If you are looking to expand your business, you are likely to need a business loan to do so. In the same way that lenders look at the credit rating of an individual when lending money, so, too, do they examine the credit history, rating or score of a business. Because of the high rate of failure associated with businesses, it is difficult to be approved for some form of credit before the business has established a successful track record and positive credit history. The worse the credit score of the business, the more it will cost to get a loan. If the business has particularly bad credit, it may not even be able to secure a bad credit business loan.
Securing a business loan will be difficult for a business if its credit score is 650 or less. When a financial institution is evaluating a credit application from a business, it examines the business thoroughly. In addition to the amount of money a business borrows and how well it repays those loans, a lender will look at the size of the business determined by its total assets and number of employees. Unlike personal credit ratings, where all the credit reporting agencies use the same formula to generate a credit score, there is no designated standard for determining business creditworthiness. Each business credit reporting agency has its own evaluation system. There are currently seven credit reporting agencies that deal with business credit ratings: Experian, Transunion, Equifax, Dun and Bradstreet, Accruint, ClienChecker and Credit.net.
Bad credit is not uncommon in the business world. Many business owners soon learn that while an initial business start-up loan was available and helped them to start operating; funding for expansion, maintenance or growth requires an additional loan, which may be difficult or impossible to get. A business owner’s personal credit history may also damage the chance of the business being approved for a loan, since lenders generally look at a combination of both personal and business credit, when making their lending decisions. There are essentially three types of funding a business with bad credit may get:
Vendor Lines of Credit
Vendor lines of credit, or trade accounts, are the first type of credit that will be extended to a start-up business. The manufacturers and suppliers of the materials required to run a business or produce its products will often offer credit to a business, allowing the business to receive the goods it needs and pay for them at a later date. During the first few transactions, these manufacturers and suppliers/vendors are likely to offer very short credit terms. For example, they may specify that complete payment is due 15 days after the goods are delivered. This is known as “Net 15.” As the relationship between the suppliers and businesses strengthen and improve, so too may the credit terms, and payments may be extended to Net 30 or Net 60. These terms may be coupled with a credit incentive for early payment. Lines of credit are a good way for a business to start building a positive credit history. However, late payments or failure to pay will damage the business’ credit score.
Business credit cards are often the second type of credit a business will try to obtain. Most credit card companies will request personal information about the business owner, such as his Social Security Number. This usually indicates that the credit card company will report negative credit history to personal credit rating agencies, instead of the business credit rating agencies. This means that the owner’s personal credit score could be negatively impacted. It is important to try and get a credit card from a company with a good reputation for extending credit to small businesses without requiring personal credit information. A secured business credit card is another option. Most banks offer secured business credit cards that are connected to business savings account. The business owner deposits money into the savings account, and the bank issues a business credit card with a limit that is equal to the funds deposited into the savings account. This kind of account is the perfect way to build a positive business credit history until a business owner can qualify for an unsecured credit card.
Businesses with bad credit may have no other option than to seek loans from informal investors such as family and friends. These people may be willing to loan money based on their personal relationship with the business owner rather than the credit worthiness of the business. This can compromise personal relationships. Government programs, credit unions and some universities with research and development funds targeted at certain industries may also offer a loan to a business with bad credit history.
There are other options for funding an existing business such as a merchant cash advance or a business cash advance. These types of loan instruments are offered to business owners that even fall below a 500 FICO score. The loan or exchange is an upfront payment with repayment done via a portion of future generated sales. This type of business financing does not rely as much on credit as it does the business model and existing and projected gross revenues. It is often the only option business owners have to receive business financing, although it will come at a larger premium in comparison to traditional bank loans..
Whatever option you choose to pursue as a business owner, the bottom line is that building good credit takes time and it is always healthy for owners of a business. It is important to be objective and realistically evaluate your business plan on a regular basis so that you can maximize its potential for success. Listen to lenders – they have years of experience to share with you. If they are not prepared to give the business a loan because of its bad credit history, this should be a signal to you that your business is not operating as it needs to be.