Whether you're an entrepreneur who's
ready to launch a new company or an established business owner seeking to grow
and expand, you know just how important a source of financing can be.
Loans are a popular source of capital for
business owners. However, what if your FICO score isn't that high? If you know how to get a business loan with
bad credit you'll
increase your chances of obtaining financing for your business.
Here's what you need to know when
applying for bad credit business loans.
What Are Bad Credit Business
Loans?
If you have a low FICO score or if your
business hasn't been operating for long you may not qualify for a traditional
business loan provided by a large bank or loan provider. That's where bad
credit business loans can be extremely useful.
●
A bad credit business loan is
designed specifically for customers with low credit scores
●
The lending criteria for bad credit business loans may
be less strict than those of other loans
●
The APRs for bad credit business
loans are usually higher while the repayment period may be shorter - typically
two years or less
Before applying for a bad credit business
loan find both your personal and business credit scores and assemble a few
documents related to your business. The other requirements are covered in more
detail below.
The Lending Criteria When
Applying For Bad Credit Business Loans?
Increasing your chances of bad credit
business loan approval begins with a better understanding of the criteria
lenders use to assess applications. These include:
- Credit scores - Both your
personal and business credit scores will be assessed by the lender.
- Debt-to-income ratio - This
is the ratio of your monthly debt payments divided by your total income,
both for you personally as well as your business.
- Company cash reserves -
Your business should have at least 3 months of expenses in cash reserves,
and some lenders prefer double this amount or more.
- Collateral - These assets owned by your business (like equipment and
vehicles) may be used to guarantee your loan. If your business exhibits
reasonably good turnover and more importantly, if your cash flow is
healthy, you may stand a good chance of being approved for a bad credit
business loan.
Your personal and business credit scores
will play an important part in the loan application process. Here's how they
work.
Personal Credit vs. Business
Credit Scores
You've probably checked your personal credit
score, also known as your FICO score, in the past before applying for credit.
Your personal credit score is calculated
by the three major credit bureaus - Experian, Equifax, and TransUnion and
ranges from 300 to 850. A credit score of 500 or less is generally considered
bad.
Business credit scores are also
calculated by Experian and Equifax, as well as by a specialized business credit
bureau called Dun & Bradstreet.
●
Experian's business credit score
ranges from 1 to 100, while Equifax's runs from 101 to 992. D&B rates
businesses between 101 and 670.
●
Each of these scores indicates the
bureau's confidence in a company's ability to honor its debts. Accordingly, the
higher the score, the more trust they place in your business.
Improving Your Business Credit
Score
It may be easier to obtain bad credit business loans
with a low credit score compared to other types of loans. However, improving
your business credit score is always a good strategy to reduce your loan APRs.
Here's how.
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Pay your bills on time - A business that
settles its credit installments and pays its suppliers on time will see its
credit score increase.
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Have your timely payments recorded - Contact
your creditors (including suppliers) and ask them to report your timely
payments to the credit bureaus.
●
Query any incorrect info - After you check
your credit report, follow up with the bureaus on any wrong information that
you've picked up.
●
Separate your business and personal finances -
By registering an LLC, you'll prevent your personal credit score from affecting
your company's score.
Bottom Line
Bad credit business loans are a good source of
capital for a new or expanding company - even if you or your business don't
have a perfect credit history.
