Running a business, be it big or small, is no easy task.
For small businesses, it doesn't matter what type of business you have or what industry you're in, without the proper funding, your company will struggle to survive.
There is nothing wrong with taking out a loan to give a cash injection into your small business.
Whether you have a brand-new startup company or an older and established business, there are loan options available for everyone.
But what if you have bad credit?
If you're a small business owner with bad credit, you may be worried about applying for a loan for the fear of getting rejected—or perhaps you've already applied in the past and been rejected.
Maybe you fall somewhere in the middle of these two scenarios.
You could have been approved for a small business loan, but the terms you got were unfavorable because of your bad credit.
Regardless of your situation, this guide will definitely help you out.
If you have bad credit and own a business, follow along closely, and I'll show you exactly what you need to do to secure a small business loan.
Write a Business Plan
Business plans are necessary for all small businesses
It's a common misconception that business plans are just for new companies.
Even if you've been in operation for years, you should still write a plan before applying for a loan.
There are lots of reasons why this is necessary.
First of all, this plan will help you out tremendously when it comes to managing your small business.
Sure, you may have an idea or two in your head for what you want to do and how you want to accomplish it, but putting it on paper drives you to take action toward achieving it and also forces you to be more accountable.
It will also give you a much better understanding of exactly how much money you need.
Now you can ask for a loan that's appropriate based on that amount.
A well thought out business plan also shows prospective lenders that you're serious about your growth strategies.
If you have bad credit, lenders will be less willing to give you money without asking further questions.
But if you can show them exactly what the money will be used for and how you plan on paying them back based on your financial projections, lenders will leave you with a lot more room for negotiation.
That's why the financials section of your business plan is arguably the most important in terms of getting a loan approved.
So outline your expected costs in addition to your projected revenue for the next two to five years.
You can even factor the monthly loan payments into these calculations to really show the prospective lender that you've accounted for everything.
Know Your Credit Score
Improving your personal credit will help you get a small business loan
As a business owner, there are certain loans that require a minimum credit score to apply.
So you'll need to know what your credit score is before you can consider anything like that.
I recommend taking advantage of free tools for monitoring your credit score.
Knowing this exact number will give you a better idea of how bad your credit really is.
Who knows? You may discover that you're not in as bad of a situation as you initially thought.
In addition to just looking at your credit score, you should also review your entire credit report.
You may discover errors on the report that could potentially be hurting your credit.
I'm referring to things like closed lines of credit appearing as open or paid bills showing as unpaid.
If you find any errors on the report, you can dispute them for removal. Even if you see things on your credit report that are factual, but hurting your score, you still have the opportunity to send a letter to the credit reporting agency and ask them to remove it.
Tell them that they don't have the legal right to share your personal financial information.
Taking these steps will help you boost your credit score fast.
You should also take other measures to increase your credit score, like settling unpaid debts and making payments on time.
If you increase your personal credit score, it will be much easier for you to get a loan for your small business.
Lenders will see that you're responsible and able to make payments.
Repair Your Business Credit Score
Important for businesses that are already established
If you're applying for a small business loan as a new business owner, your personal credit score is going to play the most significant factor.
But for companies that have been operating for years, you may have a separate score for your business.
While personal credit scores typically range from 300-850, a business credit score is based on a 0-100 scale.
The score is determined for accounts under your company's name, as opposed to your personal name.
Just like we did with your personal credit score, you'll need to learn your business score, verify that the information the report is accurate, and dispute any errors.
To improve your business credit score, you'll need to catch up on any late payments and settle debts with vendors.
Get a separate credit card for your business and make payments on time.
As you can see, loans aren't the only way for small businesses to secure funding.
Small business credit cards are another viable option, especially if you want to improve your business credit score.
By boosting your business credit score, it will be easier for you to secure a small business loan, even if you personally don't have the best credit.
Consider Alternative Lenders
Banks aren't your only option for small business loans
When most people need a loan, they assume that they need to go to a bank.
Don't get me wrong; I'm not saying that you can't get a small business loan from your local bank, but I think it's important for you to be aware that you have other options.
More than 60% of small business owners seek loan options from banks.
But less than 25% of those businesses had their loans approved by big banks.
Getting a loan approved by a bank depends a lot on what kind of credit score you have, so if you have bad credit, you'll need to consider alternative options.
Visit a credit union. Unlike banks that are owned by shareholders, credit unions are owned by its members.
If you have a credit union that's associated with your local community, they may be more likely to overlook your bad credit and make a judgment based on your character or the worthiness of your business' cause.
Approach a credit union or an alternative lender with a bulletproof business plan and show that you'll be able to repay your debt once you get the funding you need and get things going.
This will increase your chances of getting approved, regardless of your credit score.
If a bank approves your loan, chances are it may not have the most favorable terms because of your credit score.
But alternative lenders can offer you a small business loan with lower interest rates than the banks', which will obviously help save you money in the long run and make it easier for you to pay back your debts.
Use your assets to secure your loan
If the reason why you need a small business loan is to purchase new equipment, this will probably be your most viable option.
The purchased equipment will be used as collateral for the loan.
In the event that you're unable to repay the loan, the assets can be seized by the lender.
The great part about equipment loans is that lenders will usually be willing to finance at least 80% of the cost.
In some cases, you may even be able to get a loan amount that covers the full amount of your new equipment.
The reason why it's easier to get approved for an equipment loan even if you have bad credit is because of the collateral.
The lender will be more willing to look past your poor credit history in this scenario.
Moreover, secured loans typically come with lower interest rates as well.
Merchant Cash Advances
Your credit card sales can help you get a loan
For small businesses with lots of credit card sales, you can consider a merchant cash advance loan if you have bad credit.
Unlike a traditional loan with a fixed monthly rate, merchant cash advances are based on your future credit card sales.
The loan gets paid back on a daily basis based on a percentage of credit card sales each day. So this amount will vary.
There are drastic ranges in costs associated with merchant cash advances, so shop around to find one that's reasonable.
Again, this is definitely something that you'll want to consider if you're a business owner with bad credit.
Even if your score is low, you can still get a loan if you're able to show a history and projection of high credit card sales.
This gives the lender some assurances that they'll be paid back based on these numbers.
Seek a Credit Partner
Investors can help your small business grow
If you need money and you're struggling to get a small business loan, you may want to consider bringing in a business partner.
There are definitely pros and cons to this type of funding.
One of the main benefits, outside of the monetary ones, is that a business partner (especially one that has business experience) can help you run the company.
They'll be able to take on some of the responsibilities as well as the risk.
But the main downside to this option is that you'll be giving up equity in the business.
If you're trying to raise money for your startup company, you'll definitely need to have a solid business plan, as we previously discussed.
Compared to banks who earn via loan interest, investors and venture capitalists stand to gain substantially more should your business plan succeed and deliver.
That is why they are more willing to look past a poor credit history if you have a great idea and a well-thought-out plan to make profits with your new business.
Securing funds from outside investors will eliminate the need for you to seek a loan from traditional lenders.
Great for businesses with regular bank deposits
Revenue-based financing is determined by the cash flow of your small business.
You need to meet certain eligibility requirements for this type of loan.
They may require a certain minimum credit score and minimum gross annual sales.
Your business also needs to have a minimum amount of bank deposits into the business checking account on a monthly basis.
But if you qualify, you'll be able to secure a loan amount based on your sales.
Revenue-based financing can get you funds up to 10% of your company's gross annual sales, even if you have bad credit.
Business Line of Credit
Loans aren't the only way to get your small business funded
Loans provide you with a lump sum of cash. But lines of credit may be easier to qualify for if you have bad credit.
That's because the funds are only given to you on an as-needed basis.
They are similar to a credit card. You have a limit, and you can only borrow up to that amount.
One of the best parts about a business line of credit is that you only pay interest on the amount that you use as opposed to the full amount of the credit line.
So if your credit line is $10,000, but you only borrow $2,000 (because you only need this amount to cover this month's operations), you only have to pay interest on the $2,000.
And once you pay it back, with a little interest, your credit line is back to its full $10,000 again.
Securing a Bad Credit Small Business Loan
They say entrepreneurship is the real key to financial stability and independence.
As a business owner myself, I believe everyone deserves a shot at starting and growing the business of their dreams.
And bad credit shouldn't stop you from securing the funds needed for your small business.
The process may not be as simple compared to the case when you have Excellent credit, but it's definitely within your reach.
You just need to take the right steps and explore all of your options.
Know your credit score. Make an effort to improve it.
In addition to your personal credit, you also need to consider your business credit score.
Banks aren't your only option.
Need money to invest in much needed equipment? Secure a loan with collateral by applying for an equipment loan.
Take a good look at your business, its past and projected future operations.
Then consider other options like merchant cash advances, revenue-based financing, and personal lines of credit.
If you're a small business owner with bad credit, it's important for you to realize that all of these options are available for you.
Do you have a success story of securing a small business loan with bad credit?
We'd love to hear it.
Share it with us in the comments section.