Struggling with Bad Credit? Expert Tips to Secure Loans for Small Business

Although there are many loans for small businesses available in the market today but securing one has become stricter than ever. With the economic atmosphere being so volatile, lenders across the US have become risk averse. They do their due diligence thoroughly to avoid cases of loan defaults. That’s why credit scores have become a vital element in checking potential risks that a borrower might present.

But it is important to note that even with a low credit rating, it is possible to secure a small business funding. It might come with its own unique challenges as the recent financial environment has put even the most lenient lenders on guard.

Why Should You Pay Attention to Your Personal Credit Score

Personal credit scores play an important role in the evaluation of small business loan applications. Lenders put a lot of weight on an entrepreneur’s creditworthiness, in case the business falters in its commitment to repay the loan. They usually rely on a FICO score to analyze an applicant's legitimacy as a borrower.

FICO is a credit scoring model, based on which 90% of the lenders determine if a person is eligible for any kind of loan, mortgages or even credit cards. A FICO score is calculated based on information in a credit report provided by the credit bureaus – Experian, Equifax and TransUnion. A credit report would usually let lenders know how reliable an applicant is at repaying debts, how many payments have been made on time, and their debt-to-income ratio, among other considerations.

What is a Good Credit Score

A credit score ranges from 300-800 score range. The higher the score, the more trustworthy an applicant will appear before the lender. On average, most lenders tend to favor a good credit score that ranges from 670-739 score range. They often tend to be wary around applicants with bad credit or a FICO score between 300-629. One of the most common reasons for loan rejection is a low FICO score. However, with alternative funding options and new-age lenders, entrepreneurs can now get loans for small businesses even with a bad credit rating. This is mostly since modern lenders tend to focus more on where the business is heading than what led to a bad credit score in the past.

How to Secure Loans for Small Business with Bad Credit

Raising capital from business fundings is possible, even if the applicant has a bad credit score. Even if the situation is not ideal to begin with, a bit of intense preparation can go a long way in improving approval chances. There are two ways to get a loan for small business with low credit score:

1. Prepare to Provide Collateral

Lending is a risky business. Given the turmoil in today’s economic landscape, even the most qualified borrower can fall victim to the fluctuating nature of business which can leave them unable to pay their loans. That’s where collateral come into play. Giving an asset as collateral can help assuage a lender’s fears and increase the chances of loan approval.

2. Get a Co-Signer

In some situations, getting another person to take on partial responsibility for a small business loan can improve the chances of loan approval for an entrepreneur with bad credit. By co-signing the agreement, the co-signer agrees to repay the loan in case the primary borrower is unable to. Usually, the co-signer would have favorable credit scores and credit history and a steady source of income.

Two Loans for Small Businesses to Keep in Mind

With a bad credit score, it might become slightly difficult to secure the ideal funding. But nevertheless, there are two financing options that borrowers must look at if they capital to fuel their businesses’ growth:

Invoice Financing: Unpaid customer invoices can prove to be a goldmine when it comes to securing loans for small businesses. It can serve as loan collateral, with lending companies charging a percentage of the invoice amount as a fee for borrowing the money.

Equipment Financing: With this type of financing, the equipment that gets funded serves as loan collateral. If the borrower defaults on the loan, the financing company can seize the equipment to recoup their losses. This type of funding also protects a borrower’s personal assets from being used to recover the losses.

Conclusion

To summarize, securing loans for small businesses with bad credit is not impossible. But potential applicants must keep trying to improve their scores before applying because if the score is better, financing options would increase; hence ensuring that the borrower can find the funding that supports their business goals. Moreover, a good credit score would also ensure better interest rates. All these factors do help in reducing the stress of repayment on the borrower’s part. So, keep the credit score healthy so that you don’t have to run around searching for a favorable funding option.