The first lesson of running a small business is that new opportunities are not served on a silver platter: they’re uncommon, they’re almost always time-sensitive, and require decisive action (and capital!) to be fully taken advantage of. As we exit the COVID-19 pandemic, the United States economy opens up more and more, and consumers continue to spend at higher-than-normal levels, small business owners need to act quickly to retune their enterprises to be ready to meet and take advantage of the moment. Unless you have a ton of cash lying around, and most likely you don’t after such a difficult year dealing with the coronavirus’ effect on your business operations, taking advantage of incipient opportunities requires an influx of working capital loans in the form of a bank loan, business line of credit, or other forms of business financing.
Businesses with good credit and near-perfect credit reports with the credit bureaus won’t have an issue finding funding options. But some businesses aren’t in a position to easily secure small business financing from lenders due to a bad credit score and don’t want to use more risky credit options like business credit cards. This can discourage small business owners in this position from going after new business opportunities, but in this post, we’ll discuss some tips for how you can get a small business loan despite having poor creditworthiness.
Understand a lender’s requirements before applying for a loan
Before you even approach a lender to try to get a loan or another form of credit, make sure you’re not running yourself into a brick wall. If a lender requires a personal credit score of 750 or above to get any of their loans and you’re nowhere close to that score, the probability of getting a loan is VERY small no matter how good of a business opportunity you have.
For example, a very popular lending program for small businesses is the Small Business Administration’s 7(a) loan program (SBA). They make it much easier for small businesses to secure credit because they guarantee a large portion (up to 80%) of the loan in partnership with an outside lender. The SBA loan program has a strict requirement of a personal credit score of 640 and a FICO Small Business Scoring Service (SBSS) score of at least 155.
Other popular criteria evaluated by lenders could include your small business’s debt-to-income ratio, annual revenue and profit, years in business, tax returns and tax history, and the loan purpose. Evaluate the requirements of prospective lenders carefully before dedicating the time to apply for a loan.
If your credit profile is so bad and FICO score so low that you are finding no lenders who would be willing to lend to you based on their requirements, you might want to focus on building your business credit score and credit history by improving your debt management before doing anything else with your business.
Do your due diligence: make it easy for a bank to lend to you
When applying for a loan, it’s important to clearly lay out why you need credit, how that credit will be used, and why you’ll be able to pay back the loan plus interest in a timely manner. This is especially important for loan applicants who have a poor credit profile because banks will be less willing to loan them money.
Come prepared with a comprehensive overview of the business opportunity or general reason why you are applying for the loan, well-researched financial projections detailing the incremental revenue that will be generated by investing into your business with the loan, and explicitly list the available collateral that you are willing to post.
A good way to think about this process is to say to yourself “If I was making the decision to lend to my small business, would I say yes given the information I have in front of me?” A lender doesn’t have the context and thorough understanding of your business that you do as the owner and operator, so they will need particularly comprehensive information about the business and situation to get on the same page as you.
Consider obtaining credit from “Microlenders” or non-traditional financial instruments.
Sometimes traditional lenders and financial institutions aren’t an option. When this is the case, it’s time to turn to microlenders and alternative lenders or online lenders who are typically more lenient on loan requirements and minimum credit scores.
Microlenders are a type of lender, usually operating as non-for-profits, that will provide lump-sum business funding microloans of up to $50,000 (but they typically are much less than that) to low-income and underserved borrowers. They all have their own set of rules and requirements, but almost always have much lower credit requirements, very low-interest rates, and often employ unique operating models. For example, a microlender named Accion has a personal credit score requirement of 575, which is very low.
Another option is taking advantage of non-traditional financing options like merchant cash advance, invoice factoring, invoice financing, and other products that allow you to free tied up cash with much less stringent requirements. BlueVine will advance up to 85% of outstanding invoices up to $100,000 and only require a 530 personal credit score. Credibly offers loans up to $250,000 and merchant cash advance options and has no minimum credit requirement. They have a proprietary algorithm that evaluates loan applications, and the only strict requirement is that you’ve been in business for at least 6 months and track record of $15,000 in average bank deposits with stable monthly revenue.
Be sure to explore these options when evaluating your business credit options and compare them against traditional loan options.
Friends and family fundraising rounds are a valid option
Raising money from friends and family is a valid option for businesses that are unable to secure funding elsewhere. Many small business owners will launch using a “friends and family round” of fundraising and fund their early history in the business as they establish themselves.
The risk here is that any loan has a chance of not being paid back and failure to pay back friends and family can severely damage those relationships. Before going into this type of arrangement, be sure to draw up comprehensive and specific documentation of the loan amount, loan details, repayment terms, contracts, and business plans so all parties understand the risks involved.