Is your bad credit getting in the way of obtaining a business loan?
It might seem like an impossible task to find a lender if your credit score is below average.
We’re here to tell you there are other options. Business loans for poor credit exist, and we put together a guide to help you understand the lending process.
Continue on and you’ll be one step closer to making your dream a reality.
What Are Business Loans?
The definition is pretty straightforward, a business loan is a sum money borrowed from a lender by business to start, expand, or run a business.
Business loans are difficult to obtain by for many applicants. In the U.S., out of 10,000 applicants, 82% were denied for a business loan.
Business loans are risky, especially when the business is a startup, which is why they are so difficult to obtain. The costs for underwriting, evaluating, and verifying a small business loan are usually the same as a large loan. Banks usually focus on high profile business loans instead of startups.
Qualifying for a business loan is tricky even if your credit score is nearly perfect. There are many other factors banks consider such as, whether you can provide collateral, tangible assets, and financial status.
What Do Lenders Look For?
Every lender is different in their requirements, so you need to make sure you know the minimum criteria. Meeting the criteria will make you a strong applicant.
Lenders will want to see your personal credit score and business revenue to see how you handle paying bills. Many of them will quickly cross off bankruptcies and delinquencies.
Before considering applying for a business loan you should start gathering some financial information and legal documentation.
- Both personal and any business tax returns
- Business and personal bank statements
- Business licenses
- Income statements
- Balance sheets
- Personal Identification
- Commercial Leases
You can always check each lender institution for their complete list of documents you’ll need.
Develop a Business Plan
You will become a stronger applicant if you bring a business plan to a potential lender. They want to see your business will be strong and profitable enough to be able to pay the loan back.
You’ll want to develop a business plan that will impress a lender even if you have poor credit. You can recruit the assistance of the pros at https://creditrepaircompanies.com/lexington-law/.
In your business plan include projected financial results. Also, in your business plan include your company description and a complete analysis of the industry to show there is a market for your product.
Include a product or service description and explain how you plan on managing it. Other points you should include are:
- Marketing plan
- Operations plan
- Strengths, weaknesses, opportunities, threats
Lenders always will require collateral. It can be anything from an asset, equipment, inventory, or real estate.
They require collateral as a guaranteed to recover their money if your business fails.
Understand Your Credit Score
Before applying for business loans for poor credit, you should take a look at your score. Understanding your credit report will give you an idea of why you might have poor credit.
Obtain your credit report from one or more of the main credit bureaus and understand the breakdown.
- You will see the total number of your accounts open mortgages, credit cards, student loans, car loans, and others.
- It will show the monthly amount you pay for all your credit accounts.
- You will see which of your accounts are in good standing.
- It will show any negative impacts to your credit score such as delinquent and derogatory accounts.
- The length of time your accounts have been open.
- This report will also show the number of recent inquiries.
- Expect to see your total score and percent of credit available.
- Any closed or paid off accounts.
Negative impacts to your score will mean you’ll only qualify for high interests on your credit card and loans. Making a few changes to your finances could help you improve them drastically.
Don’t skip making any of your payments on time. If you have any delinquent accounts try to bring them up to date. Avoid applying for new lines of credit, as these create a negative impact on your score.
Bring down the balances in your credit cards so you have more available credit will be a positive impact to your score.
Apply for Business Loans for Poor Credit
Now that we’ve explained the business loaning industry and how to understand and improve your credit report, it’s time to look at your options.
There are several options for business loans for poor credit. These types of loans are for people who have a credit score of 640 or below.
This type of loan does not use your home or house as collateral, instead, it does equipment or inventory. In case you’re not able to pay back the loan, they will take the collateral specified on the terms agreed on.
Short-term loans are a great solution for borrowers with bad credit. These loan terms usually last between 3 to 18 months. The borrower pays them back with daily ACH payments.
On the downside, these loans are very expensive and come with high APRs. Not to mention daily payments could get in the way of the business’ cash flow.
Merchant Cash Advances
Merchant cash advances are loans you pay back with a percent of the business’ daily credit card transactions. This is a great solution for borrowers with bad credit. With all other similar loans for poor credit, you must proceed with caution.
Lenders take a percent of the daily credit card transactions, so you pay more when business is doing well, and you pay less when it’s slow. Keep in mind paying back this loan could cut into your day to day profits.
You will only qualify if you plan on processing credit card payments.
Business Credit Cards
Business credit cards are a great option because they will provide you with instant money to use for your business.
The best part is if you pay in full each month you could avoid APR charges. And making payments on time and using the credit card in smart ways could help build your credit.
Plan Your Next Step
Now that you know about the many business loans for poor credit available, you can start your research to find the right one.
Making the right moves will help you move on from bad credit loans to regular ones with lower interest rates.
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