of it as borrowing against the money you’re owed.
You’re not taking out a loan, per se. Instead, you’re getting an advance on the money you bring in.
These unsecured loans are a great option for businesses with less-than-ideal credit. And you won’t have to worry about increasing your debt significantly.
To learn more about this option with Dealstruck, you can click here to skip ahead.
Many business loans for bad credit scores follow the traditional term loan arrangement. These loans give you cash up front to use for your business.
You’re expected to make monthly payments at an interest rate determined by the lender. Those monthly payments last for the full loan term or until you pay off the balance of the loan entirely.
Keep in mind that the higher your credit score is, the better your term loan options will be.
Merchant Cash Advances
Merchant cash advances are one of the riskiest methods of financing your business. But they are an option.
These loans give you access to cash quickly and still use your credit score to determine the loan terms. But rather than borrowing against your credit score, you’re borrowing against future profits and sales.
The lender looks at your sales projections for the year and issues you cash in an amount they deem fair. This amount then has to be paid back with those future sales.
If your business does better than you’d expected, you’ll be fine. But if you hit a slow period, you won’t have enough sales to cover those payments. Worse, their interest rates and fees can be expensive, making it even harder to repay the loan.
Ways to Offset Bad Credit Scores
Business loans for bad credit are an option, but they’re not the only way to help you get funding. Believe it or not, you can mitigate bad credit scores to improve your chances of getting a great loan.
Work with a Business Partner
If you’ve started a business on your own, you know the entire financial risk falls squarely on your shoulders. This means your credit score is the only thing banks and lenders are basing decisions on.
Bringing in a business partner helps you shoulder some of that risk. Lenders will be able to use your partner’s credit score to help decide whether they want to give you a loan.
If your partner has strong credit, they’ll be seen as an asset for the bank. It shows would-be lenders that a major decision-maker is responsible with their money and boosts confidence.
Ask Friends and Family
Asking a friend or relative for help with your business is nothing to be ashamed of. And when you’re looking for a small loan just to help you get back on your feet, it’s always an option.
Ask friends and family if they’d be willing to loan you the money. You can still draw up an agreement and make monthly payments with interest. Your credit score won’t be a factor and taking a loan from a friend won’t show up on your credit report as extra debt.
This will give you the money you need while letting you focus on improving both your personal and business credit scores.
Accept a Small Loan with a Higher Interest Rate
Bad credit scores almost always mean higher interest rates. This is just the way the industry works.
And if you’re comfortable with it, you can accept a loan with a higher rate and make payments until you pay the loan off.
But if you make sure only to borrow what you need and as little as possible, you’ll still build your credit up. The smaller the loan, the smaller monthly premium payments you’ll make.
Borrowing only what you need means you’ll be better able to afford the payments each month and helps your credit score increase over time. If you need more money later on, you can always apply for another small loan once the initial loan is paid off.
This process will help you build your credit score and take advantage of lower interest rates as it improves.
Consider Working with Investors
Investors are people who put money into your business in exchange for either part ownership of the company or a percentage of the profits.
For many small business owners, the thought of approaching investors can feel like giving up control of your company. But in reality, it can make your company stronger.
When a person invests in your business, they give you the money you need to reach certain goals. This money is not given as a loan and you won’t have to worry about interest payments or credit checks.
All you’ll need to do is satisfy the investor agreement you make with each person supporting your company.
This gives you immediate access to the money you need. You can then continue to build your credit score and improve the likelihood of future loans and financing options.
Keep in mind that working with investors is often a long-term agreement. You won’t be able to terminate the relationship once they earn back the amount they invested in your company.
Get the Right Financing Now
Every business will need a business loan at some point. But if you have a low credit score, finding the right loan for your company can be a major challenge.
That doesn’t mean you need to settle for incredibly high-interest rates. You just need to find the right business loans for bad credit. Over time, your loan payments will help improve your business credit score and qualify you for better loan terms in the future.
If you’re looking for help in financing your business, apply for a loan today. We’ll help you get the money you need to meet your goals and grow your business into the company you know it can become.