A small business line of credit is a way for small businesses or startups to gain access to money that can be used for managing cash flow, financing day to day operations or pursuing new opportunities that require cash above the company’s set budget. A small business line of credit (sometimes referred to as a corporate line of credit) can provide a company with an emergency fund to cover any expenses as needed. Once approved, the line of credit is available to the business owner (or CFO), but the repayment (with associated fees) is done only on the borrowed amount. If the credit isn’t used, it sits there patiently waiting for the day if/when it is needed. Lines of credit are usually extended for a defined amount of time such as one or two years.
Having a great idea is the first thing you need when starting a business. The next thing you’ll need is probably money. If you’re lucky, you’ve got some savings socked away that you can use to fund your ‘next big thing.’ Maybe you’re starting your company on the side while continuing to work your full-time job, so you can save money because you don’t need to pay yourself. Maybe you’ll even have a little bit extra to invest in the business. If your company is a ‘unicorn’, it may be profitable from early on, which will give you capital to reinvest into the company. But if you’re not, you may soon find that you have financial demands that you can’t quite cover. On one hand, these needs are great – they’re a sign that your company is growing, and that it’s hopefully headed in the right direction. On the other hand, you’ll need to figure out how to finance these demands.
xAs your company grows, you’ll probably have to hire someone to help out. You may need to purchase tools to make production faster, better or more efficient. Or maybe you’ll need to rent an office, factory or warehouse. Perhaps you’ll need to purchase equipment like a printer, office furniture or a delivery vehicle. Whatever you need, you’ll need money. And you may not have enough of it, even if your company is pulling in income month after month.
According to a recent LendEdu survey , a full 25 percent of millennials don’t know what a credit score is. But it’s time to change that! If you’re a business owner, the first thing to know is that businesses can get a credit score just like an individual can. And just like individual credit scores, a business credit score reflects the company’s credit worthiness(or its ability to pay back debts). There are several credit rating scores that provide credit scores for businesses, and each one rates the company on different criteria. The major rating companies are Dun & Bradstreet, Experian, Equifax and FICO. What each rating company has in common is its research into your company’s payment history with its suppliers, creditors and lenders.
If you have any liens, collections or other holdings against your company, your credit score will be downgraded. Likewise, if you have a history of late payments or have filed for bankruptcy in the past, your credit score will be lowered.
Dun & Bradstreet and Experian provide business credit scores on a scale of 0 to 100, with 100 being the best credit rating. A FICO credit rating will typically be between 0 and 300, while an Equifax score will be several numbers. Generally speaking, a business that has a credit score over 75 as rated by Dun & Bradstreet or Experian is considered to have a good credit rating. A score over 140 as rated by FICO is also considered to be a good credit rating. Businesses with lower scores than these benchmarks are considered to have bad credit, and may find it harder (though usually not impossible) to get a small business loan or other form of funding.
According to Dun & Bradstreet, 1 out of every 3 businesses will see its business credit score decline over a three-month period. One way to monitor this situation is to request your business credit score regularly, but this can be a costly and ‘dangerous’ endeavor because pulling your business credit score costs money and can impact your credit score. As an alternative solution, some credit rating companies offer regular credit score monitoring (for a fixed fee) to help you keep your credit score in check. If you have bad credit this service may help you see when your credit improves. If you have good credit, it should help you keep it that way.
Your personal credit score may also impact your ability to get a loan. Even if your company’s credit is in good standing, a bad personal credit score can be a sign for lenders that lending to you will be risky. Many lenders require the business owner to have a personal credit score of 580 or higher. Some require the business owner to have a personal credit score above 620 (or even higher).
If your company is feeling the financial pinch, you’re not alone. Financial challenges have prompted over 50 percent of small business owners to apply for funding in recent years, according to the Small Business American Dream Gap Report. And that’s not all – one in four business owners admitted to applying for multiple loans. As recently as 2015, 45 percent of small business owners said that they’d been turned down for a small business loan at least once. These stats shouldn’t scare you off from trying to get funded, because as every small business owner knows (or should know), where there’s a will, there’s a way.
Though traditional banks tend to have extremely high standards for potential borrowers, alternative lenders often make exceptions for business owners with bad credit. Nevertheless, if your business has bad credit (or you have a low personal credit score), you should understand that even if you do qualify for a loan, the repayment terms are likely to be less favorable than those offered to businesses with good credit scores. The rationale behind this is simple – lending to your business is riskier for the lender, and they want to make sure that they’re getting compensated appropriately.
Every lender, whether it’s a bank or a private lender, has the right to make its own decision about who to lend money to. It’s in your best interest to put your best foot forward, even if you have bad credit. Here are some things that lenders will look at when determining whether your business is worthy of a small business loan:
Annual revenue – Yearly income will be perhaps the most important factor that a lender will look at when determining if you’re a good potential borrower. If your company’s revenue is rising, lenders are more likely to be willing to take a risk on the company. Rising revenue is a good indicator that the company will have ample funds to repay the loan back on time and in full. However, annual revenue isn’t just a measure of the income that comes into the company. A lender is looking for the company to be profitable. In other words, your income itself isn’t enough, you must be able to show that you are holding onto the revenue.
Cash flow – Cash flow is highly correlated to your annual revenue but is, for all intents and purposes, a beast of its own. Lenders want to know how well a company’s money is managed and how much cash the company keeps available. You will likely be asked for bank statements going at least three months back to show that your company has ample cash flow.
Current debt – If you have other outstanding debts, any future lender will want to know about it. The reason is simple; if another lender is going to receive your first available funds each month, a second lender may be concerned that it won’t get paid back if your funds run out. In this case, it wouldn’t necessarily be your bad credit score that will prevent you from getting a loan, it would be your other existing loan(s).
It may sound obvious, but one way to secure a small business loan with bad credit is to work on improving your company’s credit score. This may mean that you have to hold off on applying for funding for a period of time, but the wait should be worth it (that is, if you can afford to wait).
For starters, do a thorough review of your credit report. It is unfortunately all too common that
If there’s nothing that jumps out at you that can be fixed with technical corrections, you’ll probably have to work hard on correcting your personal credit score, your business credit score or both. There are several steps that you can take which will have a measurable impact on improving your business credit score. Firstly, make sure to pay your bills on time. This sounds so obvious, but unfortunately, it isn’t. Many business owners using credit cards don’t realize that paying only the minimum balance on their credit cards can have a swift and negative impact on their credit score.
One thing that most business owners don’t realize they can do to improve their credit score is to add positive payment experiences to their credit history report. This is a very important step because not all vendors share information with the ratings agencies, and therefore, if you have a positive payment history, the credit agencies may not be aware of it . A simple update of your good payment history can be a big positive step forward for your credit rating.
Another thing most business owners are not aware of is that they can request that credit agencies delete the negative account from your credit history once your account is squared away. If you’ve already paid off your open collections, you can call the agency and ask them to update your record. If you haven’t paid off your existing debts that have gone to collections, call the collections agency and make sure that they’ll erase your negative record once it’s paid.
Lastly, it’s a good idea to decrease your credit utilization ration. Simply put, this is the amount of available credit that your company uses. Many people mistakenly think that they can use all of their available credit. After all, isn’t that what it’s there for? Unfortunately, credit agencies like to see that companies are using 15 percent or less of their available credit (also known as their credit utilization ratio). So, if you’ve used too much of your credit, start paying it back to get your credit utilization ratio below the magic 15 percent.
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.Collateralized Loans
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.
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 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.
Not all alternative lenders offer funding options for small businesses with bad credit. Fortunately, there are many reputable lenders that offer options worth considering. Among those that we took a specific liking to are:
Kabbage is one of the few alternative lenders that does not have any specific credit score requirements. This is great news for business owners with bad credit. Kabbage offers lines of credit which can be useful for business owners who want to reuse the funds repeatedly as needed. The upside of Kabbage is its more relaxed approval requirements. The downside is its fees, which tend to be higher than those of many other alternative lenders. However, considering the risks that Kabbage is willing to take when offering funding to small businesses with bad credit, it’s hardly surprising that the fees are high. After all, they have to protect themselves against the risk they’re taking.
QuarterSpot is a great option for bad credit small business loans because unlike most other lenders, they have no restrictions on what you can use the money for (that is, assuming that your bank statements indicate that your company is financially stable). Another thing we love about QuarterSpot is that their loans are fully amortizing, which means that your daily or weekly payments go to both interest and principle. In other words, if you pay back your loan early, you can actually save money. This is a huge advantage because many other lenders have prepayment penalties or require all interest to be paid even if the loan is repaid early. If you’re looking to pay early in order to keep your company on sound financial footing, QuarterSpot’s bad credit business loans may be just what you need.
Before committing to a loan of any type, there are some other things that you should consider (that you may not have thought of). These rules apply to all types of business and companies with both good and bad credit, but they’re of specific importance or companies with bad credit scores.
Most lenders (if not all of them) will pull your credit score in order to determine your worthiness for a loan. Here’s where things get tricky. Some lenders will do a softpull of your credit score to get a sense of your company’s finances. A soft pull is similar to running a background check. It won’t impact your credit in any way but will give a lender a general overview of your financial state. A hard pull is a request for more detailed financial information and it may lower your credit score. A hard pull of your credit score will stay on your report for two years.
Because of the potential ramifications of a hard credit pull, it’s essential that you know which lenders will do a hard pull and which will not. Make sure to read the fine print on every loan application before submitting it – it should tell you if a hard pull will be required. If, for some reason, you find out that a hard inquiry has been done without your consent you can call or write to the credit bureau and ask them to remove the action from your credit history.
If you are feeling financially stressed, you may think that borrowing money is the only way to keep your business afloat. And you may be right. But what if you’re not? What if adding monthly, weekly or daily loan payments to your existing debts and financial obligations will only increase your stress? Or what if you are unable to make your loan payments because they are too high for you to manage?
Consider if there are other ways to reduce your expenses which would help your company remain financially solvent. Can you reduce your workforce to save money on salaries? Can you cut back on marketing expenses or optimize your campaigns so that you’re spending less and having a higher ROI? Can you find different vendors that will offer the products you need at more affordable prices? If you’re not sure of the answers to these questions or have doubts about whether a small business loan is right for your business, don’t hesitate to ask a financial advisor or another entrepreneur who has been in your place. In today’s day and age, there’s no need to make a decision in a vacuum, and no need to feel embarrassed about having cash flow issues. If anything, the need for cash may be a great sign that your company is growing the way it’s supposed to!
The best thing that you can do as a business owner is to understand your options and to make informed, confident decisions that will be best for your company. Taking out a loan is one such decision, and we hope we’ve given you the information you need to make the right choice. If you want to learn more about how business loans work, you can check out our article section for additional resources and guides that can help your business grow.