Can you get a business loan with poor credit?

Commercial banks and financial institutions do not prefer lending to individuals who have poor credit because it increases their chances of losing their money along with accrued interest. The same rule applies to all businesses seeking loans from these institutions. It means that if you are running a business, and you suddenly find yourself looking for credit, you may have to try it from elsewhere owing to your poor credit rating.

However, there are several avenues available, other than the traditional lending institutions, where you can get your desired amount as a loan.

What is Poor Credit Rating?

The exact score that will land you in the weak credit list may vary from lender to lender based on their specific SOPs; however, any rating less than 620 is considered inadequate. A credit rating is a set of financial information regarding a particular person or an entity.

The more negative items on your list, the weaker your credit rating becomes. These negative items include (but are not limited to) late payments on your previous loan installments accumulation of massive debt, foreclosure, and insolvency, etc.

Business Loan Options for poor credit

Having a poor credit rating renders you ineligible for a business loan primarily due to the strict credit control regimes set up by commercial lenders, making it more challenging to obtain a loan.

You can, however, opt for alternative small business loans if your credit rating is low, but you will also have to agree on paying higher interest on the said loan. It is because the lenders tie your interest rate with your poor credit rating, which becomes a high risk for him. In a nutshell, the more risk a lender covers, the higher the interest rate varies.

Proper Documentation

To get a business loan with poor credit, you will also need to keep your documentation ready and organized at all times. You must be able to show a prospective lender that you can pay back the loan. A consistent and robust business cash flow is a good example. It allows the lender to understand that your cash flow will easily cover the monthly installments.

Collateral

You must also be prepared to offer the lender, a guarantee against the loan. It could be anything from your car, your house, or anything that holds value. Collateral serves as a security for the lender that he can sell off if you’re not able to repay your loan. The proceeds from the sales of such collateral will be able to repay the loan and accrued interest on that loan.

Business Tenure

If you have been in the business for some years, a lender will find it suitable to lend you the required amount. However, if you are a new entrant, lenders will become reluctant, because no one wants to bet on a new and inexperienced horse.

Other Options

Microloans

By definition, Microloans are minimal loans spanning over less than 12 months. Lenders provide these loans to small businesses that are low on capital. Since the amount of microloans is minimum, a lender will find it easier to disburse it. Microloans are also offered by the U.S. Small Business Administration, for enhancing the working capital of the business and also provided by consortiums and credit unions.

Online Lenders

Online lending is also a viable option for business owners with poor credit ratings. It involves several investors over the internet who contribute small amounts of money to provide a single loan to a businessperson. The fund contributors review your loan application, analyze your business profile, and then would decide whether they should sanction you a loan or not.

Although multiple lenders are involved in the financing of loans, the borrower does not need to repay all of them separately. A single monthly installment covers all the lenders. This type of lending is rather novel in its approach. Its processing is much faster as compared to the traditional lending procedure.

However, the lenders in such a setup may require a personal guarantee from you. It could, however, jeopardize your finances in the long run if you fail to honor your commitment. Again, interest rates are also higher on these loans compared to traditional interest rates.

Invoice Financing

If you have a poor credit rating and you still want a loan from your business, you may opt for the phenomenon known as invoice financing. The idea is to get a loan for paying your outstanding bills. In reality, you sell your unpaid invoices to the lender.

The lender analyzes the previous payment history of your customers to decide whether they will finance your invoices. The interest rate on this kind of financing is very high, but invoice financing does allow you some breathing space when you are cash-strapped.

Friends, Family, and Acquaintances

If you have a poor credit rating, you can always turn to your family and friends to help bail you out of a difficult financial situation. It is a viable option, and many small businesses have flourished through the help of relatives. However, if you opt for this kind of financing, beware that it can impact your relationships.

The Final Word.

Getting a loan with poor credit is not an easy task. A lender regards this as a risk and either refuses the loan or charges exorbitant interest on such loans.

It is up to you to decide which loan you would prefer considering your projected cash flows, the state of your business, and the risk that you can take with your finances.