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Bad credit in businesses is a result of previous failures to make payments to creditors on time as agreed upon. These creditors can include banks from which they borrowed loans from, suppliers from where they bought inventory, utility companies which provide water, electricity etc. and/or others. These creditors all report payment histories and patterns to credit bureaus (Equifax, TransUnion, Experian etc.), which then assign the business a credit score between 0 and 100. When seeking to raise capital, businesses with poor credit scores have a comparably more difficult task convincing lenders than businesses with good credit.
When assessing applications for credit loans, lending companies look at the credit score as the first starting point. Credit histories and scores are more than just an indication of the borrower’s past repayment patterns. They provide the lender with an idea of the borrower’s financial strength and willingness to repay debt. If the credit score is below their preferred threshold, that represents an outsized level of risk that they are not always authorized to take. In this scenario, the business owner’s application may not qualify for approval.
For small businesses with bad credit history, there are multiple options that can be pursued if a bank loan is not a feasible route. Depending on the company’s financial profile and whether you are looking for small business start-up loans, quick loans, microbusiness loans, and/or business acquisition loans, one or more of these options may be the optimal choice forward:
The Merchant Cash Advance is an upfront cash payment advanced by a lender to the business based on the company’s card sales volume in lieu of credit scores. With a MCA, the principal amount is automatically repaid over time by a fixed percentage of future card sales being remitted directly to the lender.
Learn more: http://bit.ly/smarterloansmca
Depending on whether your business qualifies as a micro-enterprise, micro lenders (and special microcredit programs from the government) might be available to you as an owner. These loans are smaller and generally have less restrictive requirements to raise the level of capital needed.
One of the best ways to bypass low credit scores is to put up a fixed asset as collateral with a lender. Once the asset’s valuation is appraised, the lender can then gain additional comfort in the knowledge that in the event of default, they can recoup their capital via sale of the asset.
In Ontario and across Canada, the Small Business Financing Program (SBFP) is a government-backed entity that shares the risk of loans with lenders. While lenders provide and administer the loan, the SBFP steps in and guarantees fixed portions of unpaid debt in the event of default. This helps lenders become more willing to lend to slightly riskier credit candidates.
While these loans are provided based on credit score, they are still a viable option for businesses with poor credit. In this type of loan, the structure is the same as a conventional term loan from a bank where the cash is advanced to the borrower upfront. However, instead of monthly repayments, the repayment for a private loan occurs on a daily basis. This reduced the risk for the lender, meaning that the credit score doesn’t become as big of a factor in the qualifying decision.
This is particularly useful if the business in question has a poor credit score, but a lot of equity on its financial statements. Using the equity as collateral, businesses can obtain a cash advance and pay back at regular intervals just like a bank term loan. However, in the event of default, the lender would have a claim on the business and can sell it to recoup their capital.
Learn more: http://bit.ly/homeequityloan
In certain cases, businesses may need access to quick funding, but may not have the credit score requirements to obtain a revolving credit facility from a financial institution. It is here that the alternative lending can be an option as it enables businesses to gain cash quickly and with minimal requirements. The downside to this though is that alternative lenders often charge higher rates to compensate themselves for the greater levels of risk that they are undertaking.
As noted above, poor credit can represent challenges to business financing. However, this doesn’t have to be a permanent feature of your business. With the right strategies and money management practices, bad credit can be reversed. A few key strategies are listed below:
1. Can you get a small business loan with bad credit?
Yes, it is certainly possible to get a small business loan even with bad credit, but it will be considerably more challenging. That said though, it is important to weigh the options listed in this article with the business’s individual needs and objectives. Additionally, you can confide in our Top Bad Credit Business Loans Providers in Canada.
2. Are certain industries viewed less favourably in bad credit loan applications?
Yes, industries that have a high capital expenditure requirement and intense competition generally are regarded to be riskier than others. Bearing this in mind, it could be a good idea to obtain a MCA instead of a loan.
3. What does a lender want to see before advancing a bad credit loan?
Lenders will certainly want to see the business’s registration documentation and the owner’s ID. Depending on the lender and the type of loan, a credit score/history, strategic plan, financial statements, and projections may also be requested.
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