The Best Loans for Startup Businesses With Bad Credit
The short answer is no. There is no guarantee, but it is not the complete answer. Loan applications and bad credits are like oil and vinegar – they don’t mix well. Whether you are looking for a small business loan or financing on a personal level, trying to find a lender who will allow you to borrow money with bad credit can be a frustrating process.
If you have bad credit and are looking for financing, statements like “guaranteed approval” and “no loan no credit check” can be very appealing. Could A Secured Business Loan Be The Answer To All Your Problems?
Not so fast. You should exercise extreme caution before asking for financing options that sound too good to be true.
The myth of guaranteed approval
Here is the truth. When it comes to financing, there is no guaranteed approval for bad credit.
Before you start to panic, a bad credit score does not mean that it will be impossible to qualify for financing your business. However, any promise of guaranteed approval should caution you.
At best, guaranteed promises of approval can be a sign that you are dealing with a predatory lender. At worst, the ad you see could be a scam.
Bad Credit Financing Options
While secured approval for bad credit is not a real thing, there are lenders who specialize in working with business owners with poor personal credit scores or poor business credit histories. Whether your personal credit is in bad shape or your business credit rating leaves a little to be desired, there may still be viable options available for borrowing money for your business.
Before detailing some of the available options, keep in mind that bad credit financing represents a higher risk for the lender. As such, these financing options often come with higher interest rates and less attractive terms than you might expect with traditional business financing. The same goes for a small business start-up loan. Lenders like to see a balance sheet or a history, which makes a start-up loan problematic for a loan underwriter.
It is a good idea to read the terms, conditions and other fine print before completing funding applications for your business. Make sure you understand the interest rate, the repayment term, whether or not they want collateral, or if it will otherwise be a secured loan. This is a good rule of thumb regardless of your credit condition.
Here are three financing options you may want to consider if you need them. borrow money with bad credit scores.
1. Small business credit cards
Credit cards are often one of the easiest types of financing to obtain, even with credit problems. Since you will usually need to sign a personal guarantee to open an account, a small business credit card can be a good financing option if your business has poor credit but your personal credit is in good shape.
If you have credit issues both personally and professionally, your options as a borrower may be more limited. However, even in this situation, you may still be eligible for a secure business credit card.
A secured credit card requires a security deposit, but usually has more lenient approval requirements in return. Provided you manage the account well, a secure business credit card could help you improve your business credit for the future, allowing you to apply for more traditional business financing down the road.
While the rate on a secured business card may be higher, the good news is that you can avoid credit card interest as long as you pay off your balance in full each month by the statement due date.
2. Online commercial lenders
With poor credit, your chances of walking into a bank or credit union and getting someone to approve your loan application are pretty slim. A term loan from another online lender who might be willing to work with your situation if your credit is not perfect will be much easier than traditional lenders. A small business loan from an online lender could be a much more realistic option and has become the preferred financing option for many businesses today.
Despite a bad credit rating, your business may have other advantages that would make lenders take a chance on loaning money to your business. If your business has other strengths, like stable accounts receivable or stable monthly income, your chances of being eligible for financing from an online lender may improve.
You can find several lenders online who offer alternative business loans, such as:
Keep in mind that the subprime financing options offered by online lenders can come at a cost, including higher APRs, expensive fees, shorter (or more frequent) repayment terms, guarantees, and personal guarantees. Also, even if the lender’s credit requirements are more lenient, you will likely have to prove your ability to repay the loan.
Factoring, or invoice financing is another option available for businesses with a lower credit profile. Factors are more interested in your clients’ creditworthiness than your profile, so they will often work with companies that have less than stellar credit histories. There are many factoring companies online that are making factor invoices easier and more accessible than in the past.
Factoring is not really a loan. In short, you are selling your accounts receivable to a third party (a factor) at a discount. It will pay you a percentage (usually around 85%) of the amount agreed today and pay the balance, minus their percentage, once it has collected from your customer.
There are factors that will keep you collecting from your customers, but you should expect the factor to insist that they do so. It might not be a small business loan in the traditional sense, but it is a way to leverage the value of your accounts receivable today rather than waiting for your customers to pay their bills. It is a very popular way to finance business in the manufacturing and textile industry.
If you cannot benefit from the traditional or alternative program, or business loans for the first time or if you are unwilling to pay the higher financing costs associated with such loans, crowdfunding can offer you a non-traditional way to access the business capital you need.
There are two main types of crowdfunding options for businesses:
Equity Crowdfunding requires you to give up a percentage of your business to investors in exchange for capital. Reward Crowdfunding is about reaching your customers (or potential customers) directly and convincing them to make small investments in your business. In return, you usually offer these customers a reward, such as being one of the first to receive your company’s new product or service once it’s launched.
Online platforms like Crowdrise, Kickstarter, and Indiegogo can help you start and run a crowdfunding campaign for your business. Discover Elyce Zahn crowdfunding success story if you are looking for inspiration to start your own campaign.
On the bright side, crowdfunding is not a loan you have to pay back. With reward crowdfunding, you can almost think of the process as a presale of a service or product that you would have probably tried to market and sell to your customer base anyway.
On the negative side, crowdfunding doesn’t always work and it is far from a guaranteed source of funding. Many business owners who start crowdfunding campaigns fail to meet their fundraising goals. With some crowdfunding platforms, if you don’t reach your fundraising goal, you may lose the money that came for your campaign.
But when crowdfunding works, it can be a big financial victory for your business.
Building better business credit for the future
There is no doubt that a good credit score – both business and personal – can help you qualify for better business financing options. Good credit not only opens doors when it comes to financing, it can also help you get cheaper loans and credit cards.
Are you looking to develop your business credit? If your trade credit is not where it should be, here is a helpful guide you can use to improve your business credit in five steps.
Remember, it is also wise to keep a close eye on your credit reports and your personal and professional credit scores. You can monitor your business and personal credit all in one place by setting up a free account with Nav.
Good business credit is a crucial key to helping you unlock better financing options for your business. Lenders will care about your credit status, so you should be concerned about that as well.
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