If you have bad credit, you’d think that getting a Small Business Loan is out of the question. Here you will come to know that it is quite possible. In the past, a number of years plus a stellar credit is a prerequisite to secure financing. Now, things have changed thanks to the expanding online lending industry that provides more options for businesses with less-than-perfect credit. We give you the best options for Bad Credit Business Loans.
Before getting into a more detailed look at the best options, let’s first define what “bad credit” is. Bad Credit refers to a person’s lending history of not being able to pay bills on time. This is often reflected in a low credit score. Bad Credit can also refer to the history of companies which is based on its current financial situation or payment history. Now let’s talk about options.
Best options for Bad Credit Business Loans
If you are a small business struggling to get financing, here are five of your best options for bad credit business loans. You can go for Short Term Loans, Business Line of Credit, Accounts Receivable Financing, Equipment Financing, and Merchant Cash Advance. Let’s take a look at each of them.
Short Term Loans
Short Term Loans is the first option on the table for businesses with bad credit. It’s a condensed version of Long Term Loans offered by banks. It’s fast, flexible and you get funding without the long commitment. The best part is you can use it for any business purpose.
Short Term Loans are offered by alternative lenders to businesses with bad credit because there’s less risk for them. Basically, less time and less money, less hassle or complications. Payments done with this type of loan is usually done weekly or sometimes even daily.
Business Line of Credit
Unlike Short Term Loans, a Business Line of Credit isn’t like a traditional loan. Businesses who are approved get access to funds which they can spend as they need it. It sort of works like a credit card. Withdraw or use the amount you need and only pay interest against the capital you’ve used.
This option for bad credit business loans is basically for businesses with a recurring working capital need or larger projects. Payment is done on a regular schedule on a weekly basis for up to 36 months as opposed to credit cards that require minimum monthly payments. Once the initial amount gets paid, you can again take out more.
Accounts Receivable Financing
This type of financing is also known as invoice financing or invoice discounting. It’s the perfect option if you want to get a business loan with bad credit without collateral. How it works is that it converts outstanding invoices to immediate cash for small businesses. The incoming invoice then works as the collateral.
If you are waiting to get paid by your customers but in need of working capital, this is the option for you. In securing funds, approval doesn’t depend on your credit profile. It depends on the creditworthiness of your customers who will be paying your lenders directly. So the better number of clients with excellent scores you have, the higher the possibility you get approved.
If your business is in need of replacing or purchasing new equipment or even commercial vehicles, this is the option for you. Since it is called “equipment financing,” loans are secured through the equipment you are trying to purchase.
This means, lenders will not care much about your credit score. If you are not able to pay, lenders just seize the equipment and sell off the built-in collateral.
Merchant Cash Advance
A Merchant Cash Advance isn’t really a type of loan. It’s more of an MCA lender giving an amount of cash who, in exchange, gets to have a percentage of your future sales. It’s a sure arrangement wherein business owners get to have the financing they need while lenders get 100% security that they will be paid back.
The credit score is then overlooked in this type of financing and is then focused on and more concerned about the projected sales. This is how MCA lenders determine the cost of financing.
How to Get a Business Loan with Bad Credit
Now that you know it’s possible for small businesses to get a loan even with bad credit, how do you go about it? One thing you need to realize is that while it is possible to get financing, the process will require a bit more effort. After all, it still is bad credit. Below are a few recommended steps to help ease the process.
Know what your credit profile looks like. In this case, that would mean both your personal and business credit profile. If you know what you’re dealing with and where you are financially, then it would be easier for you to navigate yourself in the process.
Limit your search. Having bad credit doesn’t really give you a wide range of options even if there are options available. So to avoid being frustrated, you must limit your search. Once you know where you are financially and you know what your credit profile looks like, you can now do research on lenders who would most likely offer you financing options considering the kind of credit you have. That way, you are ready, and you are more confident of the outcome.
Make sure you have the cashflow to do periodic payments. A loan, however big or small that amount may be, is a debt that needs to be paid. And usually, for small business loans, lenders will expect a daily or weekly payment. That means, even before you apply for a loan, you need to be ready with a cashflow that can service the debt while also keeping a consistent cashflow in your business.
Now that you have the best options for bad credit loans and some tips on how to ease the whole process, know that you have now the opportunity to start improving your credit profile. It’s never too late. While there are options for small businesses to get financed with bad credit, good credit is still the goal. Do credit monitoring which will allow you to improve and get approved for bigger business loans in the future that could take your business to higher heights.