Bad Credit Business Loan Tips
Top Questions People Ask about Bad Credit Business Loans
How bad is my credit?
Because lenders charge interest and fees as a way to mitigate risk, you’ll pay more for access to money if you have a poor credit score. If a few simple steps; such as paying down balances on credit cards or a few more months of on-time car payments, could improve your credit score, ask yourself if you can wait to apply for that business loan.
Also, if your score is below 500, it’s extremely hard to get even a bad credit business loan. Unless you’ve been in business for a long time and your business has strong financials, you’ll need to bring up your personal credit score before applying.
How bad is “bad” credit?
A score between 300 and 630 will be considered a “bad” credit score. If you have a bankruptcy in your past, habitually pay creditors late, an eviction, or have had a car repossessed, your score might be this low.
Can I get a business loan with a 500 credit score?
Yes, you can get a bad credit business loan with a 500 credit score. You will have to work with an alternative lender, as most traditional banks won’t lend to borrowers with scores below 650. Your business must have other factors to offset your low score.
Offsetting factors could be if your business generates minimum monthly revenues of $8,000.
What’s my purpose in getting a business loan?
It sounds like a simple question, but many business owners may know they need money without having a clear purpose in mind. “I want to remodel my store,” is a general statement, versus, “I want to refinish the hardwood floors, paint the walls, and re-carpet the dressing rooms in my store.” The more specific you are, the better you’ll be able to choose the right loan to meet your needs.
Determining your purpose guides you in whether or not to take out a short-term or long-term loan. If you only need a loan to purchase extra inventory for the holiday season, you don’t want to be paying on it ten years later. Alternatively, if buying a fixed long-term asset that you intend to keep for ten plus years, extend your payment term to lower your payments.
Interest rates are usually higher for a short-term loan than for a long-term loan because the lender has a shorter period over which to make their money. Even if a lower interest rate looks better to you, the general rule is that the length of time you’re paying for the asset should match the asset’s expected life. Once you’ve clarified your purpose, you can determine how much money you need.
How will my credit affect my interest rate?
The interest rate that a lender charges is both a reflection of risk and includes their profit. If you have a low credit score, you present more risk to a lender. Because a low credit score is indicative of poor financial choices in the past, they have reason to doubt whether you will repay a loan and will charge a high interest rate to protect themselves.
By charging a higher rate, they are protecting themselves from the risk of nonpayment. The profit they made at the beginning of the loan could be put towards your principal if you default. Typically, rates on bad credit business loans range from 12% to 45%.
Can I get a startup business loan with bad credit?
As long as your credit score is above 500, you can get a bad credit business loan.
What factors do lenders consider for bad credit business loan approval?
While an alternative lender will look at your credit score, they also consider other factors when making a lending decision. They will look at how long you’ve been in business, your minimum monthly revenues, and collateral that you could pledge to secure the loan.
What are “loans for bad credit?”
Loans for bad credit are loans designed to help individuals unable to qualify for a traditional loan still access capital. Typically offered by alternative lenders, these loans consider a borrower’s credit score within the context of their business. Loans for bad credit will charge a higher interest rate than a small business loan at a bank, but they offer flexible repayment terms and quick funding.
When is it recommended to get a bad credit loan?
If the return on the investment is higher than the loan’s cost, it is recommended to get a bad credit loan. What this means is that if you are borrowing at a rate of 25%, but the investment in your business will return 35%, the loan is a good choice. Ultimately, it will return more in value to your business than you are paying to use the capital.
Do I need collateral for a bad credit business loan?
Collateral is not required for a bad credit business loan. However, pledging collateral can reduce your interest rate because the lender now has something that they could repossess to recoup losses If you default. Some lenders may ask you to pledge fixed assets such as machinery, credit card receivables, or investment and savings accounts.
Pledging collateral that is essential to running your business could jeopardize your operations. If you would be unable to fulfill customer orders without that piece of machinery, think twice about pledging it to secure a loan.
Do I need a large lump sum, or can I borrow in increments?
If you want to borrow in increments, you are thinking of a business line of credit rather than a loan. A business line of credit functions similarly to a credit card; you’re approved for a maximum amount, you can draw against the line of credit, and when you repay it, you can borrow again.
Lines of credit and credit cards are best used to cover temporary working capital needs, not to fund a project or larger business purpose. In those instances, you might not receive access to enough funds to complete your project, and you’d have to find additional sources of capital.
When deciding between a loan or a line of credit, consider how you intend to use the funds. Having to go back to lenders for more capital can pause, derail, or end a business plan.
What is the difference between good debt and bad debt?
Good debt increases your ultimate net worth over time. For example, a loan that supports a business line expansion which ultimately generates $100,000 more a year in revenues is “good” debt. Bad debt is when you use debt to buy items that lose their value or do not generate income. Taking out a loan to buy new curtains for your café when no one has expressed negative sentiments about the current curtains would be an example.
Is it better to use a credit card than to take out a bad credit business loan?
No, it is not better to use a credit card. In many instances, the rate on a credit card will be higher than that on a bad credit business loan. Credit bureaus view cards as unsecured, revolving debt, versus a loan which they count as more secure. Maxing out a credit card could hit your credit worse than a loan due to this and also due to how it impacts your debt service coverage ratio.
Are bad credit business loans a scam?
Bad credit business loans are not a scam, they are a way for less-qualified borrowers to receive funds. They function just like a bank loan; you apply, are approved, receive money, and then must repay that money.
How much money do I really need?
Before even talking to a lender, crunch some numbers. Lenders specialize in industries, loan size, and type of borrower. Without a clear number in mind when talking to an alternative lender, you could waste valuable time completing applications and gathering financial data for someone who would never lend to you in the first place.
As well as helping guide you to the right lender, the process of drilling down on a number clarifies your business goals. Considering unexpected expenses that might arise during a planned store remodel, for example, and building them into your loan amount ensures that the project stays on track. You don’t want to get low on funds halfway through a long-term plan and have to take out another loan.
It also keeps you from borrowing too much. While some people might advise you to take out more than you need, just in case, this will cost you. You’ll pay more in fees and interest, both of which are usually calculated off the balance loaned. You want to make sure that your number crunching shows that the project or initiative for the loan will make more money than the cost of the loan; otherwise it is a waste of time.
Both fees, interests, and other loan costs are built into an annualized percent rate, or APR. It’s a better representation than a flat interest rate of what you’re actually paying because it includes other components of the loan’s cost. Not all lenders provide this rate unless asked, but in the long run a loan could cost far more than you anticipated if you didn’t take its APR into consideration.
Lastly, if you’re struggling to make payments on debt that you didn’t need it could impair your ability to use the loan’s funds for their intended purpose. This is why it is a good idea to stick to what your business really needs, which in turn results in a reasonable payment.
Can I service this debt?
Be honest with yourself. Often, it’s difficult for failing business owners to acknowledge that their dream hasn’t worked out. Borrowing in a panic, trying to stay afloat, might seem like a good idea while you try to work things out but it rarely ends well.
Is this a normal, seasonal cycle from which you know you’ll recover? Or have revenues been steadily declining for years? Take a good look at your cash flow, both historical and projected, and make sure that you’ll be able to make the loan’s payments. After all, you don’t want this loan to make your poor credit score worse!
You may think that a lender wouldn’t approve you for a loan unless they know you can pay it off. Unfortunately, there are unscrupulous lenders out there who might give you a loan knowing that they can seize any assets you’ve pledged as collateral and cover their losses.
How will this loan impact my credit score and future ability to get funding?
A loan can impact your credit score even if you’re paying on time. Debt makes up 30 percent of a credit score, so raising your debt level changes the score’s final calculation. Try using a credit score simulator to get a rough idea.
A bad credit business loan will also impact your debt to income ratio. Calculate this ratio by dividing your gross income by monthly expenses. Then calculate it again with the new loan payment added to those costs. Lenders sometimes consider this and other ratios when making lending decisions.
If the new loan might drive your credit score even lower and you’re concerned that you could need more credit before it’s paid off, then it may be a good time to consider borrowing more. There’s a lot to think about when applying for a bad credit business loan. Taking the time to answer these questions thoroughly may prevent you from making another mistake that damages your credit score or your business.
What happens if I can’t repay a business loan?
If you cannot repay a business loan, the lender will take legal action. They will seek to enforce any outstanding claims and personal guarantees that you gave when signing the loan documents. If you pledged collateral, they will take steps to repossess and sell it to recoup their capital.