Cash flow is important when you run a business. It’s how you pay your daily operating expenses, buy inventory, and pay your employees. But there will be times when your business isn’t bringing in as much cash. There will be other times when you’ll need a lump sum of cash to pursue an opportunity, like expanding your space or taking advantage of a bulk discount on supplies. You’ll need to get a business loan.
But what if you have bad personal credit and a low or nonexistent business credit score? Getting a small business loan when you have bad personal credit or bad business credit can be challenging, but it’s not impossible. These days, there are multiple ways to get small business financing even with a bad credit score.
Check Your Personal and Business Credit Scores
Before you start looking at loan products or getting together your documentation to fill out an application, it’s important to check your personal and business credit scores. The situation may be better than you think – or worse, but you’ll never know unless you check your credit scores. You can get your personal credit score for free from AnnualCreditReport.com, and you can get your business credit score from Experian or Dun & Bradstreet. Most lenders will want you to have a personal credit score of at least 650 or a business credit score of at least 160. However, if you’ve been in business less than a year, you probably don’t have a business credit score yet. You’ll have to borrow money using your personal credit score.
Consider an Alternative Lender
Non-traditional lenders are usually the best option for business owners looking for bad credit small business loans. Traditional bank lenders typically require a lot of information, including a multi-page application, documentation of your business finances, a copy of your business plan and organizational chart, and other documentation. They may not lend to you if you have a low credit score or your business is younger than three years old.
Once you’ve applied for a traditional business loan, it could take months to find out whether you’ve been approved.
However, alternative online business lenders have fewer requirements. Online lenders will want some proof that your business is capable of paying back the loan, but they usually don’t need as much documentation as traditional lenders. Online lenders will process your application within a few days at most, so you can get money quickly when you need it.
You may also want to consider applying for a microloan from the U.S. Small Business Administration. The SBA works with non-profit community lenders around the country to provide loans of less than $50,000 to business owners in disadvantaged communities or minority business owners. If you have bad credit, a non-profit lender might make you take business classes as a condition of your loan.
Apply for a Business Credit Card
It’s often difficult to get a business loan to cover startup costs, because if your business doesn’t technically exist yet, you can’t prove that it will be profitable and that you’ll be able to pay back the loan. However, you can use your personal credit score to qualify for a business credit card. A credit card will provide revolving credit that you can use to cover startup costs and pay day-to-day expenses.
Lenders will be more likely to give you a business loan if you can provide some form of collateral. However, it’s not a good idea to put your personal assets, such as your house, up for collateral when you apply for a business loan. You could end up losing your house if your business fails, and you could risk making yourself personally liable for business debts.
If you don’t have business assets, you can use your invoices as collateral for a business loan. You can try invoice factoring, in which you sell your invoices to a company. The company gives you the value of the invoices, minus their fees of 10 to 15 percent, and then they collect their payback directly from the parties that owe on the invoices.
Another alternative is invoice financing, in which you use your invoices as collateral for a loan, but you’re responsible for collecting on the invoices and using that money to pay back the loan. If you’re borrowing money to buy equipment or property for your business, you can use the equipment or property itself to secure the loan.
It’s not always easy to get a business loan, especially when you have bad credit. But with the right solution things can be much easier.