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First thing’s first: you’re probably not planning to have a poor credit score forever, and part of building a strong credit history is knowing exactly how credit scores are calculated and using that knowledge to your advantage.
There are three main credit bureaus that calculate business credit scores. They’re Experian, Dun & Bradstreet, and Equifax. While each credit report will look slightly different and the scores will be on different scales, they’re all using roughly the same data points to come up with a number that does roughly the same thing: show at a glance the creditworthiness of a given company.
The data used to calculate that creditworthiness is typically comprised of some or all of the following:
Financial Data. Sales, assets, whether your company has ever been in collections.
Credit History. Have you made all of your payments on time and in full? Late payments can severely damage your credit report. Are you close to the limit on your lines of credit? How much debt are you currently carrying? How long is your credit history?
Business Information. Your industry and the size of your company will both have an impact on your company’s credit score.
Government Data. Have you filed for bankruptcy? Does your company carry tax liens or have you been sued? That’ll all show up on your credit report.
2. Use a Personal Guarantee or Collateral
An important thing to remember when your company has less than perfect credit is that your credit score is effectively a number used to show potential lenders how likely your company is to repay its debt. Lenders don’t like to lose money. And when your credit score is less than perfect, lenders may ask for guarantees or collateral in order to protect their investment.
A personal guarantee is effectively putting your personal credit score and assets on the line for a business loan. If your company is unable to repay the loan, the lender will come after your personal assets and that default will appear on your personal credit report.
With collateral, you’ll put up valuable assets for similar purposes. Whether it’s a fleet of trucks, an office full of computers, or a piece of real estate, you’re telling the lender that they can take possession of something worth a considerable amount of money if you can’t pay your loan. Equipment financing is a form of lending in which the loaned amount is used specifically for this purpose, which helps keep interest low.
Regardless of which avenue you take, making a personal guarantee or putting up collateral is one way to make lenders confident that despite your low credit score, they’re not likely to lose money when lending it to you.
3. Understand Your Eligibility
The number of hard credit checks performed in your history is a key part of your business credit score and having too many failed loan applications can lead to an even lower credit score. For that reason, make sure to research the loans you’re applying for very carefully.
Most lenders aren’t subtle about the criteria you need for loan approval. They likely require a certain amount of time in business, a certain amount of annual revenue, and typically have minimum credit score requirements. Those requirements aren’t suggestions: if you aren’t reaching them, you should not consider applying. You’ll be denied, which will lead to even further issues with bad credit.
Know what the lender is looking for in a borrower and apply for loans you’re all but certain you’ll receive.
4. Choose The Right Lender
While many small business owners think that they’re limited to brick-and-mortar banks, remember that there are many, many more business lenders available to today’s entrepreneurs due to the alternative lenders found on the internet. These companies have streamlined application processes, act quickly (you might receive your loan as soon as 24 hours after application), and are willing to take on borrowers with poor credit. When you’re looking for the right partner, don’t limit yourself to traditional lenders like banks and credit unions. Many online lenders offer comparable products more helpful to borrowers with poor credit.
5. Look into SBA Loans
The United States Small Business Administration, or SBA, guarantees some loans through third-party lenders like traditional banks and credit unions. Because the government is guaranteeing these loans, they’re often offered to borrowers with low interest rates and favorable repayment terms. As such, SBA loans are often one of the best loan options out there.
However, some SBA loans require pristine credit. After all, the loan is guaranteed by taxpayer dollars and the government doesn’t want to throw taxpayer money to small businesses likely to lose that money.
That isn’t to say that the SBA doesn’t also want to help businesses with less than perfect credit. SBA microloans, for example, are small loans distributed through local intermediaries. Because the loans are small – an average of $13,000, per the SBA – they’re often available to startups and other businesses with poor credit scores.
6. Crowdfunding is a Viable Option
If you’re looking for a smaller loan amount and have an existing base of customers and supporters, you may want to consider crowdfunding. Crowdfunding, typically done through a third-party site like Kickstarter or Indiegogo, allow businesses to seek out donations in exchange for reward tiers, early access, and more.
If you’re considering seeking out some sort of loan to help launch a new product, consider crowdfunding. You can use the crowdfunded money to build up the new product while it acts as a marketing device and a feedback mechanism. A win-win.
7. Build Up Your Credit When You Can
You may want to consider whether seeking out a loan is the best possible option at this time. If you’re a startup business, this may not be an option. But if you’ve got some time in business under your belt, consider whether that loan might be better off next year, or six months from now. During the interim, how can you attack the parts of your credit score that are dragging it down the most? Consult your business plan to determine whether a loan can wait.
Do you have an existing loan with a high interest rate? Can you take time to bring that balance down, saving money and creating a lower utilization rate, thus improving your credit score? Are your sales picking up recently? Could waiting to apply for a loan create a longer history of strong sales? That could also boost your credit score. Maybe you run a seasonal business, like a hotel or hospitality business in a tourist destination. Could you use your peak season to pay down debts?
When you don’t have good credit, you might feel like you need to get that financing handled right this second, but the truth is that it might well behoove you and your company to wait a bit and create a better position.
8. Look For Loans For The Right Reasons
Speaking of urgent financing, why do you need that loan? When it comes to business loans, one of the worst mistakes you can make is seeking out financing when it’s not necessary, or for the wrong reasons. Sure, a lump sum loan might lead to a bit more cash flow. But how does that new money lead to growth? To better credit? To more sales? If your loan payments aren’t helping your company get ahead, maybe you’d have been better off without that loan.
Have a specific purpose in mind when you seek out a business loan. Know how each loan will lead to greater success. There is any number of types of loans available to small business owners, and making sure you’re going after the right type of loan at the right time for the right reasons will help mitigate the high interest that comes with poor credit.
9. Use Lines of Credit and Credit Cards To Ward Off Emergencies
When your credit is low, you don’t want to find yourself in a situation where you’re scrambling to get money together. If you run a trucking company and a vehicle breaks down, you want to be able to make repairs quickly, without having to worry about whether your poor credit will lead to you not being able to get the money you need.
Try finding yourself a business credit card or business line of credit. These two forms of funding work in similar ways: you’ll have access to a certain credit limit, and you’ll make payments and pay interest only on what you spend beneath that limit. Lines of credit are withdrawable as cash, while business credit cards often come with reward systems.
The interest rate on these cards and lines of credit will likely be high if you’ve got bad credit. But because you only pay interest on what you spend, keeping a credit card or line of credit available to you means that you can make purchases, upgrades, or repairs quickly while minimizing the impact of that high credit.
10. Merchant Cash Advances Can Get You Money Quickly
One way to bypass the issue of a poor credit score is to instead go after a merchant cash advance, or MCA. That’s because merchant cash advances aren’t loans. Instead, a company purchases a percentage of your future debit and credit card sales.
Instead of an interest rate, you’ll pay a factor rate, in which the size of the advance is multiplied by a number typically between 1 and 2. That total will be the amount you need to repay. If you get an MCA of $8,000 at a factor rate of 1.4, you’ll repay a total of $11,200.
There are benefits and drawbacks to MCAs. Firstly, you won’t make monthly payments. Instead, you’ll make payments on your MCA every day. That means that if your company has a slow day or week, you’ll pay less. And when your company is making many transactions, you’ll pay more.
If you do end up paying an MCA back quickly, your annual percentage rate, or APR, will also be very, very high. With most loans, you’ll pay less in interest as the principal shrinks. Not so with MCAs. That $11,200 is the total repayment amount whether you can pay in three months or four years.
But of all non-line of credit forms of borrowing, merchant cash advances might have the shortest time for getting funded. MCAs sometimes deposit within a single business day, meaning that if you need to have cash very quickly, they’re a good option.
11. Accept That You’ll Have High Interest - But Carry It For As Short As Possible
If you do decide to go for a term loan, that is, the traditional form of loan in which a financial institution gives you a lump sum, which you pay back with interest over a set of months, you’ll likely find that you’re going to have high interest. And that’s okay – but you can make some choices to ensure that the high interest causes minimal financial damage.
Term loans are often sorted into short and long-term loans. Short term loans tend to be smaller, with high interest rates. They also will need to be repaid within 18 months. Because of those short repayment terms and small size, short-term loans sometimes will cost less in total interest paid than a lower-interest loan which lasts longer.
If it’s possible, you may want to consider seeking out short-term loans for smaller amounts that will still help meet your business needs. As you repay these loans, your credit will improve, and you’ll be able to seek out the larger loans your growing business will need down the line.
Bad Credit Doesn’t Mean You Can’t Get Funding
No matter why your business’s credit has ended up lower than you’d like, there are still options for your company to get the loan it needs. Bad credit business loans are available in multiple forms, sizes, lengths, and with any number of purposes. So whether you’re a new business, an established company looking for some extra working capital, or anywhere in between, the tips above can help you find the money you need to build your business.