The story is perhaps more common than you’d think. A business opens, and the owner’s credit is stretched tight to cover all the bases. Maybe, a few payments get missed or delayed. This has an effect on the credit score, but it could not be helped. Yet, the need for business loans will not go away – and the owner finds they now need to find a bad credit small business loan.
If this is the case for you, you might be wondering, “What are my Options?”
Here are four things to consider when you have a damaged credit history and need a small business loan. Securing a small business loan with bad credit can be tricky – but it is not impossible by any means.
1. Collateral matters – Sometimes, having the right collateral could offset the lender’s risk enough to bring down your loan terms. Does your business own any equipment, real estate or other valuable assets it can leverage? Pledging collateral is certainly risky if you default on the loan, so this is not a decision to be taken lightly. Increasing or introducing potentially fatal risk to the business is not recommended. However, sometimes equity earned in a piece of equipment or property can be leveraged to create the means to breathe new life and potential into the business. Collateral is a powerful bargaining chip for any small business seeking a loan, and when you have damaged credit, additional collateral might be a way for you to increase the chances of lender participation.
2. Existing responsibilities matter – In many matters of small business credit, time plays a very important role in how you are viewed. Therefore, time may play a very big part in how effective your loan requests will be. Do you have an existing bankruptcy, lien, or other financial matter that has not been fully discharged? This could very easily be detrimental to you when applying for a business loan. Typically, following the prescribed payment plans or terms of whatever you are facing will help you to rebuild your credit score. But if you have a lot of existing debt or other financial and/or legal obligations that are not fully handled, you will likely find bad credit loans harder to find. The amount of risk you would pose as a loan recipient would cause any provider to charge you incredibly high rates to offset their own exposure in the deal. Sometimes, there are methods to speed the process of handling an outstanding responsibility while sometimes it is simply a matter of time – doing what you need to do until the “storm” passes.
3. Cosigners matter –If you have exceptionally bad credit, have an existing lien or bankruptcy that has not been fully discharged or face some other obstacle that makes getting a loan on your own impossible, you might be able to have a cosigner help you secure money for your small business. A cosigner accepts some of the responsibility for the loan’s repayment. Generally, it will be someone close to you, who might either have or acquire through this, a vested interest in the ongoing success of the business. A cosigner would be risking their own credit rating to help you, so this is not a decision that comes lightly in any relationship. If you want to increase your chances of making the deal attractive to a potential cosigner, have a detailed, formalized business plan written that itemizes distinctly how the money will flow into and through the organization. Show where the ROI (return on investment) will be realized, and indicate potential milestones to mark success or challenges along the way. In a word, be professional. Attracting a cosigner on a bad credit business loan is not going to be an easy task, and you may be risking damage to the very fabric of personal relationships. However, when they are approached and handled in a businesslike manner devoid of personal passions, a cosigner can certainly allow you to qualify for loans that you can’t get alone with a bad credit history.
4. Structure of the loan (or other financial product) matters – When you have a damaged personal or business credit history, you may need to look beyond the limits of traditional lenders to find what you need in a loan. In fact, a “loan” may not be the best way to look at what you need. Actually, if you look at the need of “business capital” and the most efficient way to bring it into the business for handling a specific need, there might be more options available to your business than you had realized.
- There are lease-buyback options that would allow a business with equipment to take advantage of the equity built in it.
- There are factoring options, where a business can sell unpaid invoices for access to immediate cash.
- There are business cash advance programs where a business can sell off future credit card receipts.
- There are payday loans, or cash advances from credit cards for the REALLY desperate.
While all of the various alternatives will have different associated and residual costs, different risks and different benefits to assess, the point is to be creative in how you approach the situation. Be open to different options and be willing to think in new directions – but also be sure to approach new ideas with a sense of trepidation and skepticism. If something sounds too good to be true, chances are good that it is not a safe direction to explore. Be cautious.
Getting a bad credit small business loan is going to present a series of challenges in any economy. However, by considering the four simple points above, you can likely increase your possibilities, and hopefully, find a safe and low-risk means to bring working capital into your business as needed.
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