Getting a small business loan can be a tough sell these days. It’s even tougher if you have bad credit, but it is not impossible.
Naturally, higher FICO® Scores help qualify for better rates from lenders – which can save you money in the long term. (FICO defines bad credit as a score of 300 to 629.) If you have a poor credit history or no credit history at all, it’s not the end of the world. A small business loan can still be within your reach. A variety of options are available.
One such option is a microloan, a short-term loan for the purpose of buying equipment, inventory and supplies. They typically must be repaid in six years. These are available through the federal government’s Small Business Administration. The annual percentage rate (APR) can range from eight to 13 percent.
Most microloans are for $50,000 or less. The average size of a microloan is approximately $13,000. Microloans are a good fit for businesses with no established credit history. Applicants must work with through an SBA intermediary in their geographic area.
The size and credit flexibility of microloans is also attractive to startups. According to the Kaufman Foundation, the average cost of starting a business is $30,000. This amount varies according to industry, business model and geography.
Microloans are also available through private non-profit organizations at very low percentage interest rates. Among these are the Association for Enterprise Opportunity and the Communities at Work Fund. Non-profit microlenders usually make loans to minority business owners, women, and low-income applicants a priority in order to spur entrepreneurship among these groups.
A number of alternative lenders offer larger loan solutions for businesses with bad credit. These lenders are typically found online, and they offer fast access to financing. Funds can be in your account within one to three days after applying. The application process is also far simpler than a bank or the SBA.
This efficiency has helped make alternative lenders popular with small business owners. In July, alternative lenders approved 57.2 percent of credit applications. In contrast, big banks approved 24.5 percent. Small banks approved 48.9 percent. APRs vary from lender to lender. But lower APRs usually mean higher credit-score requirements. Generally, alternative lenders charge much higher interest rates than banks.
If the need for financing isn’t urgent, it may be prudent to wait. Improved credit scores can mean more loan options and better terms. That’s why it’s important to pay bills on time each month – in full if possible.
Alternative lenders report payment activity to the three credit bureaus. On-time payment can improve your credit score. Another strategy is to open a small business credit card, use it for some charges, and pay it off – even if you have the money to pay cash. The payment history you are building will help in the long run if and when the time comes that you need to borrow money for your company.