If you've read our earlier blog on acquiring a revolving line of credit for your business, you may be thinking, "But I have a bad credit score. Is it possible for me to get a line of credit?" The good news is yes. Approval may be more difficult, and the interest rates will be higher, but you can be on your way to success once you get the financial assistance needed. Read farther to see how to access a line of credit, even with a bad credit score.
Why Get a Business Line of Credit
Business lines of credit provide flexibility, and they differ from standard business loans because borrowers only pay on the amount used, not the amount available. Regardless of credit status, cash flow is a common problem, especially for new businesses, so the reward may be worth the time and effort put in to get a business line of credit. Even if cash flow isn't a problem, having cash on hand allows business owners to expand quicker, make necessary repairs, and buy additional inventory to meet seasonal demand.
Business Credit Line Options
Options vary based on several individual factors, but the two most common types are short-term and long-term.
- Short term loans are generally for less than a year and are easier for those with poor credit to obtain. Consumers pay less in interest over the term of the loan than long-term.
- Long-term loans are generally for more than a year and are more difficult to obtain than short-term loans. They provide more favorable interest rates to consumers.
These loans may be either secured or unsecured.
- A secured loan means the borrower will have assets as collateral if the borrower doesn’t pay back the loan. For example, in a car loan, the collateral is the car purchased with borrowed funds. Not paying the loan results in the lender taking possession of the vehicle.
- An unsecured loan comes without any collateral requirements, but this is typically available at lower limits and for consumers with good credit.
Sources of business lines of credit: Big banks vs. online lenders
The general requirements are:
- Two years in business under existing ownership
- $100,000 in annual revenue.
- Credit history
The top three banks in the U.S.- JP Morgan Chase & Co, Bank of America Corp, and Wells Fargo and Co offer business lines of credit from $10,000-$100,000, with varying fees and interest rates. However, it’s almost impossible for sub-prime borrowers to get a loan from a traditional bank. Sub-prime borrowers are defined as having credit scores below 680. Don’t despair! During these difficult economic times, millions face, online lenders like ROK Financial can provide a life line and the boost your business needs to grow. Online lenders’ applications are less time consuming and can be a source of instant funding.
4 Four Simple Steps To Apply Today For Instant Funds
To apply for instant funds, take these steps. Determine your lending options:
- Find out credit score. Consumers are entitled to one free credit report per year. Visit annualcreditreport.com, the only website authorized by the Federal Trade Commission for free reports, or call 1-877-322-8228. With this information in hand, a borrower can search for the best rates based on their credit score. Online lenders will likely have higher interest rates and fees. Even with higher credit scores though, online lenders may be preferential due to the time-consuming process of applying for loans with traditional lenders.
- Time in business. If your business doesn’t’ qualify for a traditional loan because your operations are less than two years old, online lenders are an option. These sources vary with some requiring one year and some without any length of time requirements.
- Revenue. Calculate how much revenue comes into the business. The higher the amount, the better the terms are more likely to be for borrowers. For those businesses not meeting the six-figure requirement of big banks, online lenders can be a source. Some online lenders require less than $100,000 of income to get a loan.
Determine your line of credit options:
- Short-term vs. long-term: Even with bad credit, borrowers can find a range of options from online lenders. ROK Financial offers loans from 6 months to 10 years. The advantage of short-term loans is that they accumulate less interest over the lifetime of the loan. The advantage of long-term loans is their lower monthly payments.
- Secured vs unsecured: Typically, online lenders will not require collateral, but will require a personal guarantee from the borrower, or will file a lien against the business.
- No doc line of credit: This is an option for those without much financial history. These are, just as they sound, lines of credit without supporting documentation on an application. One of the most common forms is business credit cards. Needless to say, these are riskier for lenders and typically include higher interest rates and lower credit limits.
Gather all necessary documents:
- Social Security number or Tax ID
- Business Bank Statements
- Tax filings
- Profit/loss statement, balance sheet, bank statements
- Review individual lender for additional documents
Apply and compare options:
After applying with all required documents, lenders will respond with an approval or disapproval. If approved, lenders will provide the terms of the loans. The terms of the loan include
- Amount and length
- Interest rate
- Fees (if any)
- Payment schedule. Revolving lines of credit are advantageous since they don’t require a monthly payment if a borrower does not use the available credit.
Not sure how much you need or what you can afford? You can also speak to a ROK Financial business financing advisor today to find out if you qualify.
About the Author, Madison Taylor
Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.