How to Get a Business Loan with Bad Credit

How to Get a Business Loan with Bad Credit

If you are having difficulty getting a business loan, you should know that the approval rate for business loans from large banks is only around 25%, so you have plenty of company. The good news is you have other options for raising capital to keep your business healthy and thriving. If you want to get a business loan with bad credit, you may have to get somewhat creative, but it can be done, through alternative lenders, for example.

Following are some strategies for obtaining a business loan. The first two, knowing your current credit status and writing out your business plan, are smart for every business. The others will apply depending on your particular situation.

Know What Your Starting Point Is

Do you know what your credit score is? Finding out is important, even if it is low, so you’ll know what you’re dealing with. The lower your score, the more difficult it will be to obtain a business loan, and the higher the interest rate you’ll pay if you do get one. You can find out your credit score online for a fee. Watch that you don’t accidentally sign up for monthly credit score monitoring, which will entail a monthly fee, unless you want this service. Your credit score will make a difference if you need to get a business loan with bad credit, so you need to adopt financial practices that improve your score over time, like paying bills on time and paying more than minimum monthly payments on credit cards.

Write Out Your Business Plan

You’ll have to create a smart, strategic business plan to get a business loan from most lenders. But it’s something you should do anyway to help yourself stay on course. In this document you’ll spell out your plan for growth, market analysis, how you’re currently generating revenue, and fact-based projections of revenues. If you are not sure where to begin in creating a business plan, don’t worry. There are plenty of online resources you can use, many with downloadable templates to get you started.

Microloans

Microloans can be a terrific source of funding for new, small businesses. They differ from traditional bank loans in that they’re smaller – on the order of a few thousand dollars – and your credit rating and collateral are not the major determinants of whether you’ll get financing. Microlending is often based on the strength of your business idea and plan, and this is another good reason to have a strong written business plan prepared. Specialty microloan programs exist to assist minorities and women, and you may have access to provincial microlending programs as well.

Collateral

In some cases, if your business plan is strong, you may be able to get a business loan with bad credit if you can offer something as collateral. For example, if you own land, or expensive equipment, you may be able to use it as collateral and obtain a business loan you might not be able to get otherwise. Different lenders have different policies about what they will accept as collateral, and it will also depend on the size of your loan. You do assume some additional risk when you put something up as collateral, but in many cases it can be a smart way to obtain business financing at a reasonable rate and build up your credit history at the same time.

Private Loans

Business loans don’t have to come from banks. Borrowing from family and friends is extremely common, and though you may have to cobble together a number of personal lenders, if you have a strong personal network it can be a good way to get a business loan with bad credit. In some cases, these loans can even be administered by lenders so that you can build credit history as you pay your lender(s) back. When determining who might be sources of private loans, start with those closest to you, including family. Then think of people you regularly associate with, especially if it’s a professional association. Your short list will include people you trust and people who are interested in seeing you succeed.

Alternative Lenders

If your business has regular bank deposits, then revenue based loans may be worth exploring. You can typically obtain a loan equal to 10% of your annual gross deposits, regardless of credit, and in many cases these loans can be set up quickly. Rates are a bit higher than with traditional bank loans, but you don’t have to worry about collateral. Other alternative lenders offer cash advances in exchange for a percentage of future credit card sales. Businesses with strong, regular monthly credit card sales can often get funding this way, even if personal credit is not strong. Be aware that interest rates can vary significantly, so it pays to compare providers.

Long Term: Monitor Your Business Credit Report

Even if you have poor credit now, it’s important to strive to improve your credit history to strengthen your borrowing position later. It’s also important to monitor your credit reports (both personal and business) to ensure your credit history is strengthening and to check for errors, which are more common than most people believe. However you’re able to fund your business capital needs, whether through a microloan, a loan from a relative, by putting up collateral, or through alternative lenders, make your best effort to meet or exceed expectations for paying the lender back and you make your business future that much brighter.

Access to capital can be a big challenge to new and growing businesses. Traditional business loans may be hard to get in many cases, but other options exist. Explore your options, have a strong business plan, plus a strategy for advertising and digital marketing, and you’ll be able to put together the capital you need to keep your business thriving.