Bad Credit Business Loans
If you’re a business owner or entrepreneur looking for business loans, even though you have bad credit, there is good news. Bad credit business loans do exist. However, the bad news is they can be difficult to find. And even when you do find them, they often come with extremely high interest rates and pretty strict borrowing terms. Business loans are no different in that respect from consumer loans. The worse your credit, the more difficult it’s going to be to find a business loan with favorable rates and terms.
If you do need funding for your business despite your poor credit, you probably should start with conventional sources. There are alternative sources, which we’ll get to in just a minute, but they all come with some measure of risk. As long as you’re going to commit to a financing package you might as well give your best shot at securing standard funding sources because the greatest protections will exist with them. Standard sources of credit include commercial banks, business incubators, and industry trade groups.
Credit Score Is Important
Just as with consumer loans, your credit score is a big part of whether or not you’ll be able to secure business loans. Credit score for businesses is figured in much the same way, using a formula that takes into account:
- total amount of indebtedness compared to available credit
- payment history
- types of credit currently being utilized
- how often credit is applied for
- the existence of current judgments or liens
The one major difference in credit scores for consumer and business loans is the fact that 650 is typically the lower limit for business loans. A credit score less than 650 will likely not be acceptable to most traditional lenders. Also keep in mind that if you’re a sole proprietor your personal credit score is factored into the equation as well. From a legal standpoint, the business of a sole proprietor is simply considered an extension of his personal finances. Therefore, if you have poor personal credit it will reflect poorly on your business.
Other Sources of Alternative Funding
Private Equity Investors
We typically think of private equity investors in a different light than we do traditional lenders like banks. But when you stop and think about it, what they do is essentially no different. A private equity investor provides funding for your business in exchange for a share of ownership. That share of ownership is maintained until such time as the investor decides to pull his money out. The only difference between that and what the bank does comes by way of ownership. The private equity investor owns a tangible share of your company while a bank owns a lien. Yet a lien is still a legally enforceable interest in your business.
There is an emerging industry of the web-based lenders quickly gaining ground among businesses with bad credit. These are non-traditional lenders that don’t legally qualify as banks. At the same time, they must be licensed in their individual states in order to provide funding. These types of lenders may provide you an unsecured loan for your troubled business, but beware of the terms and conditions. More than one business has found itself in trouble because it failed to abide by the terms of a loan.
Cash Advance Lenders
Cash advance lenders are similar to web-based lenders in that they provide unsecured credit to business owners. These lenders will loan you money based upon a projection of your future receipts. You’ll be required to repay the loan out of those future receipts according to a predetermined schedule you work out with the lender. We would suggest you use this type of funding only as a last resort. Interest rates are usually extremely high, and the loans come with very strict terms and conditions which are usually enforced with little mercy.
Friends and Family
Never discount friends and family members when you’re looking for small business loans. This is especially true if you have poor credit. They are often willing to help because their close relationship with you means they want to see your business succeed. Our only caution in using this type of funding is that you set it up as a loan with a legally binding contract. You’ll want to keep it a strictly business-centered transaction so that emotions and personal involvement are left out of the equation.
From time to time state governments receive block grants which they might use to help specific businesses involved in targeted industries. In these cases small business grant money does not need to be repaid unless the business in question fails to meet specified guidelines. The best place to find decent state grant opportunities is through your state’s business development agency. Other grant opportunities are sometimes made available through local and county governments, business trade organizations, and private foundations.
One last source of alternative funding comes by way of the micro loan. Micro loans are typically in the $5000-$15,000 range, thus the designation “micro.” Micro loans typically come from private institutions or foreign government agencies specifically trying to promote business among a specific demographic. The nice thing about micro loans is that they don’t require excellent credit. In fact, most business owners who qualify for micro loans do so because their poor credit doesn’t enable them to get more traditional loans.
If you’re a business owner with poor credit don’t give up hope. Be diligent in your search for funding that will help keep your business going. In the meantime, consider seeking help from resources like the Small Business Administration; sources that might be able to show you how to correct the issues that are causing your financial distress. With a little bit of luck and some perseverance you can turn your business around.