Most people who start their own business do so outside their comfort zone. You say goodbye to the security of a fixed monthly salary and you suddenly have only one idea of what tomorrow will bring. This is also the reason why the start-up phase is such an interesting learning period. This period brings both negative and positive experiences. The same is true when you search for the first time, the best and the cheapest commercial loan.
It is difficult to get a traditional loan from a bank if your credit is poor. Fortunately, there are many other sources of funding that you may be able to use;
CHEAP SOURCES OF REVENUE-BASED LOANS
Business Credit Cards: Using a business credit card not only gives you access to capital but can also help you improve your credit score if you make payments on time. As a result, a business credit card can be a good financing option for a start-up business that needs to establish a credit history. (Make sure you choose a business credit card that reports your payments to the major credit reporting agencies, but not all of them – you may need to contact the card issuer to obtain this information.) Since business credit cards have higher interest rates than many for other types of financing, they are better suited for financing small amounts that you can repay quickly.
Short-term loans: Traditional and alternative lenders offer short-term loans with terms of six to 24 months. Instead of a fixed monthly payment, some lenders automatically withdraw payments from your company’s bank balance daily, weekly, or monthly.
Short-term lines of credit: they offer conditions similar to those of short-term loans, except that it is a revolving credit (such as a credit card) rather than an installment loan (which requires fixed monthly installments). Business owners often use short-term loans or short-term lines of credit when they need working capital to pay for expenses such as payroll or inventory.
Invoice factoring: Small businesses with outstanding receivables can convert them into cash using factoring. Factoring companies buy your unpaid invoices for a percentage of their value (usually between 80% and 85%). The factor collects payments on your customers’ invoices and pays you the balance of the invoice minus the factoring fees. The value of your bills, not your credit score, is the primary consideration for the factors.
Bill Financing: Although similar to factoring, this method of short-term financing has some key differences. Instead of buying your bills, the finance company will advance the value of the bills. You are responsible for collecting payment from your customers and repaying the loan and all related costs.
Equipment Financing: Do you need to buy equipment for your business? This type of loan is used to finance the purchase of collateral equipment from the equipment itself (much like a car makes for a car loan). This helps keep interest rates relatively low, although those with bad credit pay more interest. Equipment manufacturers are the best place to look for equipment loans; there are also lenders of third-party equipment, including Currency Capital, CIT and Balboa Capital.
Microcredit: If you need a little money (between $500 and $10,000), microcredit from a non-profit organization might be the answer. These loans are mainly intended for business owners who live in disadvantaged communities or run socially responsible businesses. The goals of your business should also align with those of the non-profit organization, such as creating new jobs for people living in poverty. Poor credit is not a decisive factor for microcredit; however, the lender may ask you to regularly consult with professionals or attend business courses to approve the loan. You can check out popular credit organizations to learn more about microloans.
Merchant Cash Advance: Companies that accept a high volume of credit card payments (such as retailers or restaurants) may qualify for these short-term loans for people with bad credit. The lender gives you a lump sum amount compared to future credit card sales of your business and then collects a percentage of these sales every day. Since payments are based on sales, you will not have to make a big payment on a day when sales are slow. However, cash loans from traders have high-interest rates and fees, so most companies should use them as a last resort.
HOW TO GAIN BUSINESS LOANS WITH BAD CREDIT
To get a business loan with bad credit, do the following;
- Check your credit score: Check your credit score and your professional credit score by getting copies of your credit reports. Examine the reports for possible errors and contact the credit bureaus to dispute any errors. Knowing where your credit score is can help you determine the types of loans, you are most likely to qualify.
- Look for your options: Look for a commercial loan that will give you the amount of money you need at the lowest cost and whose repayment term is right for you. (Keep reading for more details on the different types of business loans for people with bad credit.)
- Develop a business plan: Some moneylenders request a business plan as part of your loan application. Even if your lender does not need it, writing a business plan is a wise decision. If your bad credit stems from money management problems, a well-designed business plan will help you avoid making the same mistakes with your business finances. You can get free advice on your business plan from expert SCORE consultants (Service Corps of Execute Executives) or your local Small Business Development Center (SBDC). Do you prefer the DIY approach? Try to search for business plan templates online.
- Provide a guarantee: Putting up a guarantee can improve your chances of getting a business loan with bad credit. If you cannot repay the loan, the lender will take your guarantee as payment. Avoid using your assets, such as your home, as collateral for a commercial loan. If your business fails, you risk losing your business and your home. Instead, choose a loan that allows you to use corporate assets such as equipment or overdue debts as collateral.
- Find a co-signer: If you want to get a business loan, but you have bad credit, see if you can find someone with a good credit score who is willing to co-sign the loan for you. Since this person guarantees that they will take care of the loan payments if you cannot, it is essential to make sure that they can afford it and that both of you are comfortable with this arrangement.