Starting a new business can be an exciting experience, but it often requires financial support to turn your dream into reality. Moreover, if you face the hurdle of bad credit. Here, we will explore the strategies and options for getting small business loan with bad credit. If you want to know more, take a look closer!
What is Credit?
Credit is a financial concept that represents the trustworthiness of an individual or organization. It’s a benchmark that a borrower will repay or fulfill a financial obligation in the future. It is what lenders will assess before lending their money.
The most common credit score is FICO credit. The FICO system further breaks down credit scores into bad scores at 300 to 579, fair credit scores at 580 to 669, and good to excellent credit scores at 670 and above.
So, getting small business loan with bad credit score is not impossible, but you may end up settling for short-term credit or high interest rates.
What Makes a Bad Credit Score?
A credit score reflects your debt-paying and expense history. It is an indicator of how you handle repaying a loan. Factors that contribute to a low credit score can include late payments, defaults, high credit card balances, bankruptcy, and other various financial missteps.
Lenders typically use your credit score to assess the risk of lending you money. Regardless, some strategies can help you obtain financing for your business.
Strategies for Getting Small Business Loan with Bad Credit
When you have difficulties getting a loan, you can apply for some strategies. What are those? Here is the detail.
1. Use Personal Loan
If traditional business loans are hard to secure because of bad credit, personal loans can be an alternative option. Remember that you need to keep your personal and business finances separate to avoid potential complications.
Personal loans can be obtained from credit unions, banks, or online lenders. While they are subject to your creditworthiness, they may have lower credit requirements than business loans.
2. Renew Your Business Plan
If you are just starting your business, it’s better to write down your business plan. The document is going to outline your strategy for growth in the long term. Many lenders require a business plan before lending money. Here are some key components you need to pay attention to build your business plan
- Summary – details about your business model, your product’s value, and the revenue that you expect
- Market research – current demographic and data of your target customers.
- Budget and future revenue – if you already have a business plan, you can update your numbers based on current market averages
- Key objectives – share and review your most important goals and the performance you’re using to get there.
3. Bring a Co-Signer
Getting small business loan with bad credit can be done using a co-signer. If you have family members, friends, or a business partner with good credit, you can consider applying for a loan together.
The co-signer improves your chances of getting your loan approved. They can also help you get a lower interest rate based on both credits. Remember that the co-signer would be equally responsible for the loan, so it is essential to have a clear understanding of the terms and responsibilities.
4. Try Alternative Lenders
The strict or loose credit requirement and the risk level to take are subjective to the lenders. Traditional banks and financial institutions tend to have strict credit requirements. However, sometimes they do not work well. If it ever happens, you can try alternative lenders, such as:
- Online lenders – these lenders typically lower their FIO score requirements to 600 or lower
- Community Development Financial Institutions – CDFIs are certified organizations to support the development of certain communities,
- Minority Depository Institutions – MDIs are banks or financial institutions usually owned by minority individuals.
These alternative lenders typically give higher interest rates, but it’s easier to acquire for individuals with bad credit.
5. Improve Your Credit Score
While getting small business loan with bad credit is the issue here, working to improve your credit score leads to more favorable interest rates and terms in the future. This may not yield immediate results, but over time, it can make a significant difference in the long run. Here are some steps to consider
1. Be Aware of Your Credit Utilization
The credit you use makes up almost a third of your FICO score. It is best to keep your credit utilization below 30 percent of your credit limit.
2. Pay Bills On Time
Paying your bills consistently and on time is one of the most effective ways to improve your credit score. Set up reminders or automatic payments to better schedule your payments.
3. Apply for A Transfer Credit Card
New credit card typically has a grace period. Choose the one with no annual fee. That way, you can pay off your debt without the interest added. Most credit cards accept bad credit, but you can find a designated card for credit building.
4. Negotiate with Creditors
If you have outstanding debts, contact your creditors to discuss better payment arrangements or settlements. They might bring a better insight to work with you to clear the debt.
5. Establish a Positive Credit History
If you don’t have much credit history, consider obtaining a secured credit card or becoming an authorized user on someone else’s credit card. That way, you can establish a positive payment history.
Types of Loans for Bad Credit
There are several types of loans for getting small business loan with bad credit. Here are some of them you can consider.
1. Term Loans
This loan offers cash upfront, and your small business repays over a fixed amount of time. The payment period typically ranges from 6 months to 2 years for short-term loans and up to 10 years for long-term loans.
2. Lines of Credit
It is a business loan that preapproves you for a loan amount. You can draw a loan anytime, but that action will trigger the repayment term. Repayment terms are short, typically 6 to 24 months. With a draw fee of 1 to 3 percent when you tap the borrowing limit.
Let’s Prepare and Try Getting Small Business Loan with Bad Credit!
Bad credits make it harder for you to qualify for traditional loans, but you may find workarounds or alternative loans. Let it be a lesson to improve your credit score and the time you use to revamp your business plan. Then, are you getting small business loan with bad credit? Prepare for everything, do research, and get yours now!
