When you apply for a business loan, the first thing the bank will look at is your credit score. A good score, usually from 680, increases your chance of getting the loan. It shows your financial history is in good order, that is, you didn’t default on payments for credit cards or other bills, or you have never exceeded your credit card limit. But not everyone is able to maintain a good credit score due to various issues. Does that mean you won’t get any business loan? Absolutely not. There are lots of business loans for bad credit available for people with bad credit, that is, a score between 300 and 599.
Factors Used In Evaluating Business Loan Applications
A credit score is one of the primary tools used in determining someone’s creditworthiness. Apart from this, there are other factors that contribute to an individual’s credit score. These are called the five Cs of credit.
1. Character
It is your behavior as an individual with the lenders, that is, whether you have paid loans on time in the past, your educational background, and expertise. Your reputation places great weight on your loan application. Thus, to increase your chances of getting a loan, your credit report should demonstrate a positive image.
2. Capital
It is the fund you can provide for your business. If you can contribute a significant part of the total investment, then you will have to borrow less money from the lenders. Therefore, your business venture will be less risky. Also, it shows your interest in the project, which convinces the lenders how serious you are about your new venture. So, there is a higher chance that you will take responsibility for repaying the loan. Most lenders will evaluate your capital depending on the down payment you will give. Banks usually look for 30% down payment, non-profit lenders 10% to 20%.
3. Capacity
An individual’s capacity comprises expenses, income, and debt. It is shown as a debt-to-income (DTT) ratio. If the DTT ratio is high, it indicates more debts compared to the income, and so the project becomes riskier for the lender. You must show that you have enough working capital to pay off the loan amount. You may mention your cash flow management strategy. You can enhance your capacity by reducing debt and having a stable income.
4. Collateral
Banks want collateral to ensure that they can get back the money from a client in case of default in payment. If the collateral value is higher, then the banks will be at low risk. Most banks would like you to hold your real estate property or home as collateral.
5. Conditions
The terms of the loan are important considerations. These terms are affected by the economic state of an industry. Conditions also mean the external factors like industry stability, macro-economic changes, competition, and other things that may affect your business status. You should be able to convince the lenders that your business can adapt to these market changes.
Strategies For Approval Of Business Loans For Bad Credit
There are many ways you can improve your probability of getting business loans for bad credit. First is to improve the five Cs just mentioned. To improve character, you can consider having auto payments on your recurring billings so that you don’t fail to pay on time. This step will help boost your credit score. You can save up money or invest to get a good yield to later use for your business capital.
You can enhance your capacity by reducing debt and having a stable income. For the collateral, you must do regular maintenance work on your properties to increase their value. At the same time, it is mandatory to organize papers like ownership documents, property appraisals, and maintenance logs. To improve the conditions, that is, the 5th ‘C’, you need to provide strong financial projections. This will demonstrate your understanding of the market conditions. You can negotiate loan terms to be in your favor.
Next comes transparency. You should always be truthful about your financial history. No matter how bad it is, playing hide and seek with the information won’t help. Try to explain the circumstances under which you faced such financial difficulty, and that the consequence wasn’t intentional. For example, you may have failed to pay your bills due to a country-wide recession.
You can get into a partnership with someone with a good credit score who is also seeking a business loan. In that case, you need a lawyer to draft an agreement to point out each partner’s responsibilities. A family member or a friend can act as a guarantor for the loan.
Types Of Business Loans For Bad Credit
There are plenty of loan options for you, even if you have a poor credit score. With the right terms and conditions, these can be as good as traditional loans that are given to people with good credit scores.
Short-Term Small Business Loans
You will get a lump sum of money if you agree to repay the loan over a specific period of time with a particular payment schedule. These loans are similar to conventional bank loans except that the repayment period is short. Every repayment amount includes the principal and the interest amount incurred for that period.
Short-Term Business Line of Credit
In this category of loan, the borrower can access funds continuously up to a particular agreed-upon limit. The borrower will be charged interest on the open balance only. It works similarly to a credit card. You can withdraw a specific amount and repay before withdrawing more money.
Invoice Financing
If there are unpaid customer invoices, then you will find some lenders who will give a loan on the invoice value. The unpaid invoices here act as collateral. Here, your invoices are converted into instant cash. You will get funds from the lender depending on your accounts receivables.
Equipment Financing
If you are applying for a loan to buy new equipment, then, you can use the equipment as collateral. If you default, the lender will seize your equipment. Here, the lender won’t check your credit history.
Working Capital Loans
You will get these loans to finance your day-to-day business operations; for example, inventory, wages, and taxes. These loans are not appropriate for purchasing long-term assets or investing elsewhere. You can get these loans very quickly with less paperwork.
Merchant Cash Advance
In a merchant cash advance (MCA) loan, you get a sum of cash for a percentage of your business’s future sales. Approval of this type of loan is less dependent on your credit score, so you can get it even with a poor score.
After you get one of these business loans for bad credit, you need to make sure that your business progresses. It will help you add more capital to your business in case you don’t get enough loan. After you repay the loan amount, you can then apply for a better loan, and your credit score will be higher, too.
Conclusion
Apart from these options, you can consider other alternative ways of funding, like borrowing from friends or family, or funding through crowdfunding platforms such as GoFundMe or Kickstarter. In all the financing options, you must convince the lenders that your business will be a good investment. That way, you will have a very good chance of getting a business loan.
