Business Loans for Bad Credit Borrowers
October 6, 2018 by BlueSky Capital Funding
There are various types of business loans. Usually, such loans are influenced by the type of business, the credit history of the company and the assets it has. In many cases, the personal credit history of the owner or partners will also be factored in.
Business loans typically require collateral. In case the funds are being used to procure equipments or to invest in real estate, setup or anything tangible, then those very assets will become the collateral or security. Business loans for working capital or for a fresh round of funding will require some asset as collateral and the credit history would be a crucial factor. If there is no collateral, which is when you would need unsecured business loans, then credit history would be more important.
However, some business loans for bad credit are also unsecured lending. They do not require assets as collateral and there is some leniency while assessing the credit score, be it of the business or the personal credit history of the owner.
Can I Get a Business Loan with Bad Personal Credit?
The straight answer is yes. However, there will be fewer options at your disposal. It is near impossible to get a huge amount as a business loan with bad personal credit. The only way you can get a substantial loan is if you have some asset to be used as collateral. Else, you would have to settle for a reasonable sum of money. The biggest lenders are the banks and the most resourceful investors are hedge funds or venture capitalists. Financial institutions would rarely consider applicants who had bad personal credit or a poor company credit score. Banks would also want a reasonable credit score for the business and a good or above average personal credit history. If you have bad personal credit, poor or below average company credit and no asset for collateral then you have to consider private lenders, crowdfunding and small business administration loans.
- SBA Loans are backed by Small Business Administration. It is a federal agency. The SBA loans do not demand collateral. Small Business Administration operates a myriad of schemes. The entire spectrum of lending is quite vast and you would need to find the appropriate provisions. There are microloans, special financial packages for certain industries, loans for underprivileged or unprivileged communities and individuals, propositions for cooperatives and various other types of programs, all of which are designed to empower people with entrepreneurial aspirations who do not have enough financial resources.
- Private lenders are more flexible and lenient than banks and financial institutions. They may not offer as much money as banks and their terms may be a little unfavorable compared to financial institutions but they do not stress on excellent credit history and valuable assets as collateral. Private lenders will often accept cosigners, some kind of personal guarantee or commodities as security. If you are looking for venture capitalists or angel investors then your personal bad credit would rarely be of importance. The investors would be more interested in your business and its potential, than the assets you have right now or your credit history.
- Crowd financing is an option for businesses with bad credit. Peer to peer lending has become popular in recent times. Crowdfunding has also received a boost with dedicated websites raising money from ordinary people. Social media can be put to good use. Crowdfunding has absolutely no fixation over credit history. The focus is on the product or service. The only problem with crowdfunding, rather a limitation, is that many businesses will not be eligible or relevant enough for ordinary people to be enthused enough to part with their money.
Business Loans for Bad Credit
The best answer to how to get a business loan with bad credit is private lenders. Private business loans are not a banking product. But they are an institutionalized financial service. You would be dealing with companies. These are private and independent nonbanking organizations. Some of these lenders have a nationwide presence. Most would have a statewide presence. You can choose the most relevant private lender based on the terms and the scope of lending.
Private lenders offer both secured and unsecured business loans for bad credit. Most private lenders will be much more accommodating than banks. They usually entertain applications from a plethora of businesses, small to medium or big. They assess the eligibility of businesses on the grounds of revenue and viability. Credit history is not of paramount importance. This is primarily why private lenders are most conducive for business loans if you or your company has a bad credit score.
Types of Private Business Loans for Bad Credit
You can consider term loans. Such business loans for bad credit will have a fixed term for repayment. The borrower needs to repay the whole amount with the interest accrued over the months or years. These are identical to conventional business loans offered by banks.
Short term loans are the second most common type of private business loans for bad credit. As the name implies, the term for repayment would be shorter. It could be just a few months. In some cases, the repayment term may be a few weeks. Term loans can have repayment periods spanning from three years to ten years, albeit the latter is quite rare for applicants with bad credit. Short term loans will have a repayment period of a maximum of two years. Rare cases may call for three years.
You can explore a line of credit for your business. Your bank can offer you a line of credit too but private lenders may be more generous. A line of credit as a business loan is not very different from using a credit card. You will have a limit and you can keep using the available funds as long as you keep repaying to maintain the credit limit. There would of course be other terms, such as interest and penalties if you fail to repay on time. Line of credit is most appropriate for businesses looking for a working capital or those that have to deal with sporadic recurring expenses.
Private lenders can finance your equipment if that is the purpose you need a business loan for. Equipment financing is a secured loan for business, not very different from a home loan or car loan. The equipment or machine you buy will be hypothecated to the lender till such time you repay the entire loan with interest. Such business loans for bad credit are easier to get since you are using the money for something tangible. The lenders can track the use of the funds and seize the equipment or machine if you fail to repay. There is some scope for the lender to recover the money it has lent.
Another option is invoice financing. This works like a line of credit for business. If you have outstanding invoices, private lenders may provide you the cash against those impending payments and you can repay the money with interest when you get paid. Invoice financing is anyway a sound strategy for companies that operate with arrears.
You can get cash advances from a merchant. If you are using any payment gateway or a point of sale device, you can apply for cash advances and the merchant may grant you small business loans for bad credit against the expected sales or transactions. Your company would be transacting money through the payment gateway or point of sale device anyway so the merchant has some control over your financial inflow in a way. Such type of business loans for bad profit is mostly relevant for retail stores and restaurants.
You may consider credit cards for your business. This will not be a business loan in its stringent sense. It will be similar to a line of credit or cash advance. You would have to weigh the pros and cons of the rates of interest, the repayment terms and other clauses before you choose any of these business loans for bad credit. Simply because you had poor credit history does not imply you should grab any loan you can get. The rates of interest for some unsecured business loans for bad credit can be exorbitant and they may cause more harm than good to your enterprise.
Advantages and Disadvantages of Business Loans for Bad Credit Borrowers
The most notable benefit of business loans for bad credit borrowers is the fact that a company can get some assistance in times of need. Credit always plays a significant role in traditional banking and financial services. Private lenders are more considerate and they actually occupy the space vacated by banks and other conventional lenders. Since business loans for bad credit borrowers can be secured and unsecured, companies with little or no asset can avail some financial help from time to time. Banks do not offer unsecured loans, regardless of the credit history or score of the borrower. There are many private lenders offering business loans for bad credit borrowers. Hence, there are enough options for you to find the best proposition. The availability also increases the chances of you actually getting a loan. Business loans for bad credit borrowers, especially from private lenders, can be availed quickly so an urgent need for cash can be met effectively.
There are some disadvantages of business loans for bad credit borrowers. The most concerning reality is the high interest rate. It is actually impractical to expect a private lender to offer a rate of interest similar to banks when the credit history is poor and there is no substantial collateral to offer. Rates will be more reasonable if there is a valuable asset to be used as security. Some private lenders will be willing to negotiate the rate of interest, depending on the loan amount and the exact credit score of the borrower. Some lenders will not consider those specific variables and will keep its rate unchanged. A few lenders would levy unnecessary charges and this may take a toll on the repayment. Borrowers should carefully study all the clauses before signing up for business loans for bad credit.
Best Business Loans for Bad Credit
There are many lenders across the country that offer business loans for bad credit borrowers. You may consider BlueVine, CAN Capital, Credit Junction, Direct Capital, ForwardLine, Fundation, Fundbox, Funding Circle, Headway Capital, InterNex Capital, Kabbage, Lending Club, OnDeck Capital, QuarterSpot, RapidAdvance, SmartBiz, StreetShares, Swift Capital and The Business Backer. The quest for business loans for bad credit should be similar to assessing any type of loan. You should apply to different lenders, explore their propositions, compare the terms including the rate of interest, negotiate if there is any room for it and then decide. Always conduct a holistic assessment. Do not focus only on the loan amount, repayment term or rate of interest. You must study the propositions in their entireties to make an informed decision.
Every private business lender will have its fair share of pros and cons. Some lenders will be more relevant for certain types of businesses. The specific purposes they would fund will also vary. You must try and deal with a lender that is most appropriate for your type of business, the nature of purpose and of course the ease of correspondence. Whichever lender you choose, make sure they report your repayments to the credit bureaus. This should reflect on the credit history of your business or your personal credit score, depending on how you are applying for the business loans for bad credit.
The only effective way to repair bad credit is to keep repaying existing and new loans so you become a reliable borrower. The only other way is to wait for the stipulated seven years or ten years when bad credit records will simply fall off the report and your credit history will be restored. Such a natural remedy will not serve your present purpose. Find business loans for bad credit and repay them on time to rebuild your credit score.