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 rate of interest. 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 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. Here are some of the ways in which you can do this:
- Avoid commingling. Stay away from the practice of using the same bank account for your business and personal expenses.
- Get your EIN. The Employer Identification Number is assigned by the IRS. 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.
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:
A higher score signifies that you have a good credit history and are more likely to repay your debts on time. 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. Lenders don’t usually work with business owners that have a bad credit score, so learning how to improve it is crucial.
Here’s how you can work on improving your score:
- 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.
How to get a business loan with bad credit
Bad credit can prevent you from getting money when you need it. This can lead to missed opportunities and could hold back your 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 are unable to pay salaries or meet your administrative expenses. This could be solved with a loan, 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, small business owners with poor credit do have some options.
These are high-interest loans that are made by lenders 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%.
Secured business loans
This is another option for borrowers with bad credit.
A lender advances money based on the collateral that you provide. In this type of loan, your credit score is not the deciding factor when your loan application is processed. Instead, it is the collateral you provide.
What is collateral, and why does the lender require it?
When you take a secured business loan, you would 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 that 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, any of your assets could be seized.
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.
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 on the basis of 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 expensive form of borrowing. Another problem is that the funds are available to your business for a very short period.
The best option: improve your 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.
So what should you do?
It’s advisable to take certain steps that will help you to strengthen your financial position. You could start by improving 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.
- Your loan application will be processed faster.
- You will be able to raise funding at relatively lower rates of interest.
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. 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 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.
Remember that our motto is “No Business Left Behind,” and we will do our utmost to assist you in meeting your financial requirements.
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