Business Loans with Bad Credit
Getting a business loan as an owner who doesn't have great credit can be a big challenge. However, there are many options for businesses that are faced with this situation, if you just know what to look for and what steps to take. This guide will give you a starting point for getting a business loan even with bad credit.
How Can I Get a Business Loan With Bad Credit?
Getting a business loan with bad credit may require you to pledge collateral to secure the loan. Lenders will make loans to certain borrowers if they can pledge liquid assets or the proceeds of future accounts receivable (such as in a merchant cash advance) to secure repayment of the loan. Business borrowers with bad credit may be required to pay higher fees and higher interest rates than those businesses with good credit.
What is a Bad Credit Business Loan?
A bad credit business loan is financing given to an individual or company with a bad credit score. Most lenders rely upon a rating system called a FICO score. A FICO score below 500 is considered bad credit. Loans to individuals or companies with bad credit are also known as sub-prime loans. Because of the risk of default, loans made to applicants who have a bad credit rating usually carry higher interest rates.
Topics Discussed in This Article
How Can I Get a Business Loan With Bad Credit?
Getting Started: Business Loan With Bad Credit
The Best Sources for Business Financing With Bad Credit
Understanding Your Credit Score and Business Loans
What is Considered a Bad Credit Score?
Business Credit: Credit Rating Agencies and Business Credit Ratings
How to Improve Bad Business Credit
Summary: Obtaining a Business Loan With Bad Credit
Getting Started: Business Loan With Bad Credit
Getting a business loan with bad credit is challenging, but with new sources of funding, such as crowd-funding and alternative lenders in the marketplace, it has become easier to secure financing for your business.
Most lenders will consider the following factors in deciding to grant business loans: owner’s credit score, business credit score (if available), time in business, annual revenue, and negative events such as bankruptcies.
Keep in mind that with bad credit you should expect to pay a higher interest rate, get shorter repayment terms, and have access to smaller loan amounts. Before applying for a business loan, assess your business credit profile and determine if you can improve your score. There are some things you may not be able to change, but knowing where you stand will help you make a decision on where and how to obtain the best bad credit business loan.
The Best Sources for Business Financing With Bad Credit
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Business Credit Cards
Business credit cards are easier to get approved than conventional bank financing. Business credit cards will generally have lower credit score minimums, but will likely have higher interest rates and lower borrowing amounts.
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Invoice Factoring
For companies that have unpaid invoices. Invoice factoring is a financing method where you sell your accounts receivable at a discount for a lump sum cash amount.
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Merchant Cash Advances
MCAs allow businesses to sell their future credit card sales or other business receipts to the MCA funding provider in exchange for a lump sum payment (cash advance). MCAs are not loans, do not have a fixed term, and are repaid through smaller, regular payments.
Understanding Your Credit Score and Business Loans
Getting a business loan with bad credit can be challenging. Understanding the reasons why you have bad business credit is an essential first step. This rest of this article will cover the basics of business credit, then explore ways to improve your business credit.
Most lenders will consider the business owner’s personal credit history and FICO credit score when deciding whether to offer financing to a small business. Lenders almost always do this with small businesses since the business is essentially an extension of the owner’s personal financial wellbeing.
Keep in mind that bad business credit can affect your insurance premium rates and the credit terms that your suppliers offer your business. Bad business credit may also prevent your company from winning important new business if your potential customers don’t think you are financially stable.
Personal Credit: Credit Rating Agencies and FICO Scores
Personal Credit: Credit Rating Agencies and FICO Scores
What is Considered a Bad Credit Score?
Credit scores range from a low of 300 to a high of 850. Below a score of 500 is considered a bad credit risk. Credit scores were established to give lenders a grading system on how an individual manages their credit.
There are many factors that are considered in calculating your credit score. However, there are two factors that account for 65% of your credit score:
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Payment history
Your payment history accounts for 35% of your credit score. If you miss the payment due dates on your credit cards or loans, this will drag down your credit score significantly. Making a late payment can lower your credit score substantially, especially if payment is over 90 days late.
1. It is vitally important that you make your payments on time.
Credit Tip: If you know you will be late in making a payment, contact your creditor and let them know you need a little more time to pay. It is not uncommon for creditors to extend payment cycles and not report the late payments to the credit agencies as late payments.Keep in mind that the credit reporting agencies use the information your creditors give them. Therefore, it is important to maintain a close relationship with your bank, credit card companies, and other lenders. If you know you will be late in making a payment, contact your creditor and let them know you need a little more time to pay. It is not uncommon for creditors to extend payment cycles and not report the late payments to the credit agencies.
2. Amount of Existing Credit
Your existing credit amount accounts for 30% of your FICO score. This criterion is generally evaluated as a ratio of your existing debt payments to your monthly gross income. For example, if you have a monthly income of $10,000 and you have $5,000 in debt with payments of $500 per month, your debt-to-income ratio is 5%. In other words, you are using 5% of your monthly income to pay your debts.
Debt-to-Income (DTI) Ratio Formula
DTI = Total monthly debt payment amount/gross monthly incomeYour DTI is used as a general guideline to assess your available income to pay present and future debts. As you take on more debt, your DTI ratio increases and your available capital to pay debt decreases. Logically, as you incur more debt, there is a point where your monthly debt will exceed the funds you have available to make payments. Lenders will use this ratio subjectively to make a determination of your ability to safely take on additional debt.
Business Credit: Credit Rating Agencies and Business Credit Ratings
While most people are aware that they have a personal credit rating measured by a FICO score, there is also a system of business credit ratings. According to Nav (a business credit support website), “45% of small business owners don’t know they have a business credit score and 82% don’t know how to interpret their score.”
The most popular business credit ratings include Equifax and Experian, whose names you may recognize from a few paragraphs above, since they also provide consumer credit ratings. However, the largest business credit reporting agency is Dun & Bradstreet.
Unlike consumer credit ratings, which use a standardized FICO score, business credit ratings are based on a proprietary (non-standard) scoring system unique to each of the credit rating agencies. Also, unlike consumer credit reports, business credit reports require you to pay a fee to view, even if you are the owner.
Finally, business credit reports rely partially upon information provided by the business owner. And like consumer credit reports, a business owner may contest information found on their report. We will address ways you can take steps to remove errors or improve your credit score later in this article.
Business Credit Scores at Top Ratings Agencies
Equifax:
Business credit scores range from 101 - 992, with lower scores indicating a higher credit risk. A score of 0 indicates a bankruptcy filing.
Request a business credit report
Experian
Business credit scores range from 1 - 100. Higher scores indicate lower risk.
Request a business credit report
Dun & Bradstreet
(D&B): D&B’s analysis is more public, and more complicated. They use six sets of scoring classes to evaluate creditworthiness. The D&B Delinquency Predictor Score assesses the likelihood that a business will pay its bills on time in the next 24 months. The scores range from 101 - 670, with a higher score indicating that the business will make its bill payments on time.
View sample Dun & Bradstreet business credit report
Request a business credit report
Biz2Credit
Biz2Credit offers a proprietary business credit score analyzer called the BizAnalyzer. While this assessment is used by our funding partners and affiliates, it also offers insights into your company’s financial health. Through its Virtual CFO function, it provides suggestions on how you can improve your company’s financial profile. The BizAnalyzer allows you to see how your cash flow summaries, industry benchmarks, and even your personal credit score affect your business finances.
How to Improve Bad Business Credit
Like consumer credit history, business credit reports contain information from various sources. It is common for a business credit report to contain information that is inaccurate or outdated. Therefore, it is necessary to monitor your credit profile at the major rating agencies mentioned in this article.
Here are the steps you can take to improve your credit scores:
- Obtain copies of your business credit report; make note of any information that is inaccurate or more than 3 - 5 years old. Credit agencies have policies for how long credit data stays active on your account, and may remove outdated information upon the passage of time. Policies will differ from agency to agency, so be thorough.
- Contact each credit agency if you discover any negative credit actions. Be prepared to submit proof of your findings and request that the information be removed or corrected.
- Ask your customers, vendors, and suppliers to report your on-time payments and deliveries of goods and services. Not all companies automatically report to the credit agencies.
- Talk to any suppliers that have submitted delinquent payments on your account. Ask them to consider alternative payment arrangements; if they agree, stick to those commitments. After several months of on-time payments, ask them to report that to the credit agencies. Making good on negative accounts will show that you are serious about improving your business creditworthiness.
- Try to reduce your use of credit and amounts owed. Paying off debt is one of the most significant ways to improve your credit profile. Business debt is a normal part of business operations, but too much outstanding debt over a prolonged period may signal financial distress.
- Establish your business as a separate entity from your personal finances. You can do this by creating a legal corporate entity, such as a corporation or an LLC.
- Obtain an Employee Identification Number from the IRS. This gives your business legal tax status. You may obtain an EIN for free on the IRS website.
- Open a business bank account to show prospective lenders a record of deposits and balances.
- Make on-time payments. Even if you have made late payments in the past, change that immediately, and prioritize paying on time 100%.
- Create a business account with the credit agencies. Do not assume that your business has a credit profile with the major credit reporting agencies; sometimes you will need to initiate the process using the links provided above.
Summary: Obtaining a Business Loan With Bad Credit
Bad business credit will increase your cost of borrowing, and may have negative effects on your insurance premiums and your ability to land new clients. However, having bad credit does not disqualify your company from obtaining a loan.
You can obtain a bad credit business loan through various sources, including: alternative lenders, invoice factoring, merchant cash advances, and crowd-funding. It is important to take steps to monitor and improve your business credit. Just because your business suffers from having bad credit does not mean you have to accept it, or that you can never change it. You can take immediate steps to improve your business credit so that within a short period of time, you can enjoy the benefits of a strong credit rating.