Maintaining a good credit score can be challenging. A slump in your business or a few slow-paying customers can cause your credit score to spiral into a freefall. Suddenly, you might find most banks won’t touch your business with a ten-foot pole.
Securing a business loan can be difficult when you have bad credit, but it’s certainly not impossible. There are many routes you can take to access the funding you need to keep your business going.
Financial challenges faced by business owners
Every business venture comes with its own set of unique challenges, which is partially why more than half of all new businesses fail in the first year.
Rising overhead costs and competition can squeeze profit margins to their breaking point. Equipment, rent, utilities, payroll, insurance, and marketing adds more fuel to the fire. Small business owners are often doing everything they can just to keep their doors open.
Cash flow problems lie at the heart of most challenges faced by business owners. And while cash flow takes time and perseverance to overcome as you grow your business, your bills and operating expenses still need to be paid on time. Finding viable financing isn’t just an option for many businesses – it’s a necessity.
The challenges of traditional lending
Any business owner can tell you that traditional lenders have high standards when it comes to qualifying an applicant for a business loan. It’s often a long and arduous process that can take weeks before you’re approved.
Traditional lenders require copious amounts of paperwork that include business leases, tax returns, bank account statements, background information, and much more.
You’re also required to create a business plan that outlines how you intend on paying back the loan. This business plan will act as a roadmap of your business and will show how the funds you are borrowing will be put to use.
If you are approved, you will be offered one of two loans – secured or unsecured. If your lender determines you’ll be able to meet your monthly payments, you’ll likely qualify for an unsecured loan.
Unsecured loans do not require collateral to act as a secondary source of payment should you default on your loan. If you’re given an unsecured loan, you’re considered a low risk to the bank. With that being said, you need a lengthy track record of profitability and success to be considered for this type of loan.
On the other hand, there are secured loans which require collateral but have lower interest rates than unsecured loans. If you present a risk to the bank, you will be required to back your loan with collateral of similar value.
For example, if you apply for a loan of $35,000, you will likely need to back it with collateral that’s valued at $40,000. Houses, cars, and equipment are often used as collateral for larger secured loans.
While traditional lending is a reliable way to fund your business once you’re approved, it typically isn’t an option for business owners with bad credit. Most banks will only lend money to borrowers with prime credit (720 or above).
Therefore, individuals who do not qualify for a traditional bank loan must explore alternative options for financing.
Alternative lending options if you have bad credit
When you need financing, and traditional lenders aren’t an option, you’ll need to find an alternative method to get the money you need. Thankfully, there are numerous alternative lending options to explore.
- SBA loans
Small Business Administration loans are a viable option when you find yourself in a pinch. The SBA lowers risk for lenders because the government backs a large percentage of the loan.
This makes business owners with bad credit more attractive to lenders. Be mindful that you need a credit score of 650 or higher to qualify for an SBA loan.
A disadvantage of SBA loans is that they tend to have higher interest rates than traditional lenders. SBA loans also require tedious amounts of documentation and a lengthy waiting period for approval. If you’re finally approved, however, you’ll find that many lenders will be more than willing to work with you.
- Business credit card
You’d be surprised by the sheer number of business credit cards that you can qualify for with bad credit. Qualifying for a business credit card is also far less arduous than applying for a line of credit at a bank.
Business credit cards are an excellent way to address cash flow problems. For example, you can easily purchase equipment, supplies, and other essential expenses even with an empty bank account.
If you make your payments on time and discipline your spending, your credit card can serve as a reliable way to build your credit back up. That said, it can be challenging to find a reputable credit card company when you have bad credit.
It’s also a guarantee that you will pay high-interest fees and start with low limits. Given time and good habits, your credit limit should gradually increase.
As the name implies, microloans are designed to help businesses deal with small scale problems with small loans. Microloans can be advantageous because lenders offer great flexibility when working with business owners.
Like business credit cards, microloans are an excellent option for rebuilding credit. As long as you promptly repay your loans, your credit will gradually improve. In addition, as your credit improves, you’ll be eligible for larger loan amounts.
The primary disadvantage of microloans is their small size. Microloans are great for putting together a modest marketing budget or making quick purchases for your business. However, they won’t help you if you need a large sum of money.
Furthermore, some microloans must be paid weekly. This may put pressure on business owners to produce a continuous flow of cash to pay off their loan before the end of each week. Despite this, the small size of the loan makes paying it back much easier than tackling the payments of a larger loan.
- Merchant Cash Advance (MCA)
With a merchant cash advance, a lender will advance you an upfront sum of money in exchange for a percentage of your future sales until you’ve paid the balance in full. MCA’s specialize in putting money in your pocket right away, allowing you to handle emergencies or unexpected expenses that may arise.
Approved amounts are determined by several factors that include the health of your bank statements, length of time you’ve been in business, terms of the advance, and your gross monthly deposits. MCA’s are not based on your credit. Therefore, business owners with poor credit can apply with no difficulties.
One of the primary advantages of an MCA is that the application and approval process is quick and painless. You can have money in your bank account in as little as 24 hours. Unlike applying for a traditional bank loan, little to no paperwork is required, nor is it mandatory to create a business plan to pay back the loan.
You’ll likewise enjoy highly flexible repayment options. There is no payoff date, no interest rates, and no fixed monthly payments. You’ll only have to pay a set factor rate that’s determined by the financial health of your business.
Payments on your loan will be automatically deducted from daily or weekly ACH payments based on how much the MCA lender believes you can afford. For example, 20% of your daily revenue may be deducted automatically to pay back the loan.
If you pay the loan back early, you may be eligible for early payment discounts. Once your loan has been paid in full, or if at least 50% of the loan has been paid off most MCA lending companies will allow you to take out another loan, providing a quick and easy way to get more funding when you need it.
One disadvantage of a merchant cash advance is that they tend to be more expensive than traditional bank loans. This is because MCA lenders are taking a risk by loaning money without the need for collateral, paperwork, or any other form of due diligence.
They are also taking a risk by accepting individuals who may have bad credit. Another disadvantage of MCA’s is that there’s not much flexibility to change merchant service providers. Once you’re locked in with an MCA lender, you’re stuck with them for the long haul.
This is a good short-term funding option as long as you know you can put the money to good use in 3 -18 months, as this is the average term length of most MCA loans.
- Tap into your personal network
If you’ve exhausted your list of financing options with nothing to show for it, try raising money by turning to family and friends. While this can be a great option to gather capital, use it with great care. It would be a great shame to ruin a close relationship due to money problems.
If you decide to tap into the financial power of your personal network, ensure both you and your loved ones understand the risks involved. Invest the money as you see fit, but make sure you pay it back – with interest of course – as soon as you can!
Funding is possible with bad credit
Don’t let poor credit stop you from getting the funding you need to operate your business. There are plenty of alternative financing options available for businesses with poor credit. We encourage you to do your research and see what works best for your situation.
If you need fast cash, but you’re struggling with bad credit turn to Rise Up Capital. Our application process is fast and easy, and a business with a poor credit score can receive funding in as little as 24 hours. We require little to no paperwork and you won’t need a business plan. Apply today to get started.