Top Tips for Obtaining Bad Credit Business Loans
Bad Credit Business Loans
Obtaining a bad credit business loan can be a very difficult process, especially when there are credit challenges below the 500-550 FICO score range. In the past, applicants with less than perfect credit would find a bank or credit union unwilling to lend to them, no matter how successful their business was. Over time, solutions have been created to make it easier for businesses and owners with credit issues to get the funding they need to keep growing. Below, we will lay out some simple steps you can take to evaluate yourself and your business, as well as to improve your credit over time, as well as outline some of the factors that lenders evaluate before approving a loan.
No Credit Score Options?
Many business owners seeking bad credit business loans have sacrificed much to build their small business, and many times that includes taking credit risks that end-up lowering the owner's personal credit score. Biz2Credit offers many options for business financing and some of those business funding options do not rely upon a business owner's FICO score.
For owners seeking a bad credit business loan, often a Merchant Cash Advance is a more appropriate financing program to obtain additional working capital. A Merchant Cash advance is evaluated on your company's credit card sales and is repaid directly by deducting a percentage of future credit card sales. Naturally, this solution applies to businesses that have a history of a significant volume of credit card sales.
But for companies that qualify for a merchant cash advance, a personal FICO score is not a consideration. We only consider the sales volume of the merchant.
However, business owners will generally pay more for a merchant cash advance than a traditional bank loan. Therefore, it is important to understand the basics of personal and business credit and how to distinguish between the two.
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Evaluate Yourself
Before you can make any determinations on what type of loan you can qualify for, you need to have a deep understanding of your financial situation. If you have filed for bankruptcy, defaulted on a loan, or missed payments in the past, these factors may still be negatively affecting your credit score. Many people will find that free tools like www.annualcreditreport.com or one of the individual reporting agencies like TransUnion or Experian will be sufficient to explore the items on their record to determine if there are any inaccuracies or items that aren't recognized. In more complex cases, or where there are several items on the report with mistakes, contacting the credit bureaus directly may be the best option. Keep in mind, credit agencies are obligated to provide you with a free copy of your credit score each year, but they are not obligated to provide you with your FICO score free of charge. In many cases, you can obtain your FICO score by paying a small fee. Alternatively, many banks and credit card issuers will give you a copy of your credit report and FICO score as a service with your online account.
Debt types and amounts can also affect your credit score to a great degree. Even if all of your accounts are in good standing, carrying a large amount of credit card or revolving debts can negatively impact your credit score. Credit agencies rate what is sometimes known as an "Overall Debt Utilization" score, which assesses the dollar amounts of your debts owed against the total dollar amount of the credit available to you. If you have two credit cards with a combined credit limit of $20,000 and you have spent $18,000 between the two cards, your credit usage of 90% may make it difficult to obtain additional personal credit accounts.
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Improve Your Credit
The absolute best thing that can be done to improve the chances of both being approved and subsequently receiving a favorable rate and term is to improve your business and personal credit. This is definitely not as easy as it sounds, but can be done over time and through taking common sense steps.
By reviewing your existing credit report, you can identify areas that may contain inaccuracies, such as old or erroneous collections reports and debts. Using the Annual Credit Report tool outlined above, you can contact the credit bureaus to dispute or update information on the report.
After you have ensured that all information on the report is accurate, start assessing your current debts and make a plan to begin paying them off. Revolving debts like credit cards or lines of credit are some of the most impactful on your credit, but also require quite a bit of planning to pay off while not re-using the available credit.
Business credit is dependent on vendors' credit and payment accounts, as well as staying current on taxes, leases, and other installment debts. Planning your cash flow around keeping these accounts in good standing will help your business remain free of credit issues.
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Personal vs. Business Credit
Applying for a business loan will also require credit assessments beyond your personal history. Banks and other lenders will take your business' payment histories, financial statements, court judgments, and other related incidents into consideration when you apply for a loan. Businesses that have defaulted on past loans, missed payments on other accounts, or that are currently involved in an ongoing legal issue will find it much more difficult to obtain a loan.
Business financial records are far more complicated than individuals' credit in most cases, because business credit involves much more than loans and credit accounts. Many vendors deliver to businesses on good faith and missed payments or delayed repayment can negatively affect the business' rating.
How Your Business Will Be Evaluated
Outside of just credit, business performance will be evaluated to determine revenues, expenses, and to review the overall direction and plan. Even when presented with a loan application for a business and an owner that both have excellent credit, some lenders will take a negative stance on the loan if the business plan or other documentation are not in order. Similarly, a lender may overlook some personal or professional credit issues if the business is doing particularly well. Areas that lenders evaluate include:
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Revenues
How much money does your business actually generate? Lenders will compare your business to others in your area and will evaluate businesses of similar size in the same industry to get an idea of how well yours is performing.
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Expenses
Is the business owner managing their expenses well enough, relative to their revenues? This will help the lender determine your profit margin and will demonstrate sound management if the expenses are kept within a manageable range.
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Debt
What are the obligations this business has to another bank or different creditor? Similar to reviewing expenses, a lender will want to determine how well you have managed your debt load. A business that is wildly in debt with high monthly payment amounts is unlikely to continue being approved for new loans. Likewise, a prospective lender will want to know that the business owner is only taking loans for the purpose of growing the business or meeting demand, rather than to pay expenses not covered by a revenue source. Lenders also want to understand where they will fall in the debt repayment line if you or your business should become unable to repay. If your business is already in debt to another bank, a new lender is unlikely to view "second position" positively, as it means they will be last to be repaid if and when any settlements or liquidation occurs.
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Best Loan Options
Depending on your actual credit score, you may have a variety of loan options to choose from. People with cores that could be considered bad, typically 650 or below, will be best served by an online lender.
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Traditional Lenders
These lenders include banks and credit unions. Traditional loans are among the most difficult to obtain, due to regulations and credit screening requirements that the lenders are subject to. Since these institutions are typically insured and regulated by the federal government, their credit requirements tend to be much more stringent than a private or online lender. Some banks will consider borrowers with lower credit scores, but other parts of the applicants' files must be in near-perfect order - business plans, revenue and financial statements, and other business debts must be within the institution's parameters.
Some traditional lenders also offer special loans like the Small Business Administration (SBA) loan program, through which the SBA provides additional guarantees and backing for loans issued under certain guidelines. These programs may be only be available for certain types of businesses and may also require certain credit scores.
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Online Lenders
Online-only lenders are the best option for businesses and individuals with credit challenges. These companies are generally more forgiving than banks and other traditional lenders because their funding sources aren't reliant on government backing in most cases. This means that the lenders themselves set the guidelines and can offer loans to a much wider variety of credit and business types.
In general, online lenders are considered the best option for businesses and individuals that don't have perfect credit. Terms, rates, and other conditions are all set by the lenders themselves, and do not have to conform to outside regulation and requirements. These options will offer greater flexibility and can allow the borrower to get the funds they need without as much red tape.
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Rates and Fees
When applying for a loan, either with a bank or alternative lender, it's important to remember that lenders use credit as a measure of risk to a large degree. When lending to a business or individual with less than perfect credit, the lender may add extra fees, increase the interest rate, or require a shorter term for the loan than they would for a client with average to good credit. This may mean that you or your business, if applying with credit challenges, could end up paying considerably more than a business or individual that does not have those same issues. Cost alone may make waiting the best option, especially if the term restrictions put in place by the lender do not meet your ability to repay the loan. The worst situation would be one where a loan is issued and is failed to be repaid, which would further worsen the credit situation.