Why Bad Credit Does Not Scare Lenders
Bad credit can make it difficult to obtain credit in almost type of financing, so why are there so many lenders willing to provide business loans with bad credit? First of all, although bad credit demonstrates a borrower’s inability to pay their bills on time in almost every aspect of life, in the business world not paying a particular creditor at any given point in time might very well be a prudent decision. Second, and even more important, a business owner’s credit history has very little to do with an actual company’s ability to pay back a business loan. Lastly, a bad credit report may linger long after the individual has completely turned their financial situation around.
The business world is dynamic and every company whether large or small experiences ups and downs as the economy flows. When customer spending is at higher levels most businesses do not encounter difficulties when it comes to paying creditors, however, when spending begins to slump keeping creditors happy can be a challenge. As a company’s cash flow begins to tighten, determining who gets paid becomes a question of priority. A restaurant owner is going to pay the daily food suppliers before he or she makes the lease payments on their equipment. Now although this will not reflect well on a credit report, especially if the lease is with an overzealous creditor, it is actually a smart financial decision for keeping the business going and ultimately paying back all of the creditors of the company in the future.
This type of cycle where creditors are juggled is normal in the business world, especially when it involves smaller businesses in the early stages of growth. A small company does not build cash reserves overnight so by not paying a creditor here or there is normal as a company gets more mature and eventually reaches a point where it can manage all of its bills in good times and in bad. Business lenders are very well aware of the ebbs and flows of a business so when confronted with a bad credit profile they are looking more at what the bad credit is for when determining approvals.
This type of analysis of a credit report is at the core of being able to provide bad credit business loans. A credit report must be judged for what it contains and not just the overall number at the bottom of a page. There are many reasons why a credit report has derogatory items that are unnecessary or even unwarranted. Also, credit reporting agencies have a very long time frame for keeping negative items on a report and there is a very good possibility, especially for business owners that have very active and dynamic cash flows, that both the personal and business finances have turned around dramatically over recent years. A business loan provider is going to look at current bank statements and business financials and be able to determine a clear picture of the borrower’s financial status and their ability to pay back a business loan despite what an outdated credit report might or might not say.
The company’s financial strength is the most important component when determining an approval. Lenders are more concerned with the current cash flow of the business along with its operating costs. The loan providers are experienced because they have looked at thousands of company profiles so they have a very good idea of exactly how much money a business owner can borrow and pay back. Additionally, the injection of working capital is likely to result in new opportunities and business advantages that can potentially yield profits that cannot be determined by any credit profile. A lender is also interested in what the money will be used for because it matters for the pay back process. All of these little details that are not in a credit report help loan providers determine the viability of an applicant and whether or not they will be able to repay the loan. These details are why lenders can provide bad credit business loans.
Bad credit can be an obstacle for obtaining almost any type of credit; however, loan providers in the business financing industry do not perceive bad credit as an automatic exclusion from receiving a business loan. Business lenders care more about the details behind the report along with a company’s financial strength when they make an approval decision. Bad credit business loans do not scare lenders because they have the ability to see what really matters in a loan applicant.
Sam is an expert in small business financing and has been CEO at Shield Funding for more than a decade. The company has funded more than 1000 small businesses and has been a significant contributor to the phenomenal growth that many of those companies have experienced.
Latest posts by Sam Baitz (see all)
- Why APR on Business Loans Does Not Matter - September 11, 2019
- How to Read Your Business Loan Agreement - August 16, 2019
- Closing the Gender Lending Gap Through Alternative Lending - July 11, 2019