Guide to Bad Credit Business Loans
Small businesses of all types can face challenges to credit availability and gross receipt. Whether a new business or an established one that may have fallen on tough times these same businesses are often held back by poor credit scores and forced to find outside capital. Fortunately it is possible to receive outside business funding even with bad credit.
2021 Guide to Bad Credit Business Loans
Obtaining a bad credit business loan can be difficult, 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.
When taken at the right time bad credit business loans can help businesses with bad credit expand their credit history, improve FICO scores and ultimately increase their credit limits.
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.
Contents:- Common Types of Business Financing - Bank Loans, or Term Loans - Commercial Real Estate Financing - Lines of Credit - Merchant Cash Advance - Working Capital Loans - What is an Online Lender? - Key Factors Affecting Your Business Credit Score
Common Types of Business Financing
The first step many small business owners take toward improving their loan eligibility is to know their options.
The most common types of business financing are term loans (or bank loans), lines of credit, and merchant cash advance.
Bank Loans, or Term Loans
Term loans are those financial products most commonly thought of as bank loans. These types of loans are also good credit small business loans. Term loans are characterized by have a defined repayment period and interest rate.
Explore term loan options offered by Biz2credit.
Repayment terms, like repayment period and frequency, for term loans can be more flexible than those found with other small business, or short-term loan options. For businesses with good credit these loans can be an accessible and useful option.
Term loans are also the financial option most often made available by traditional lenders and for this reason may mean a more rigorous application process and higher minimum credit scores. Applying for this type of loan from a traditional lender also comes with the additional factor or time. Most banks and credit unions offering term loans have a longer origination process than will be found at alternative and online lenders.
To avoid some of the time and high credit requirements associated with traditional bank loans businesses can look toward working capital and merchant cash advance as alternatives.
Commercial Real Estate (CRE) Financing
Commercial real estate (CRE) financing is a form of lending used most often for the purchase of large commercial properties or other capital projects related to real estate used to generate business income.
Explore commercial real estate options with Biz2Credit.
While CRE financing is a funding tool used most notably by large companies, it can also be a valuable option for small and mid sized businesses. CRE financing is available to businesses of all sizes that would like to improve their working environment but may be limited by the amount of money they have on hand.
As a financial option used to make larger purchases the minimum and maximum loan amounts start and end at higher ranges than are seen in other forms of business financing.
Commercial real estate financing also provides flexibility in the underwriting and loan approval process. Through the origination process CREs are often guaranteed against the partial or total value of a property. While the financial agreement of a CRE may have more teeth to it, it remains a dependable option for those who are ready to take the next step with their business.
Lines of Credit
Lines of credit, or business lines of credit are flexible funding arrangements made between businesses and lenders, and provide a set amount of credit that can be drawn against as needed. Unlike traditional bank loans these business funding options are not used as a lump sum payout.
For many small businesses, lines of credit can function similarly to business credit cards, because they allow the borrower to draw from a total spending amount in smaller increments as needed.
Business lines of credit are a common financial option offered by traditional banks that may have strict credit score requirements. For that reason a line of credit may not be the first option for those with bad personal credit or a poor business credit history.
In this case, similar to bank loans, businesses with poor credit may choose alternatives like working capital and merchant cash advance. While these options do now provide the ability to take out small incremental amounts of money based on a total line of credit, they do offer faster approval processes and more flexible loan applications.
Merchant Cash Advance (MCA)
Merchant cash advance (MCA) is a short term funding option that is actually not a loan. MCAs provide borrowers an advance on future earnings from credit card sales. In doing so, this financing option determines loan amount and eligibility based on credit card sales and puts less weight on credit score.
Merchant cash advance is often used to meet business needs like payroll or other operational expenses. Because eligibility for MCAs is determined by cash flow this option is commonly used by startups, or those that may not have established credit or have low credit scores.
MCAs are most often provided by alternative lenders that specialize in small business loans. The eligibility, cash flow, and credit score requirements for MCAs can differ between these lenders based on their independent underwriting processes.
MCAs can be good options for businesses that have short term needs and want to increase cashflow quickly. Over time that reputation has made MCAs a go-to option for those looking for bad credit small business loans. However because the application process is easier and has fewer credit score requirements, these funding options often come with a higher cost attached.
Working Capital Loans
Working capital loans are small business loan options determined by the amount of assets the business has divided by its liabilities or current debts. As a substitute to strict reliance on credit score requirements, lenders that offer working capital loans use the underwriting process to measure all aspects of business health.
Working capital options are designed as short term loans to help businesses with operational costs and the month-to-month revenue fluctuations that many small businesses face.
Explore working capital options with Biz2Credit.
For new businesses or those looking for bad credit business loans, working capital loans can be a strong option. Ability for the borrowing business to increase short-term cashflow without having to give up cash reserves can help businesses weather tough times or even jumpstart business growth.
What is an Online Lender?
In the realm of business funding, an online lender is one that has the ability to originate your loan either entirely or partially online, either through a website or mobile app.
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.
Key Factors that Affect Credit Score
Filing a business loan application can be a stressful process made harder by the challenges created by bad credit score. Factors that affect credit score can vary from what type of credit is being used to credit history, and your amount of annual revenue.
Here are steps that will help small business owners increase their business credit score and improve their eligibility and loan amount without the added weight of instruments like personal guarantees.
Evaluate Your Creditworthiness
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 and the amount of money your business truly needs.
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.
Improving Your Credit
The absolute best thing that can be done to improve the chances of being approved and receiving a favorable interest 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. Balancing the needs of unpaid invoices with those of accounts receivable, and planning your cash flow around keeping operational accounts in good standing will help your business remain free of credit issues.
Does Personal Credit Score Affect Business Financing and Interest Rates?
A borrower's personal credit score can impact business financing and loan options if the business does not have a business credit score that can be used instead.
Many small business owners find their business needs capital but does not have the cashflow to cover necessary expenses. Those same would be borrowers may come to find that they have not established a business credit score. In that case the business owner, or borrower, must use their personal credit history to help substantiate their loan application. Individuals who have poor credit may find this negatively affects their chances at loan approval.
The best resolution for a personal credit score that has negatively impacted business funding options is to build your business credit score.
Personal Credit Score vs. Business Credit Score
A business credit score is a credit score used to verify the creditworthiness of a particular business. Unlike a personal credit score, business credit scores are not tied to the creditworthiness of an individual or business owner.
Separating credit scores creates a distinction of who is guaranteeing repayment of the debt. When a business credit score is used, the business is guaranteeing repayment instead of the individual business owner. This separation between business and personal credit reduces the risk of using financing options from both traditional lenders and alternative lenders. In addition using a business credit score on a loan application can increase the odds of approval by showing that the business has a credit history.
Applying for a business loan with personal credit will require credit assessments beyond your personal credit history. To understand the credit history of your business, banks and other lenders will look at your business' payment histories, financial statements, court judgments, and other related incidents when considering your loan application. 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, because in most cases 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.
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.