Business owners need access to capital to keep their businesses going. Small business loans are an accessible way for new and old business owners to access this capital. Small business loans are used to start new companies or provide business owners with the money to buy new inventory, strengthen their financial foundation, or grow their business. However, it can be challenging to get access to any business loan when you have bad credit.
This isn’t to say that business owners can’t get business loans with their bad credit. There are a handful of ways to get access to these loans despite your credit standing, but first, there are a few things you need to know about loan for business with bad credit.
What are bad credit business loans?
It is a challenge to qualify for business loans if you have a low credit score. Lenders will look at your low score and assume you wouldn’t be able to pay the loan back on time, if at all. Bad credit business loans provide funding to businesses – and business owners – with a low credit rating. These loans look beyond the applicant’s credit history and use other metrics to judge their capability to repay. These loans tend to come with higher interest rates, but that’s just the price you pay for the more flexible lending criteria.
The good news is that paying a bad credit loan on time can improve your credit score. One or two bad loans can see your score improve enough to get a better loan in the future if you need one.
How do bad credit business loans work?
Bad credit loans could be the solution you’ve been looking for if you need some extra credit for your business. However, failure to pay back a loan of any kind will do damage to your credit score. You could find that you don’t have the credit score you need to secure the loan that you want.
When applying for a loan, the lender will check your credit history and credit score to assess your ability to repay the money you borrow from them. Borrowers are considered “high risk” if they have a low credit score and inconsistent repayment history for loans.
Different lenders have different lending requirements. Using collateral or having a co-signer on the agreement can improve your chances of being approved for the loan. These measures can also help secure better terms for a bad credit loan. There are more business owners with bad credit than you might expect. Many lenders have turned quite a significant profit by giving these businesses the loans they want and need.
Bad Credit Loans for 2021
Just as the name suggests, microloans are loans that are offered in small increments. Microlenders can offer business owners a small amount to help finance their businesses. These loans are understandably called “micro” because they are comparatively smaller than those from other lenders who can usually go up to the high hundred-thousands. It is not usual for microlenders to give out even $50,000.
Unless your business is one that can survive off of a $10,000 capital, microloans are not recommendable for starting big business ventures. It is more suitable for specific needs for businesses that are already established and are only looking for an additional financial boost. Or for businesses that do not need a big capital to start with (such as crafts or home-baked goods services).
Different microlenders have their own rules and standards that need to be met by borrowers. Microlenders rarely require high credit scores, so business owners with bad credit can benefit from approaching them.
- Merchant Cash Advance
A merchant cash advance, or MCA, is not quite a loan. It is more of a literal advance on the business’ future income. Business owners apply their request to the MCA provider, and once approved, they will be granted a deposit for the amount advanced. This will then be repaid by deducting a discussed amount from the profit off of credit card transactions within the business.
The deducted amount will be by percentage and is dependent on the profit garnered in a month. If the business hits a low, then the amount deducted will adjust accordingly by the percentage. The deductions will continue until the amount is fully paid off.
MCA providers are less strict than other lenders and are therefore more accessible for businesses with bad credit. The process of approval is also fairly quick as the amount is deposited directly into the business account. The MCA method of acquiring business funds is one of the best choices for businesses that are in need of immediate financial assistance.
- Invoice Financing
Some lenders offer “invoice financing” as a sort of collateral for the loan. These lenders usually have lower-than-usual credit score requirements; they give people with bad credit more wiggle room.
Invoice financing is a method for businesses to borrow money in exchange for the pending amounts to be paid by their customers. For businesses that need, or prefer, to move the operation faster than their clients can pay, invoice financing is the best option.
- SBA Loans
The small business administration (SBA) oversees loans given to small business owners. The Small Business Administration doesn’t directly lend money to companies, but it does set the regulatory guidelines for loan providers. The SBA also works with other lenders to provide small businesses with financial options when they need them. The SBA guarantees loans to feel assured they will get their money back even if the borrower can’t repay it. SBA loans tend to have more favorable terms and rates than traditional bad credit loans. These loans may also come with reduced down payments and no need for collateral. The SBA also offers counseling and education services to small business owners to help them manage their business.
About credit scores
You can have bad business credit even if you have great personal credit. The two credit scores are different. They are kept separate because your personal credit score is a reflection of your own creditworthiness. In contrast, the business credit rating is based on how well your business performs and repays debts. If your company has a prior history of non-payment, lenders will not be confident that you’ll pay them back on time either.
How to choose a good bad credit business loan?
- Go through your credit report
Start by checking your credit report before applying for a loan. This will give you an idea of your current standing and how likely you are to get approved for the loan. Avoid wasting your time with loans you could never get.
- Try different lenders
The good news about getting a loan is so many people offer them. If you can’t get a loan from one lender, then shop around and find another. Not every lender will be right for you, though. Some bad credit business loan providers are better suited to specific situations. Some lenders cater to particular borrowers, such as Street Shares, which offers incentives for military personnel.
- Offer collateral
Collateral is one of the best ways to get approved for a loan – and get better rates for that loan. However, avoid using personal assets for a business loan as they can be forfeit if you default on the loan. It would be best if you used business assets instead, such as business equipment or savings accounts.
- Find a co-signer
You can consider having a co-signer on the loan if you don’t have collateral to offer. Find someone with a good credit rating you can trust to support your application. Having a co-signer gives you a much better chance of getting a loan, but be warned that the co-signer will have to foot the bill if you don’t pay the loan.
Get in touch with Clear Skies Capital today!
Still not sure which bad credit business loan is right for you? Get in touch with Clear Skies Capital today for more advice and support. We would be more than happy to help connect you to the right financial product and lender for you. Businesses with financial assistance are more likely to succeed than those without it, so see what Clear Skies Capital can do for your business success.