Bad credit scores can happen to good people. Healthcare bills, sudden emergencies, youthful exuberance or just a really bad run of luck can create financial problems. Most of us deal with the damage and move forward, a little wiser and warier. Sadly, banks tend to assume that if you had a money problem once, you’ll always be a bad financial risk. And they don’t want to lend money to someone who may not repay it.
But as a small business owner, you need capital to fund your business. You may need to expand inventory, equipment or business space, upgrade technology, or reach more customers through marketing. You might need a cash influx to meet current obligations while you’re waiting for vendors or customers to pay you.
Bottom-line: you need to invest in your business, to be successful it needs to grow. How do you do that if you can’t obtain a small business loan? Thankfully there are options for small business owners with shaky credit histories.
Credit Scores and Small Business Loans
Business loan risk is primarily calculated by a credit score – other factors come into play, but a credit score is often the first thing that banks check. Typically, they look at a FICO score – a specific type of credit score that determines personal (consumer) credit worthiness. Personal FICO scores range from 300 to 850. With FICO, 800 and up is an excellent score, mid-to-upper 700s is very good, low 600s is problematic and anything below 500 indicates a serious credit risk.
You may also have a business credit score if you have a merchant bank account and a business credit card. Business credit scores run from 0-100, with 75 considered excellent. It’s worth checking, but chances are as a small business owner, your personal score will be reviewed when you want to secure a loan. So, start off by getting your credit reports, and finding out how your score (or scores) rank.
Bad Credit Small Business Loans
If your credit score is low, you have options but you need to be realistic – you’re going to pay more in fees and interest rates than you would otherwise. You could hold off for a year or two and work hard to improve your credit score before you actually apply for a loan. If you don’t immediately need funding, this is a good option to consider. Or you might be able to borrow cash to obtain a secured loan from your credit union, which will raise your score if you pay back the loan on time. You can also look into getting a secured business credit card. And you should certainly pay all of your bills on time, as this is key to establishing a good credit score.
If you need funding soon, then you’ll want to look for sources that focus on your ability to pay now rather than your credit score. In general, applying for loans if you don’t meet a lenders credit score requirements is a waste of time at best, and may actually end up lowering your credit score at worst. Instead look for funding sources that specify they will work with small business owners with bad credit.
Alternative Lending Sources for Small Businesses
Alternative lenders typically conduct business online, and many act as the middleman for institutional or private investors. Those with lower credit scores can look for alternative funding offers based on business revenues, rather than credit scores. For example:
A merchant cash advance is not a loan – it’s an advance on expected revenues. If your business has consistent revenues of $5000+ a month, you may qualify to receive a cash advance on those revenues, which you pay back with a percentage of your sales on a daily/weekly basis. You will also pay interest and fees, so best case scenario is that you have a plan on how to turn the advance into a sustainable new revenue stream.
Invoice factoring provides an advance on the money due to you from unpaid customer invoices. With this type of funding, call invoice factoring, the financial history of your customers is more important than your own credit score. You are charged a percentage of the advance amount, based on the repayment term and whether you opt to sell the invoice to the funding company or collect the invoice and repay the funder directly. Be aware that this is not a solution for dealing with deadbeat clients – a credit collection firm is the way to address that problem. You’d use invoice factoring to close the gap between billing for your work and actually getting paid – typically 30-90 days.
Alternative lenders also offer short-term loans, equipment financing loans and other options.
Finding Bad Credit Funding
You can Google for “Bad Credit Business Funding” and slowly shift through the many options. An easier way would be to work with a company that connects small business owners to funders.
As an example, for pre-approval by One Park Financial you need to meet the minimum requirements - in business for a minimum of 3 months, earn at least $5,000 in gross monthly revenue, and have a minimum credit score of 450. Pre-approved small business owners can talk with a funding expert about their business needs to determine what funding types best meet your needs. One Park Financial works with a network of funding sources, and will help guide you through the funding process. Visit oneparkfinancial.com or call 855.218.8819 for more information.