A Guide for Business Loans with Bad Credit
Are you worried that your bad credit score will make it impossible for you to secure the funding you need? The good news is that while bad credit limits your funding options, the doors of some lenders are still open. As long as you know where to look, you can always find the right loans for your business. To help you out, we have put together the ultimate guide to securing business loans with bad credit.
What is a bad credit score?
Your credit score indicates how safe it is for lenders to lend to your business. It is based on how well you manage your credit cards, loans and other debts. Several things contribute to a bad credit score, such as failing to make payments before the due date and utilizing your credit limit to the maximum, to name a few.
The most widely used credit score is called FICO. FICO scores start from 300 and go as high as 850. The higher the credit score, the more the creditworthiness of your business. A credit score of below 650 is considered fair or poor (if it is below 600), and you are likely to have access to limited funding options, as a result.
Does bad credit matter?
Unfortunately, the answer is yes. Your credit score is one of the most important factors lenders take into account when considering whether to approve your loan or not.
The minimum score required to qualify for a loan varies from lender to lender, the amount and kind of loan you are applying for and whether you are providing collateral. However, most traditional lenders, such as banks, require a good credit score (i.e., 670 and above). A high credit score doesn’t only ensure approval of your loan application, but also means lower interest rates and better terms. A low score, on the other hand, often means unfavorable conditions, higher interest rates and in some cases, the requirement to put up collateral against the loan.
What are the funding options available if you have bad credit?
In most cases, traditional lenders are unlikely to lend to businesses with a bad credit score. However, you can choose from the following bad credit cash loans for businesses:
Invoice financing: If you have significant outstanding invoices, you can exchange them for a cash advance under an invoice financing agreement. The lender can give you up to 85% of the invoice amount and the remaining, minus the lender’s fee, once the customer clears the payment. Since you are using your unpaid invoices as collateral, your credit score doesn’t matter, and you get immediate access to funds.
Alternative online lenders: Many online lenders are not as concerned about credit scores as traditional lenders; they are more interested in how long you have been in business and your annual revenue. If you have a sound income stream, you can usually secure the funding you need, even with bad credit.
Merchant cash advances: Under this option, you get a cash advance in return for a fixed percentage of your daily credit card sales. Since the lender takes a proportion of your revenue, they are more concerned with your tax, instead of credit score. However, merchant cash advances are an expensive funding option and must be taken with caution.
Short-term loans: These loans are much easier to qualify for than long-term loans. They can be used for any purpose and are payable over anywhere between 3-18 months. However, interest rates tend to be higher, and it is best to pay them off as soon as possible to minimize costs.
How can you improve your credit score?
Review your credit report for mistakes: Your credit report can have significant errors. For instance, a lender may claim that you delayed payments when you didn’t, or there may be outstanding bills that may still be on your report even after you have paid them. For this reason, you need to get a copy of your credit report from rating agencies and report any errors you find so that they can be fixed.
Reduce your credit utilization: Your crhttps://www.thebalance.com/understanding-credit-utilization-960451edit utilization is the percentage of your current borrowing limits being utilized, and it makes up 30% of your credit score. By paying off some of your debts, you can instantly improve your credit score.
Always make payments on time: The easiest way to improve your credit score is always to make all your debt-related payments on time because every single payment that is made on time helps improve your credit score.
To sum up, bad credit isn’t the end of the world for your business. You can still get access to the funding you need, just at a higher cost and less attractive terms. Moreover, there are some easy ways to improve your credit score that you can work on to make it easier to secure the funding you are after.