Whether your dream is to build an artisanal bakery or to launch the next big social media network, you’ll probably consider financing at some point. The odds can be overwhelming, but according to the Federal Reserve, more than half of all small business owners who apply for loans fail to meet their borrowing goals. Many factors influence your business proposal’s attractiveness to a lender or investor, but bad credit is a big one. Here’s how to obtain your best possible score and find the right option for your plans.
Business Credit vs. Personal Credit
Your personal credit history and your business credit history are separate entities. Personal credit is linked to your social security number, and business credit to your tax ID or employee identification number. The IRS is strict about not mixing your personal and business accounts, but there is often an inevitable overlap. Many small business start-ups begin with maxed out credit cards, and some business loans have to be personally guaranteed; however, the scale is different. As a business owner, you’ll typically be accessing much higher levels of business credit than you do with personal loans. The good news? It’s much easier to build up your business credit history and achieve your best possible score.
What You Need To Get a Small Business Loan
If you have collateral in the form of machinery, equipment, vehicles or real estate, it may be easier to obtain a business loan with bad credit. Without assets, you’ll be looking for a no-collateral loan, which will entail higher interest rates and closer attention to your credit score.
How To Achieve Your Best Business Credit Score
Aside from getting together your key financials, including balance sheet, profit and loss statements and so on, follow these steps:
- Set up a dedicated business account to handle all your business payments.
- Build a business credit history and avoid using personal credit cards to ‘bootstrap’ your growth.
- Open credit lines with suppliers and make regular payments.
- Check your score regularly, for progress as well as errors.
How To Get a Loan With Bad Credit
Given how hard it can be to get a business loan, it’s no surprise that owner financing (using personal or family funds) is the most common way of financing a small business. In fact, small and new businesses are more likely to access informal sources of financing, whereas more mature firms take the traditional routes.
But if you only need to borrow up to $25,000, in common with the 58% of small businesses that start with less than $25,000, consider a small business administration (SBA) loan. The SBA is not the lender but works with banks, community development organizations and micro-lending institutions. You can get an SBA loan without collateral, but you will need to meet the minimum credit score and have at least two years of operating history.
If you’re taking out a non-collateral loan, many lenders will ask you to offer a personal guarantee, making you liable for borrowing. Alternatively, they may ask you to agree to a UCC lien, which authorizes the lender to access your assets if you default.
What Options Are Available?
If you’re trying to get a business loan with bad credit and are consistently meeting resistance, explore alternative avenues to traditional bank financing, such as:
- Accounts receivable financing: money borrowed against customer payments due, used to smooth cash flow.
- Line of credit: money that can be accessed at any time from a lender without obligation.
- Term loan: financing offered for a fixed amount of time with set payments, usually to buy equipment.
- Peer-to-peer lending: collateral-free financing from investors, in exchange for giving up business equity.
Many of these will appeal to small businesses with low credit scores.
How To Get Your Best Possible Rates
Your creditworthiness will dictate the interest rate you pay on any loans. If you have a bad credit score, you might be able to offset some of the impacts on your annual percentage rate (APR) by making a larger initial down payment. However, you will still have to factor in origination fees and prepayment penalties.
Find out how ScoreMaster can help you achieve your best possible credit score, with the tools and services to help you grow as a small business owner.