So you’ve either decided to start a new business and need cash, or you need to get your hands on supplementary funding for your existing business.
The problem is, your credit history has classified you as less than credit worthy and now you’re not exactly sure how you’re ever going to secure a small business loan with bad credit. Typically the first thing that comes to mind for most small business owners and aspiring entrepreneurs is to march down to their local bank and apply for a traditional small business loan. Most lenders, especially banks, will require you to prove that you’re able to repay the money to secure the funds. But if your credit isn’t great — as is the case in this scenario — that could be hard to do.
Your personal credit history is at the top of the list of factors that are taken into account when applying for small business loans. Lenders also examine the potential borrower’s business management experience, collateral, and equity investment in the business — as these aspects certainly go a long way in determining if you will qualify for a small business loan. If you happen to have bad credit or less than perfect credit, the first thing you should know is that the bank and other conventional lending sources will most definitely turn you down.
Now that we have the bad news out of the way, the good news is that all is not lost. There are lenders willing to provide small business loans to owners with bad credit. There are also a few more creative ways to secure the money that you so desperately need. So without further ado, here are the top 5 ways to obtain a small business loan with bad credit.
1. Peer-To-Peer Financing
Peer-to-peer financing or P2P lending for short is an excellent way to secure the funds you need, even if your personal credit scores are sub-par, to say the least. This loan method involves individuals that provide unsecured loans directly to borrowers. In essence, it cuts the lending institutions with their high level of borrowing standards completely out of the mix. There are multiple peer-to-peer lending platforms available on the Internet, and typically the entire process is conducted online. The loan amounts and interest rates are either determined directly by the person lending you the money, or the platform. They most likely will follow some basic guidelines. However, the terms are far more customized and personally based on your particular situation. Overall, peer-to-peer financing is an excellent method for obtaining a small business loan with bad credit.
There are a plethora of non-traditional online lenders that offer microloans to small business owners and entrepreneurs that need cash in a pinch. The loan sizes typically range anywhere from $5,000 to $25,000. Many of these companies are willing to lend to borrowers with poor credit due to the smaller loan sizes. In return, you do need to be prepared to pay some pretty high-interest rates.
Expect the interest rates to run anywhere from 12 to 20 percent, though they can go higher. Of course the higher the interest rate, the larger your monthly payments will be. Microloans are also a good way to help repair your bad credit. Lenders typically report your account to the three main credit bureaus. As long as you are making the monthly payments on time, the loan will have a positive impact on your credit, meaning you will see your credit scores rise. Bottom line, though microloans are an excellent way to secure a small business loan with bad credit, you do need to factor in the high cost of borrowing the money.
3. Credit Cards
It’s never a good idea to carry large balances on your credit cards. However, if you just cannot secure the funds you need in any other way, this method is something to consider. You can take cash advances or purchase the items you need using your personal or business credit cards. Much like microloans, interest rates are typically on the high side. The good or bad news depending on how you look at it is, credit card companies only require a minimum monthly payment that is based on a percentage of the entire balance.
For example, you may owe $3,000 but are only required to pay $30 per month. This can certainly be helpful for new — or struggling — businesses that have little if any cash flow. On the flip side, the minimum monthly payments do not pay down any of the principal balance. In essence, you can pay the minimum monthly payment forever and still owe the entire balance. In reality, using your personal and or business credit cards should only be used as a last-ditch effort.
4. Enter Into a Partnership
If your business truly has the potential for growth, or there is a realistic chance that your idea will get off the ground and succeed, then entering into an agreement with a partner that has good credit may be your best method for obtaining small business funding. Of course, in exchange for the equity in your existing or soon-to-be-formed business, your new partner will be responsible for applying and qualifying for the bank or conventional loan.
The deal you make with your partner will determine who is responsible for servicing or paying for the loan on a monthly basis. The partnership agreement will also establish percentages of ownership and the overall responsibilities of each partner. Taking on a partner to secure a small business loan does present certain risks. You’ll be giving up leverage and a portion of your business ownership rights. The other thing to factor in is how well you will get along with your new partner; so chose him or her wisely.
Another creative method for securing a small business loan with bad credit is to borrow the money from people within your social and business network. The circle should include anyone that you know on a personal or professional basis. This could be associates, acquaintances, neighbors, friends, and of course family members. There are two ways to look at the family and friends round of financing. It should either be a short-term loan with a solid plan in place to repay the lender, or you need to be prepared to give up a percentage of business ownership.
In essence, the second option brings in a partner with the added bonus of actually knowing the person before the partnership. That being said, you do risk straining relationships with the people that you know. For example, if you take a vacation or purchase a new automobile before paying them back, it may very well cause a problem. There is also the risk of the private investors holding the bag if your business should happen to fail. Of course, the partnership route may cause a set of entirely different problems.
Typically, the family and friends round of financing your business includes shorter-term loans that require a repayment as soon as more conventional loans or investors are in place. Crowdfunding, which has become hugely popular should also be considered for those seeking a small business loan with bad credit. If you’re not familiar with the concept, it is the practice of funding a business, project, or other venture by raising small amounts of money from a large number of people, typically through online-based platforms.
The Bottom Line
Your bad credit doesn’t have to be your business’ death sentence. There are options available to those seeking a small business loan with bad credit. However, you must give careful consideration to each and every one of your options before pulling the trigger. Perhaps the most important question of all you need to answer is, if any of them will be worth it for the long haul.