One of the most daunting obstacles an entrepreneur might face is obtaining funding-especially with a less-than-stellar credit history. While traditional lenders may treat bad credit as a warning sign, it certainly does not mean that one cannot get a business loan. In fact, more and more lenders now offer bad credit business loans to assist small business owners who might not be able to meet the traditional credit criteria.
In case you are thinking about a business loan for bad credit, you really should know what kind of expectations are placed on you and how to prepare yourself for the process. By having a realistic set of expectations and taking certain steps, you can make it easier for yourself to get approved and get the funding needed to maintain day-to-day operations of the business or to take it to the next level.
What Are Bad Credit Business Loans?
Bad credit business loans refer to loans that are generally offered to entrepreneurs whose credit scores fall below what traditional banks would normally consider acceptable, usually anything lower than 630. They come from some online lenders and alternative finance companies, as well as a handful of credit unions that take into account more than just your credit score when examining loan applications.
Still, these loans go a long way in providing a lifeline to business owners, who have limited options due to bad credit. These loans typically carry tougher terms, which means that you should consider the pros and cons before accepting a bad credit business loan.
What to Expect with Bad Credit Business Loans
Recognizing typical attributes of bad credit business loans will align your expectations both mentally and financially through the process.
1. Higher Interest Rates
The most noticeable difference probably is the interest rate. Bad credit business loans carry an interest rate higher than usual by lenders, so they can balance this increased risk. If a borrower with a good credit score can expect an interest rate ranging from 7% up to 12%, a bad-credit borrower may be paying anywhere between 20% and 50%, depending on the lender and type of loan.
With this increased cost attached to the borrowing, it means that you will be paying more in interest for the duration of the loan. Calculate the cash flow impact of repayment before you apply for a loan.
2. Smaller Loan Amounts
Because of their lower credit scores, lenders may establish another justification for limiting the amount of capital they want to offer. Contrary to the traditional loans that provide a funding option that can be up to hundreds of thousands of dollars, bad credit business loans generally misinform markets with discount funding up to $5,000 to $50,000. In some cases, the amount of a loan is calculated in proportion to the monthly revenue of your business.
3. Collateral or Personal Guarantees May Be Required
The typical arrangement for many lenders is to take collateral from a borrower against the risk involved when issuing a small business bad credit loan. The collateral may be business assets, such as equipment or inventory, or perhaps personal assets like a vehicle or even a home. Otherwise, a company may be asked to sign a personal guarantee; this would personally hold the signatory responsible for repaying the loan in case the company does not repay it.
These are usually better terms for collateral-backed loans but pose greater risk to the borrower. Therefore, be cautious and trust only those agreements whose terms you do understand.
4. Shorter Repayment Terms
These are short-term loans and thus expect quick repayment, usually six months to two years. This tends to spike monthly payments, thus putting cash flow into the picture. Some lenders may even ask for repayments on a daily or weekly basis, as opposed to monthly ones.
When contemplating short-term loans, make sure your business will be able to keep up with payment requirements without interfering with their daily operations.
5. Preparation Before Applying
Even with a dismal credit history, taking a few steps before applying for a bad credit business loan will greatly help in getting approved and also getting better terms.
6. Boosting Your Credit Score
This may take some time, but improving your business credit score may help you buy better loans with the payment or with their deposits. Some lenders maintain a minimum credit score, so any increase in your credit score is definitely an important improvement.
7. Draw Up a Detailed Business Plan
Lenders want to be sure you have a sound plan to use the proceeds and repay the loan. An effective business plan should include a concise summary of your operations, financial projections, marketing strategy, and the contribution of best business loans for bad credit toward the growth or stability of the business on
Final Thoughts
The bad credit business loan is tough to get approved for, but far from impossible. You’ll pay higher interest rates, smaller amounts of financing, and harsher qualifications; however, there are many alternative lenders who’ll work with any borrower who shows some promise and responsibility.
It all boils down to preparation. Improving your credit, putting together a solid plan, staying realistic in expectations, and keeping sparkling good financial records will lead you to increasing the chances of obtaining business loans for bad credit, which in turn will guide the company to survive, grow, or even shine.
