According to the U.S Bureau of Labor Statistics, approximately 70% of small businesses make it to the end of the second year, and the number drops up to 50% at the end of the fifth year. This decline is mainly linked to financial problems. As a small business owner, you may lack enough funds to meet certain needs such as purchasing equipment, getting inventory, or expanding.
Therefore, you may need to get a loan to keep your business going. However, this step can be challenging, especially if you have bad credit. Fortunately, you no longer have to worry because many lenders are now financing entrepreneurs with poor credit. This guide discusses how to get a business loan with bad credit. Let’s delve into the details.
Getting Small Business Loans with Bad Credit and No Collateral
Putting your property up for collateral when you have bad credit can help you secure a small business loan faster. However, this may not be possible for everyone. For example, if your business has not yet accumulated enough assets.
Luckily, you can get small business loans that don’t require collateral, even when you have bad credit.
Note that these loans have unique terms and approval requirements. Therefore, you should go through them carefully to avoid misunderstandings in the future.
Types of Business Loans You Can Get with Bad Credit
Different types of long-term business loans for bad credit exist. As such, you should research the best small business loans that meet your specific needs. Some examples are equipment financing, term loans, invoice factoring, lines of credit, and merchant cash advances.
Equipment financing is the best loan option if you can’t afford the needed equipment. This loan usually finances 80% to 100% of the purchase price. The equipment will serve as collateral, which means the lender can take it if you can’t repay the loan according to the agreed terms.
Term loans involve borrowing money from a lender, which is repaid within a set period, between one to ten years. However, since you have bad credit, you should get term loans from alternative lenders since traditional ones like banks can deny you.
Invoice factoring is another example of a guaranteed small business loans bad credit. If you have unpaid invoices leading to cash flow problems, you can use this loan option. The lender will buy your invoices at a discount and give you an advance.
Your clients will pay the lender directly, who will then deduct their fees and give you the remaining balance once the invoices are paid in full. Your accounts receivables will act as collateral. Besides, you can only qualify for invoices that are payable within 30 to 90 days.
Lines of credit are revolving loans with a fixed amount that you can use to meet your business needs. When paying back, only the interest on the portion you borrowed will apply. Merchant cash advances allow you to get an advance from a lender for future sales.
Lastly, SBA loans are government small business loans. With this option, you can finance any project, including purchasing inventory, construction, renovation, mergers and acquisitions, or buying real estate, among others. Therefore, if you have bad credit and want funding that doesn’t restrict you on how to use the proceeds, you should consider applying for an SBA loan.
Research Business Loan Lender’s Credit Score Requirements
Despite the above-mentioned small business loan options being flexible, every lender has credit limits. For example, most online lenders will consider your application if your credit score is about 500, which is generally low. However, below this, such lenders can decline to work with you.
Some lenders, on the other hand, will offer you a loan regardless of how low your credit score is. Therefore, don’t waste time sending applications to lenders with credit score requirements you don’t meet.
What Lenders Look for When Considering Bad Credit Business Loans
Besides credit score, lenders have other requirements that applicants must meet to qualify for bad credit business loans. These include years in business, the size of a company, annual revenue, the risk associated with a particular industry, and credit history. For example, even though you may meet a lender’s required credit limit, you can be asked to wait until your business has sufficient credit history.
Moreover, the reason behind your bad credit may affect a lender’s decision. For instance, bankruptcy and defaulting on loans can lower your chances of loan approval. Therefore, getting a small business loan with bad credit is significantly dependent on the lender. Hence, it is important to check for multiple lenders and choose one with requirements that favor you.
Find an Option That Suits Your Business
During your research, you should go through the loan conditions to discover what suits your line of business. For example, if you are a contractor, you want to work with a lender that offers equipment financing since your business mainly deals with such assets. Equipment financing is also beneficial for trucking companies with bad credit. If you are in the business-to-business industry, which means you supply products or services to clients who pay invoices over certain period payment terms, work with a lender that offers invoice factoring, and so on.
Work with a Co-Signer
Another tip that can help you get decent small business funding with bad credit is working with a co-signer. This is someone with a good credit score who agrees to be partially responsible for your loan. It means they can repay it should you fail to do so.
Finding a co-signer can be challenging. Therefore, it’s easier to ask your family members or friends who trust you. Also, ensure that you explain the loan terms to them in-depth to help them make an informed decision. After signing, involve them in your repayment plan and keep them informed throughout the loan period.
The tips discussed above can help you get both short and long-term loans when you have bad credit. Once you qualify for these loans, you should pay them on time and comply with the terms to have a good relationship with the lender(s).