Obviously, lenders prefer borrowers with great credit, since great credit is built by proving that your company is more likely than not to repay its debts. The problem is that your credit history is a massive part of your credit score, and if your company is a startup, if you’ve got a significant amount of debt, or have ever missed a payment, you might find limited financing options due to a bad credit score. But that doesn’t mean your company is shut out of receiving financing. There are plenty of options for businesses with less-than-perfect credit.
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What is Bad Credit and Why Does It Matter?
In short, your business’s credit score is a simple way for potential lenders to have an idea of how likely your company is to repay its debts. While no single statistic will give an all-encompassing view of your company’s finances, lenders put lots of stock in these scores.
And there are several companies that provide business credit stores. Experian, Equifax, and Dun & Bradstreet all provide business credit scores and do so on different scales and using slightly different factors. In most cases, these companies all use the following factors to produce their scores:
Debt payment history: Are you making full, regular loan payments on each of your existing obligations? If you’ve made late payments or even missed a payment or two, that can greatly hurt your business credit score.
Credit Age: How long has your company been using credit of any kind? The longer you can show your business’s history of good standing with any existing business financing, the better.
Total debt and debt usage: How much money is currently being loaned to your company that hasn’t yet been paid back? Or if you’ve got a business line of credit, what percentage of your credit limit have you withdrawn?
Industry risk: Some industries are riskier bets for lenders regardless of your particular qualities as a borrower. Restaurants, alcoholic beverage sellers, and cannabis companies are examples of some industries that can impact your credit score.
Company size. If you’re a large company with lots of employees, you can be seen as more stable than a company where the business owner is the only one on the books.
As you can see, some factors are inescapable for certain companies. A startup can’t help their lack of credit history and if you own a restaurant you can’t simply change your industry to boost credit. However, business lenders are often willing to work with companies with bad credit if certain accommodations are made.
Business Loans For Companies with Bad Credit
If you are running a company with one or more of the above risk factors bringing down your credit score, there are still types of financing available to you when you need to purchase equipment, boost cash flow, or pay your team. It sometimes helps to consider your company from a lender’s perspective as you think about where to seek out funding.
Lenders want to make money just as much as you do. And they really don’t like to lose it. So a lender considering whether to loan you money has to figure out how best to protect itself from that loss while also leveraging the nature of the funding to earn money. That’s why business loan applications sometimes ask for personal resumes and business plans in addition to credit reports and financial statements.
Each type of loan for businesses with bad credit is structured to protect lenders from losing money. Entrepreneurs considering these loans should know that they’re likely to be more expensive than other forms of lending, but that price is part of the give and take required to make them palatable to lenders.
In comparison to traditional brick-and-mortar financial institutions, many alternative lenders online are more willing to offer business funding to firms with checkered credit reports. They offset the risk of lending to a company with bad credit by typically offering smaller loans than might be available from traditional banks, while also offering them with higher interest rates.
The size of the loan protects the lender from significant financial losses. You can’t lose money you haven’t loaned, after all. And the high interest rate means that these lenders are maximizing the money earned on these small loans.
Smaller interest rates on larger loans make more money for lenders. But online lenders tend to avoid those gargantuan loan amounts. They create a low-risk, low-reward situation that earns money in the aggregate due to the fact that online lenders can work with companies anywhere at any time.
So if you’ve got poor credit, the first place you can look is online. You may find that you meet all of an online lender’s eligibility requirements despite meeting none of them at a traditional lender. Working with an online lender could allow you to take out a working capital loan or equipment loan without having to put up personal assets.
A secured loan is one way of guaranteeing lenders that they won’t lose money on you. Secured loans mean putting up a valuable asset as collateral. That way, if the business isn’t able to make payments, the lender can take possession of the collateral and sell it.
Equipment financing is one form of secured lending. The borrower makes a down payment on a piece of equipment, and a lender finances the rest. Equipment loans can be used to buy, rent, lease, repair, and even upgrade equipment, which is then held as collateral.
Some term loans and lines of credit will require collateral, up to and including a small business owner’s personal assets like a home or vehicle.
Crowdfunding is the practice of using a third-party company like Kickstarter, GoFundMe, or IndieGoGo to allow patrons to fund your company. In exchange for perks and rewards like early access to a product, your loyal customers will help provide funding. While these companies do take a cut of the donations, crowdfunding can be a helpful method of raising money even if you’ve got bad credit.
Many small business loan options for companies with bad credit will demand a personal guarantee from the business owners. Personal guarantees mean that the business owners are putting their personal credit score on the line in the case of default on a business loan.
These guarantees can lead to lenders being more forgiving on the credit scores of the businesses to whom loans are made. If you are sure that your company will be able to repay a new loan and have a good credit score that’ll appease lenders, using a personal guarantee can help achieve the necessary funding for your business.
Similarly, if you’ve got good credit as an individual, it’s possible to use a personal loan to fund your company. Bad credit business loans can be expensive and require difficult repayment terms or collateral. But if you’ve got a strong credit score as a person you might find that you’ve got better terms.
However, personal loans come with personal guarantees built in. There’s no longer separation between the business’s funds and the owner’s. Any risk or liabilities to the business become a risk or liability to the owner.
Revolving Credit Lines
Revolving lines of credit, like business lines of credit and business credit cards, are helpful options when your business has bad credit. In a revolving line of credit, the borrower doesn’t receive a lump sum. Instead, you’ll have access up to a certain credit limit and you’ll only need to make payments and pay interest on money borrowed under that limit.
That difference can be extremely beneficial for companies with bad credit. You only use the funding you absolutely need and pay interest as necessary. And then, once you’ve paid the debt down, you have access to it again.
On top of all those benefits, using a revolving credit line means building your business’s credit score. So it’s a win-win-win: you use the smallest amount of funding possible, pay interest only on what you use, and doing so helps your company set itself up for more favorable funding down the line.
Merchant cash advances and invoice factoring are two forms of transaction-based financing. These forms of financing are not loans. Instead, they involve companies purchasing something from your company in exchange for cash upfront. They often come with simple loan applications, fast funding, and quick decisions.
In a merchant cash advance, the cash advance provider purchases a percentage of your company’s future debit and credit card sales. You’ll then make payments each day depending on the volume of sales. On days you make more money, you’ll make larger payments, and vice versa.
Invoice factoring works by selling your unpaid invoices. The invoice factoring provider then takes over receiving payment on those invoices after advancing you a percentage of the total. If you’ve got $10,000 in invoices waiting to be paid, an invoice factoring company might pay you $8,000 up front, for example.
Because of the nature of transaction-based financing, they’re often more available to new businesses or businesses with lower credit scores. After all, a merchant cash advance is repaid through your daily sales. So if you can demonstrate that your business is processing a significant number of transactions each day, your poor creditworthiness won’t be as significant a factor.
While the United States Small Business Administration funds several types of business loans, microloans are most available to companies with bad credit. These loans are small, only up to $50,000. Like other SBA loans, microloans are funded through an intermediary lender. In this case, those are nonprofit community-based lenders. Some of those lenders don’t even require a credit check at all. If you’re looking for small amounts of funding (the average SBA microloan is only $13,000), these can be helpful targets.
Improving Your Company’s Credit
So now you know that there are options for borrowing if you’ve got a low credit score. But if your business isn’t in a desperate financial situation or if you’re just barely making it past a lender’s minimum credit score requirements, you may want to consider holding off in order to improve your company’s credit score. If that delay is possible, you might find that you’re offered larger loan amounts and lower interest rates, which can offset many of the downsides of the poor credit lending options discussed above.
There are a few ways you can help boost your poor credit score:
Pay off small debts
Use a credit card for small purchases.
Use seasonal business to get ahead
Make sure debts are reported to credit bureaus
Keep an eye on your credit report.