6 Tips for Getting a Business Loan with Bad Credit

29 Mar, 2016 / Comments: Comments Off on 6 Tips for Getting a Business Loan with Bad Credit / By

Many small and even medium-sized companies require additional capital in the first years of operating to overcome a lack of cash flow, enter into new markets, or expand their product line or services. As a business owner, you may find yourself in the position of needing capital without the necessary credit score to do so through traditional means. However, if you have not had the chance to establish a strong business credit history or if your personal credit score is lacking, then all hope is not lost, as you have several options. Here are six tips for obtaining a small business loan on bad credit.


1.  Consider Alternatives 

Bank financing and credit cards only account for 25% of funding needs for those small businesses that are just getting started. This means that 75% of financing needs come from alternative sources that rely less heavily on your credit score. For instance, there are lending programs and credit cards that are created for those individuals who have less than ideal credit scores. However, keep in mind that these will often charge a higher interest rate to compensate for the higher credit risk you impose as a sub-prime borrower.


2.  Reconsider Your Financial Needs

If you have bad credit, it is critical that you carefully evaluate your financial needs. In many cases, a business owner will be denied a small business loan because their credit score is not high enough to match the amount that they requested. Make sure that your goals could not be achieved with less capital before you seek alternative financing. Additionally, when talking with a small business lender, ask them if your credit score may allow you to obtain a loan for a lower amount.


3.  Consider a Web-Based or Micro Lender

Many nontraditional lenders offer their services online to aid budding entrepreneurs. Typically, you can take out between $5,000 and $25,000 from one of these lenders. These sites may be just what you are looking for to meet your capital needs if you are struggling with bad credit, as your payment history will also be reported to credit bureaus, which will thus raise your credit score as long as you make timely payments. If you are interested in this option, then make sure that you compare rates by looking at several different lenders as each may offer a different pricing structure for their loans.


4.  Consider an SBA Loan

If you need less than $35,000 to fund your business, then you may be qualified to obtain a Small Business Administration (SBA) loan. You may qualify for several different loan programs under the SBA’s 7(a) category. These programs are beneficial because they are government-guaranteed, which means that lenders will be more willing to offer capital to small business owners who have less than ideal credit. The SBA will give you a list of lenders who are in the loan program so that you can apply directly through the bank of your choosing.


5.  Look into a Business Cash Advance

Do some research into obtaining a business cash advance. This can be an ideal financing option for those business owners who only need a few thousand dollars due to cash flow issues. That being said, you can show a lender that you have at least $2,500 worth of monthly receipts and have been in business for a minimum of one year to be able to obtain a cash advance for as much as $10,000. If this is the option you decide to go with, then it is critical that you comparison-shop to find the best interest rates and terms.


6.  Offer Collateral

The reason why you will have difficulty obtaining a small business loan is because having bad credit is an indication that you are a higher risk to lenders, which means that they are less likely to receive timely payments from you. However, you can squash some of this risk factor by offering to put up equipment, land, or another type of asset as collateral in order to secure a business loan. If you can reduce the risk lenders take on by offering you a loan by tying your asset to it, then they will be more willing to take a chance on you.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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