The credit crunch of 2008 took its toll on small businesses. Banks had to tighten their actuarial requirements to avoid suffering similar losses.
Unfortunately, this made financing a lot more difficult for business owners. Business owners with poor credit scores struggled the most.
The good news is that there are a number of ways that diligent companies can still get the funding that they need. Even with a poor credit score, you should still be able to secure financing to expand your business.
Steps Business Owners Need to Take to Get Alternative Funding
Your likelihood of securing the funding that you need depends on a number of factors. One of these factors is your industry. The approval rates for companies in the restaurant and hospitality sector is 51%, while it is 16% in the personal services sector.
However, other factors are also very important. Your credit score is at the top of the list.
You credit history is a good measure of how banks and other lenders will view you as a borrower. To them, you are either a high or low risk profile. People with a healthy borrowing and repayment are viewed as good or excellent credit profiles and are likely to get approved for a loan. Borrowers with bad credit, however, always have a hard time accessing business loans. Does that mean you should give up on your entrepreneurial dream?
The answer is “no”. A business owner with a poor credit score can still access funds they need to push their business to the next level. It is obviously challenging to get approved for financing with a low score, but the following tips will describe ways that can improve your chances of approval.
1 Analyze Your Options
There are different loan options for people with bad credit.
- Microloans- this type of financing is slightly similar to bank loan although more lenient and offered to individuals with average scores. If your score ranges from 570 to 700 or above, this is the most viable option for you. Few lenders offer financing to credit profiles below 620 score, but micro lenders such as credit unions are always an option for such borrowers.
- Merchant cash advance- This only applies to individuals with low credit score but have existing businesses. If you have cash flow problems and don’t want to go through the banks protocols and hustles, then merchant cash advance is a viable solution. However, be prepared to pay high interest fees in the long run.
- SBA Loans- small business administration connects startups to lending institutions. Instead of directly going to the lenders, SBA will connect you to the most suitable financier. SBA act as a co-guarantor in the loan, thus the lenders are guaranteed that the loan will be paid in case you fail to repay.
- Revenue Oriented Loan- This is a unique type of loan that allow existing businesses with over $100,000 annual revenue access funds. Borrowers with a score of as little as 550 can easily get approved for this loan if they meet the other requirements.
- Friends and Family- This is one of the most overlooked options. Approach your family or friends professionally with a written agreement and most of them will be more than willing to support you.
2. Check the Minimum Score Requirements for Each Lender
You don’t want to waste time applying to lenders that are beyond your current capabilities. May it be in terms of credit rating, revenue, or experience. So, look out for financers that fall well within your profile. For instance, if you have a score 600 score or below, avoid traditional banks as they are more likely to reject your application.
3. Design a Viable Business Plan
After choosing the most suitable lender, you still have to convince them to give you the funds. People with existing businesses normally have an easy time as they have all the numbers and particulars sorted. Startups, on the other hand have to prove why the need the financing and how they will use it. Considering that you have a relatively low score, then you must come up with a plan that stands out.
4. Have A Credit Repair Plan.
Lenders are looking for positive signals that you are trustworthy borrower. Although you might have missed some payments, had repossessions or paid your bills late in the past, show them you’re willing to improve your score. In this case you might choose to repair your credit score by yourself and dispute some negative marks on your score. You might also choose to hire a credit repair company to repair the score on your behalf. All in all, carry copy of documents that show you are willing to become a trustworthy borrower.
5 Be Prepared to Pay Premium Interest Rates.
As explained earlier, people with bad credit are high risk borrowers. The only way lenders can secure their money is by offering you the loans with high interest. As you would expect, a business borrower with 700 score is more likely to pay less interest than the one with 600 score. However, the interest rate difference is between 2% and 5%, depending on the amount and nature of the business. In such cases, asses your business capabilities and decide whether the 2 or 3 percent might have an impact on your business. If the rate difference is fair and the business can afford it, taking the loan would be a good decision. Furthermore, you can use the loan as the ladder to better credit score in the future by making timely payments.
Follow the Right Steps to Secure Funding as a Business
Every small business is going to need external funding at some period to grow. It can be more difficult to get financing with a bad credit, but it is not impossible. You need to follow the right steps to get the financing that you need.