Business loans are complicated enough, but when you throw a low credit score into the mix, it can seem all but impossible to get a loan that meets the needs of your business. Luckily, if you have a low credit score, all is not lost. There are still many ways that you can receive business loans - low credit score and all. Follow along as we discuss the best methods of applying for business loans, pros and cons of loans, and how best to find a loan that works for you.
Options for Business Loans With a Low Credit Score
For better or for worse, your options for business loans with a low credit score (typically below 600) are somewhat limited. Depending on just how low your credit score is, some of these options may or may not be feasible for your situation, but it’s a good idea to examine all possibilities and ask questions of potential lenders to see if you meet their requirements.
Short-Term Business Line of Credit
A short-term business line of credit is a great option for businesses and individuals with a low credit score. A line of credit functions similarly to a credit card, allowing you to borrow up to a certain limit, with interest charged only on what you use. You can pay it back and borrow money again.
A line of credit may be secured by collateral or unsecured. It may depend on the exact credit limit you request and the lender you work with. A short-term line of credit typically lasts between six months to a year, which makes it easier to get when you don’t have a well-established credit history.
Short-Term Business Loan
Short-term business loans are offered primarily through online lenders. One of the main advantages of choosing a short-term business loan is that you usually get your funds pretty quickly after you make the request.
However, short-term business loans typically come with higher interest rates, typically ranging from 10% to 25%, and you’ll likely be expected to start paying it back pretty quickly. Instead of monthly payments, many short-term business loans require weekly or even daily payments to be made in order to remain in good standing with the lender.
A short-term business loan typically needs to be repaid within two years of receiving it, though the exact loan terms will vary from lender to lender. Because of the short amount of time you have in which to repay the loan, you want to ensure that you’re not borrowing more money than you’re capable of paying back.
How to Get a Business Loan With a Low Credit Score
While it may be harder to get a business loan with a low credit score, it’s certainly not impossible by any means. Show up prepared with everything you need to give yourself the best chance of getting approved, whether you apply online or in person. Be ready with documents such as your business plan, financial statements, tax returns, bank statements, and any relevant licenses or permits.
Your Business Plan
Whether your company is just getting off the ground or it’s been running for decades, you’ll want to have a good business plan to show. A good business plan will outline the goals that you have for your business and the strategies that you’re implementing to achieve them. Remember, the more detailed your business plan is, the better the chances of securing a loan. If possible, include financial reports including your business expenses, profit, and profit projections.
Business Tax Documents
You’ll also want to provide tax documents for your business. When your business is in its infancy, you may not have this information. In that case, you’ll need to provide your own personal tax documents. Plus, with low credit score business loans, lenders often require personal tax documents to assess your financial situation.
If you’re wondering how much information is really required to get a business loan, the answer truly depends on the lender. However, it’s always better to provide more information than they need than not enough. Your main goal should be to make it as easy as possible for them to say yes to the loan.
If you are not approved on your own, you might want to find someone willing to cosign with you.
Pros and Cons of Getting A Business Loan With a Low Credit Score
There are pros and cons to everything, and securing a business loan with bad credit is no exception. Whatever you choose to do, it’s useful to weigh the pros and cons against against your personal situation to make an informed decision.
Pros
Luckily, there are reasons why it might be worth looking into business loans. Low credit scores shouldn’t deter you from making the best choices for your business.
Raise Credit Score. Taking out a loan and paying it back on time can improve your credit score in the long run. Set aside an emergency fund to ensure you can make timely payments and improve your credit score. This will ensure that the loan gets paid off, even if unforeseen circumstances involving your business come up that may otherwise hinder your ability to pay.
Easy to Acquire. The good thing about business loans for those with subpar credit is that they tend to be relatively easy to get, with quick turnaround times that can have you tending to the needs of your business within a day or two should you be approved.
Cons
On the other hand, there are also some cons that you should consider before getting a business loan with a low credit score.
Higher Interest Rates. With a low credit score, lenders take on more risk. To compensate for this risk and protect the lender should you default on your loan, you'll likely face higher interest rates.
Lower Loan Amounts. Because lending to someone with a low credit score comes with an inherent risk, many lenders will have a cap on the amount that they will allow you to borrow.
Collateral May Be Necessary. Typically, anything that you buy for your business using the money from the loan is considered to be collateral. Anything from vehicles to equipment to the products you may have in stock can be repossessed as part of collateral. Many loans will also require a personal guarantee, which means that you are held responsible for paying back the money. Not following through may result in legal action.
Alternatives to a Business Loan
If getting a business loan isn’t an option for you or you’d rather exhaust all of your other options first, there are alternatives to getting a business loan with bad credit.
Rebuild Your Credit. If you need a business loan but don’t need it immediately, try taking some time to build your credit and apply in the future. It can take anywhere from several months to several years to fully rebuild your credit, but every point you gain toward an excellent credit score makes it that much easier to secure a loan.
Crowdfunding. Instead of going with a traditional loan, crowdfunding can allow other people to donate money to support your business goals. Plus, if your business idea is superb and you’re a good marketer, you can quite literally have people from all over the world supporting your business. Crowdfunding is also a great option when your business is just getting started, as many traditional loans can’t even be obtained until you have been in business for a certain amount of time.
Grants. Investigate the grant opportunities in your area to find out if something works for you. Midsize to large cities are often looking to increase diversity in local businesses, so even if you don’t know if you’d qualify, it doesn’t hurt to look around and see what options are available for you locally.
Ask Family. It may be embarrassing to ask, but your friends and family members might be able to help out, and may be more likely to give you some leeway on the repayment terms. Plus, you likely won’t have to provide any documents or sign any official contracts with a friend or family member. That being said, you should still consider drawing up a formal agreement with your lender, even if they are a family or friend. Being diligent in this manner may save you both a huge headache in the future.
Where Can I Find Business Loans With a Low Credit Score?
A low credit score can certainly put a damper on your ability to find a loan that works for you. At BusinessLoans.com, we strive to match business owners with lenders that are best for their situation, which saves you valuable time and resources. Don’t delay; start your application today and find the best business loans, low credit score and all!
