Chances are high that if you have bad credit a bank won’t approve your loan application. The good news is that there are many well-respected alternative lenders that will consider the applications of companies or business owners with low credit scores. We’ve researched dozens of lenders and loan options and presented you with our findings so that you can not only find a bad credit small business loan, but so you can truly understand your options and find the best funding source for your business. Keep in mind that there isn’t one lender or loan type that is the best for every small business. For this reason, it’s important to really think about your company’s needs and what you can afford to pay, and to understand the repayment terms before committing to a specific lender.
People have been using goods as loan collateral for centuries, if not longer. In the 15th century, clothing was a common form of collateral, though certainly animals or tools were also viable candidates. But we digress. Today, typical collateral could include the business owner’s personal assets including his or her home or car, as well as the company’s assets, such as real estate or machinery.
Collateralized loans, also known as secured loans, are available to companies with good credit and those with bad credit. For the lender, the advantage of a secured loan is that they know they have something of value to claim if the business owner defaults on the loan. The collateral often allows lenders to provide better rates on the loan since it makes the loan less risky. For small businesses with bad credit, collateralized loans are a great option since they reduce the risk that the lender will take when approving your business for funding. Here are some types of collateral you can offer:
If you have a savings account with a good amount of cash, you can offer this money as collateral for the loan. If you default on your loan the lender can then access the account and help itself to your money. Needless to say, cash is the preferred type of collateral for most lenders because it’s the easiest to manage; it doesn’t need to be sold in order for the lender to get access. On the other hand, using cash as collateral can be somewhat dangerous for the borrower. After all, if you default on your small business loan, you could potentially lose your life savings (or a good chunk of it).
If you own property you can offer it as collateral against your small business loan. Real estate is the most common form of collateral for loans today. Offering real estate as a security means that if you fail to pay your loan payments the lender can seize your assets. Think about this seriously if you’re planning to offer your family home or your company’s expensive office.
Similar to real estate, property is quite a common offering as loan collateral. Property can include cars, boats, machinery or even your company’s inventory.
If your company is suffering from cash flow issues, it may be because your clients are late on paying your bills. This is sadly not uncommon, especially if you deal with a lot of new companies that are struggling with their own cash flow issues. The good news about this bad situation is that you can use these unpaid invoices as collateral against a bank loan. For example, if you have $20,000 of outstanding invoices, your lender can stake claim on those outstanding payments if you don’t pay your loan.
It’s extremely important to understand that if you commit to a personal guarantee, as opposed to a collateral guarantee, you are signing over your personal assets to the lender. With an unlimited personal guarantee, you are literally signing away the right for lenders to recover 100% of the loan amount (plus any relevant legal fees associated with the loan) from among your personal assets. Needless to say, this type of guarantee can reduce the risk for the lender and make it easier for you to get a loan, but it could put your own financial future at risk. On the other hand, a limited personal guarantee with define in specific detail exactly what assets can be taken from you by the lender if you default on your loan.
Business Credit Cards
A business credit card can be a great option for business owners that have bad credit for one simple reason; credit card bills, when paid on time, can actually help improve your business’s credit score. And, of course, an improved credit score can help you qualify for better funding options with better rates in the (hopefully not too distant) future. There are many companies that offer credit cards to businesses with bad credit, including banks and alternative lenders. Since this type of credit card is easier to get than other types of funding (and since there are more options available), it’s important that you understand your options.
Firstly, consider the interest rate that each credit card carries. In an ideal world, you’ll pay all of your bills on time. But if you can’t, you’ll want the credit card that has the lowest possible interest rate. Secondly, consider if there is a minimum credit score requirement in order to be eligible for the card. While some credit cards have more relaxed requirements, others will be more stringent, which may mean that you’re not eligible for those cards.
Merchant Cash Advance
Merchant cash advances can provide working capital to your business for a specific and immediate need. In return, your business pays a percentage of its future sales for the security of this instant cash injection. You can apply for and receive funds from a merchant cash advance lender within a few days, versus a bank loan, which can take a few months. A merchant cash advance lender will look for sources that show a business’s cash flow, like sales volume, recent bank and credit card statements. The application process for a merchant cash advance is significantly less burdensome than it is for a bank loan. In a merchant cash advance, a predetermined percentage of the company’s daily sales is paid back to the merchant cash advance company on a daily basis until the advanced amount is fully repaid. Interest rates tend to be higher because of the short-term nature of the advance and the added risk the merchant cash advance company is taking on with an advance.
Invoice factoring, also referred to as accounts receivable factoring, is a funding option that might be relevant to you if have outstanding invoices. With invoice factoring, the lender purchases the accounts receivable of the client in exchange for giving the borrower immediate funds which can be used to pay outstanding expenses.
If you have friends or family that can help your business get out of its financial rut, asking them for a loan may be a reasonable way to go. The advantage of this option is that if your friends are nice, you’ll probably get a better interest rate than a bank or alternative lender could offer (or, if you’re really lucky, no interest at all!). The disadvantages, however, should not be overlooked. For starters, entering into business dealings, specifically borrowing money, from friends and family can be emotionally draining and perhaps even dangerous. If you default on your loan from a friend or relative you run the risk of permanently severing the relationship. In a worst-case scenario, you may also infuriate or alienate other friends or family members which can have widespread impacts on your relationships.
If your company has bad credit because it’s too new to have developed good credit, you may qualify for a startup loan. While many alternative lenders require borrowers to be in business for a minimum of one year (some have even longer minimum requirements), there are some that specialize in giving loans to startups. The terms of these loans are likely to be less favorable than terms offered to established companies with a proven track record, but if you’re in a pinch, a loan is still a loan, even if the interest rates are higher. After all, this may be just the opportunity you need to turn your small business into a bigger one.