Image for how to get a business loan with bad credit

How to Get A Small Business Loan With Poor Credit

 
Do you have poor credit yet need to access additional funds for your business urgently? Well, finding a reliable source of business funding can be difficult to start with and having poor credit may make it even harder for you to secure business funds.
 
Having a bad credit score can affect the prospects of taking business loans. Surely, personal and business scores are completely different. However, it is not to be forgotten that new entrepreneurs may face a lot of difficulties even when the personal credit is in a mess.
 
If you are new to entrepreneurship, you won’t normally have a lot of skills and management expertise. Hence, under such situations, the financers evaluate personal credit history, thereby bringing in massive issues. Getting capital from urgent loan with bad credit would either mean rejection or high rate of interest.
 

Factors to consider when choosing a business loan

If you have a good credit score, applying for loans is never an issue. However, bad credit business loans attract a lot of uncertain situations and eligibility criteria. Hence, if you are looking for a small business loan with bad credit, there are some factors for you to consider.
 

Loan term

Any business would want to pay off their urgent loan with bad credit on a longer repayment tenure. However, such negative credit brings about a risk for the creditor and hence the term for the loan is kept at the shortest. Hence, you would need to consider the one who is offering the most lenient term.
 

Loan interest rates

Needless to say, bad credit business loans will attract high rates of interest. This, paired with short loan repayment terms, would mean you will have to pay a high amount of money than your new business might be able to handle.
 

Loan fees

Loan fees are one-time payments that are made at the time of disbursal, be it a small business loan with bad credit or good. However, the loan fees are often waived off for business with an excellent credit score.
 

Factors lenders consider before approving business loans

There are some factors that lenders take into account before approving business loans. They are:

Debt coverage of the business

The past debt coverage of the business is a very important indication for business loan lenders. If there are loan repayment obligations from the past, it might affect the current application.
 

Business credit

Business credit is taken into consideration to measure the applicants’ quantitative reliability for the repayment. Credit history, size of the company, credit utilisation, etc., are some of the factors to consider.
 

Personal credit

In case the business is new or the owner is new into entrepreneurship, the lenders take the personal credit history of the applicant into consideration.
 

Business prosperity

Business prosperity is another very important aspect to consider. Quite naturally, if the growth graph of your business is on a rising scale, it will be easier to get the loans approved.
 
Here’s how to get a small business loan with poor credit;
 

Look for an alternative lender

Alternative lending enables you to access a variety of loan options outside of a conventional bank loan to help you meet your business needs. Having poor credit may threaten your chances of getting a business loan through a traditional bank. Alternative lenders however, may overlook your bad credit history and offer you a business loan in exchange for collateral such as outstanding invoices and real estate. Most alternative lenders offer smaller loan amounts and may charge higher interest rates for business loans with poor credit. Typically, alternative lenders offer more lenient loan assessment criteria. Their loan approval and repayment schedules are generally flexible compared to their conventional banking counterparts.
 

Gather documents for bad credit business loans

Regardless of your poor credit score, you should gather all the necessary documents that your potential lenders need. Mentioned below are the documents that must be produced to avail a small business loan:

  • Background check documents – Government ID proof, Address Proof, Education Certificates
  • Bank Statements – Savings and Current account statements of the past year
  • Business plan – Description of Business, detailed financial projections, marketing, and sales strategy.
  • Personal Credit report (and Business Credit report)
  • Income tax returns for the past three years
  • Documentation of Collateral, which should be on your name
  • Other Contract and legal documents – Business licenses and Registrations, Franchise agreement, Lease of Business equipment and building, contract with clients or suppliers.

 
These documents can significantly influence your loan approval depending on your prospective lender. The type of documents required may vary from one lender to another, hence, it is important to consult appropriately with your prospective lender to know what to avail during loan application.
 

Collateral

Having poor credit score may discourage many lenders from considering your loan application. This is because they would be sceptical about your ability to pay off your loan. Normally, a poor credit score indicates that you have had issues with your loan repayments in the past. Suppose accessing unsecured business funding becomes a daunting task, you can opt for a secured business loan. In this case, you will need to provide collateral to access funding. Providing collateral can increase your lenders’ confidence and show them that you are committed to repaying the loan. The value of your business asset to be provided as security may determine the loan amount you qualify for. Business assets of higher value could qualify you for higher loan amounts while those of lower value could limit the loan amount you can borrow.
 
Read Related Blog: What You Need To Know About Secured Business Loans for Small Business Funding
 

Opt for Microloans

Micro loans are small, short-term loans usually available to entrepreneurs or small business owners that require cash if necessary. They are generally available at low interest rates.They can allow small business owners to access funds regardless of their credit. Some lenders offer microloans ranging from $5,000 to $25,000.
 

Gifts and Scholarship Programs

This is an option that is seasonal, or you need to grab the opportunity at the right time. The government and or a few Multi-National Organisations or NGOs release certain programs to encourage small business entrepreneurs, with zero investment. Your ideas and project should excel in comparison to others for easy and free capital investment for your small business.
 

Check your personal credit score

Having a poor credit score may not mean that the fault lies with you. You may have been paying off your personal debts on time yet the credit bureaus have been inaccurate in producing your credit report. When looking to get small business loans with poor credit, you should first check your personal credit by consulting various credit bureaus to confirm whether or not your credit report is correct and accurate. In the event of errors, consider filing a complaint. Commonly, borrowers tend to encounter issues with their personal credit scores when they correct their initially poor credit scores by finally paying off their debts. Sometimes, the credit bureaus may delay to update your credit score after clearing your debt, consequently giving a negative image to your potential lenders. Filing a complaint updates or reminds the credit bureaus about your improved credit record.
 
The presence of many alternative lenders has made it easier to access business loans with poor credit. You need to choose the right funding option for your business and assess the loan terms of your potential lenders before applying.