A bad credit score can be a severe disadvantage for your small business. It could prevent you from getting a small business loan when you need it.
Even if you find it possible to raise funds, the lender may require you to pay a high-interest rate. This could lower your profits and leave you with less money to invest in your company.
Does that mean you’re stuck with a poor credit score forever and that your business will be strapped for cash permanently?
On the contrary, there are several steps you can take to extricate yourself from this situation. In this article, we’ll discuss why you need a good credit score, ways to improve your credit score, and the sources you can tap for a bad credit loan.
The difference between no credit and bad credit
Before we address the subject of raising a loan for your company, it’s important to understand the difference between two terms that are usually mixed up: “no credit” and “bad credit.”
Having no credit score
If you have no credit, it implies you don’t have a credit record. Consequently, you won’t have a credit score.
If you don’t have a credit score, some lenders will have a hard time arriving at a credit decision when you apply for a loan. On the other hand, some online lenders, like Camino Financial, do offer loans for business owners with no credit score.
Nevertheless, you should learn how to build credit for your small business.
Having a bad credit score
Your credit standing is determined to a large extent by your FICO score. This score ranges from 300 to 850.
Here’s a guideline about credit score:
Excellent: 700 to 850
Good: 670 to 699
OK: 620 to 669
Low: 580 to 619
Bad: 300 to 579
A higher score signifies that you have a good credit history and are more likely to repay your debts on time. Therefore, it’s crucial that you understand what determines a good credit score.
But if you have a bad credit score, then that’s a whole other story. Traditional lenders don’t usually work with business owners with a bad credit score, so learning how to improve it is crucial.
How to improve a low credit score
Here’s how you can work on improving your score:
- It’s crucial that you always make your payments on time
- Keep a good credit utilization
- Constantly get your credit report to monitor your score and find inconsistencies that the credit bureau should fix
- Don’t open any new lines of credit
Can You Get a Small Business Loan With Bad Credit?
Many business owners think bad credit can prevent them from getting money when they need it. This can lead to missed opportunities and could hold back their company’s growth.
For example, if the demand for your products or services is seasonal, the lack of funds could result in a situation where you cannot pay salaries or meet your administrative expenses. Of course, a loan could solve this problem, but what happens if you have bad credit?
Does it mean that it is impossible to get a loan if you have bad credit?
Fortunately, not all is lost for small business owners with poor credit. While things can be a bit complicated and financing options are scarce, there are definitely some alternatives for business funding.
Of course, it’s always better to improve your credit score in order to get better interest rates, loan amounts, and loan payments. But if you’re in urgent need of business credit and have a poor credit history, here’s what you need to know to get bad credit business loans.
How to get a small business loan with bad credit
Getting small business loans for bad credit is easy when small business owners are prepared. These steps will allow you to be better prepared and improve your chances of getting that business loan.
1. Know what your personal credit score and business credit score are
Maybe you think that if you have less than perfect credit, that’s all that lenders see. But it’s not the same to have a personal score of 300 as 580, for example.
Imagine you get a loan for people with a terrible score; you’ll have very high-interest rates. But because you had a less than perfect credit score (but not terrible), you could have gotten better terms.
Knowing your exact credit scores will allow you to find the perfect lender. How? By asking what their minimum credit score is.
2. Research different lenders and their requirements
The truth is that traditional lenders, like banks, don’t usually tend to cater to businesses with a low credit score. But that doesn’t mean that there are no options out there.
Research online lenders and alternative lenders.
You’ll have to find out what all their requirements are to make sure you meet them.
The most common types of requirements are:
- annual revenue
- years in business
- and, of course, your credit score
3. Compare and choose the small business loan that best fits your needs
Now it’s time to compare all these lenders. How much money do they lend? What credit scores do they approve? Do they lend to a business owner with bad credit? Do you need to have a business bank account? How often do you need to make payments? Do they require collateral?
Make sure you understand everything about these bad credit business loans so you can choose the one that will best help you grow your business.
Bad credit business loan: the best 7 options
Maybe it’s not easy to find traditional business loans for poor credit, but there is a myriad of other products out there that can help you finance your business enterprises.
If you’re looking for the best loan options for bad credit, here are the top 7 alternatives.
1. Short-term business loans
These types of loans are exactly what they sound like: small business loans that just have a shorter repayment time (they usually never have repayment of more than a year and a half).
Of course, you won’t be able to receive as much money compared to a traditional loan and will pay more interest rates. Plus, you’ll probably have to make weekly o daily payments. All of this helps online lenders offset the risk of lending to a person that might have a bad payment history, for example.
Should you get a short-term loan?
The truth is that weekly and daily payments will never be a good idea as monthly payments.
We recommend you try to find loans for bad credit that require monthly payments, as that will allow you to keep a better eye on your cash flow.
2. Merchant cash advance
If your business accepts payment by credit card from its customers, you can raise funds through a merchant cash advance. This is, essentially, a short-term loan that is made based on your future credit card sales.
The bank or financial institution would advance a sum of money to you based on the estimated value of your future credit card sales. Subsequently, when a customer pays by card, the money would go directly to the lender.
Is a merchant cash advance a good option if you have bad credit?
It depends on your financial situation. Merchant cash advances come with several disadvantages, and they can be an extremely expensive form of borrowing. Another problem is that the funds are available to your business for a very short period.
3. Payday loans
These are high-interest loans that lenders make to borrowers who usually can’t raise money from anywhere else. Repayment is made from your next paycheck. Consequently, the average loan term is two weeks.
Should you opt for a payday loan?
You should try and avoid this form of borrowing as much as possible.
Payday loans carry shockingly high rates of interest. According to the Consumer Financial Protection Bureau, a United States government agency responsible for consumer protection in the financial sector, typical two-week payday loans carry an annual percentage rate (APR) of 400%.
4. Secured business loans
This is another option for borrowers with bad credit.
A lender advances money based on the collateral that you provide. Your credit score is not the deciding factor in this type of loan when your loan application is processed.
Unsecured business loans, on the other hand, don’t require collateral, but you need good personal credit to get them.
What is collateral, and why does the lender require it?
When you take a secured business loan, you need to provide your property or your company’s inventory as collateral. If you don’t repay, the lender would have the option of seizing the collateral and selling it to recover the money you owe.
Collateral could also take the form of your vehicle. The lender may even create a “blanket lien” on all your assets. This implies that in the event of non-payment, the lender could seize any of your assets.
Is a secured business loan a good idea?
Although secured business loans usually carry a rate of interest that is significantly lower than the rate on payday loans, they aren’t a very good option.
Why is that?
The problem arises if you fail to repay. The lender can take away your assets and sell them to recover the sums that you owe. It’s unlikely that the sale will yield the true value of your assets. Additionally, the loss of your property may force you to close down your business.
5. Invoice financing or factoring
With invoice financing (also called Accounts Receivable Financing), you essentially sell unpaid customer invoices to a lender, who then advances you a percentage of said invoice (up to 95%). So the actual unpaid customer invoices are your collateral.
When the client pays the invoice, the lender receives the cash. And, of course, you have to pay the lender’s fees.
In a way, invoice financing is quite similar to Merchant Cash Advances.
Lenders don’t consider your credit score or your annual revenue because that won’t determine your ability to pay because they know your client will pay you, and they’ll receive that money.
Is invoice financing a good alternative?
The fees these types of lenders charge are not calculated like interest rates; they are actually factoring fees. Plus, many lenders tend to charge fees that can end up making this small business loan quite expensive, especially if your clients are late with their payment.
6. Business credit cards for bad credit
Credit cards can be a great option because there are products both for bad credit and to build your credit. Plus, business credit cards are usually very versatile, and you can find one even if you have bad personal credit scores.
A line of credit is an equally good alternative.
What are unsecured and secured business credit cards?
In short, secured credit cards require a deposit (kind of like collateral); usually, this deposit becomes the card limit. If you have a bad credit score, this is the type of credit card you need.
On the other hand, unsecured credit cards don’t require a deposit and are given to those that have good credit scores.
Are business credit cards the best option?
If you just need to make constant or small expenses, then they probably are. But if you’re trying to finance a big investment, they won’t really help you.
We recommend you apply for a different type of bad credit business loan and also for a line of credit or business credit card for smaller expenses; this will help you start improving your credit score.
7. The best option: a Camino Financial loan
Not all lenders are committed to helping small business owners, but we are. A small business loan for Camino Financial is a great tool to help you grow your business, and the best part is that we don’t ask for a minimum credit score.
Does Camino Financial lend to small business owners with bad credit?
If you’ve had some late payments in the past that affected your credit, but you’re making sure to work to improve it, we are the lender for you! We value your hard work and will consider your application. We’ll guide you on ways to improve your score and give you the possibility to invest in your small business!
How expensive are Camino Financial loans?
We know how important it is for you to know how much you’d have to pay every month if you get a small business loan. Having the ability to budget a potential loan is the key to use debt to succeed rather than hurt your business.
If you want to know how much you would pay for one of our loans with no minimum credit score, use this calculator to find out!
Have you not started to strengthen your credit score? It’s never too late to begin!
Keep reading to learn how to do it.
The road to a better credit score
As you can see, if you have bad credit, it is still possible to borrow money for your business. However, your options could be limited to loans that are expensive or that carry conditions that could have the potential to harm your company.
The truth is that if you start working to improve your credit, you’ll have more options at your disposal.
Working on your less-than-stellar credit score and slowly building it should be your priority. This will help you get better loans with better interest rates in the future. But that’s not the only benefit:
Why you should improve your credit score
A higher credit score will help in three ways:
- Lenders will be more likely to advance the money that your business needs.
- the lender will process your loan application faster.
- You will be able to raise funding at relatively lower rates of interest.
Here’s how to improve your credit score
So what should you do to improve your credit history?
It’s advisable to take certain steps that will help you to strengthen your financial position. You could start by improving your credit score.
- Avoid commingling. Stay away from the practice of using the same bank account for your business and personal expenses.
- Get your EIN. The IRS assigns the Employer Identification Number. It is used to identify taxpayers who are required to file various business returns.
- Pay all your bills on time. This is a crucial part of building credit for your business.
- Don’t max out your credit cards. Resist the temptation to use your credit cards to the limit. If you do this, your credit score could be negatively affected even if you pay the credit card company on or before the due dates.
- Check your credit report for inaccuracies. The credit bureaus could have made a mistake, and your report could contain an error. If you notice one, you should raise a dispute.
- Reduce your debt and pay your bills on time. Remember that even a delay of a few days when making a payment could lower your credit score. Another factor that you must bear in mind is that you should limit your borrowings to an amount that you can comfortably repay.
These are just some basic tips, but they will go a long way if you stick to them.
Don’t risk your business, work on your credit score instead
If you have bad credit, consider your options carefully before selecting a lender. Don’t be in a hurry to sign on the dotted line; take your time to understand all types of bad credit business loans. As a business owner, you understand the importance of paying attention to even the smallest details. So, spend some time understanding the rate of interest that you will be paying and all the pros and cons.
At Camino Financial, we’ll be happy to help any small business owner. If you have no credit, you can apply for a small business loan because we don’t ask for a minimum FICO score.
If you have bad credit, start building it today!
We have tons of advice and resources that can help you strengthen your credit so that you can get the loan you need sooner than you think.
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