How to Get a Business Loan With Bad Credit

By Rohit Arora Published September 10, 2013 Small Business

Business loans bad credit

While the small business lending landscape has been steadily improving over the past year, challenges still remain, particularly for companies that have less than stellar credit histories. Many banks are not willing to provide capital to small business owners who have below average credit scores.

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There can be valid reasons why a company might have a poor credit history. During the Great Recession of 2009-10, many small businesses fell behind in payments to vendors or simply could not correct their cash flow issues quickly enough. After all, the hardest time to secure credit is when you are desperate for it. The black marks on a company’s credit history can take months — even years — to erase.

Fortunately, there are lenders who are willing to take chances on a small business owner who may have run into some short-term financial problems and startup companies that have no credit history whatsoever. However, remember the lenders are usually not brand names in the financial services industry; and the interest rates and fees can sometimes be higher than those offered by traditional banks.

Here are some financing options available to business owners with lower than average credit scores:

Merchant Cash Advance is a short-term loan paid in a lump sum to a business owner in exchange for a portion of a company’s future credit-card sales. Companies involved in this type of financing offer quick access to cash without requiring excellent credit or substantial collateral. Some cash advance companies will approve funding requests and forward money in as little as 48 hours. Interest rates are often a bit higher than what traditional lenders charge, however.

Business Credit Cards can provide business owners with poor credit histories access to debt financing. Opening a credit rebuilding credit card is one of the best ways for a business owner to repair previous credit damage.

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Microloans are made by non-profit organizations, such as Accion (http://www.accionusa.org), which will grant small loans (up to $50,000) designed to help startups owned by women and minorities, as well as companies that are established in economic empowerment zones. Loans are also available through the Small Business Administration’s (SBA) Microloan Program, which lends funds through non-profit community-based intermediary lenders. Microloans are a great option for businesses with bad credit or no credit histories because their credit requirements are typically more lenient.

The good news for small business owners is that there are ways to improve credit scores. Here are some tips for repairing damaged credit scores:

Check business credit reports periodically

A business’s credit score is derived from a complex mathematical equation designed to predict the likelihood of default. Credit ratings agencies, such as Equifax and D B, examine:

  • company size and business structure
  • industry risk
  • outstanding accounts payable balances
  • payment habits and credit utilization
  • length of credit history
  • public records (judgments, liens, bankruptcies)
  • other factors

Pay bills on time

Late or missed payments negatively impact credit scores. The most important thing is to remain current. Fortunately, recent payment history counts more than older credit problems. Thus, negative issues will eventually fade, and credit problems fade with the passage of time. However, a collection account will remain on your credit history for seven years.

Be cautious with credit cards

Even if your personal debt is problematic, building a positive history of business transactions can enable you to establish a track record of creditworthiness. For this simple reason, it is wise not to co-mingle business and personal bank accounts. Once accounts are separated, be sure that company payments are in order.

My advice to someone who is just starting to build a business credit history is to open a business credit card and make consistent, prompt payments. Some people open numerous credit cards in an effort to increase available credit. In fact, if you open too many credit accounts too soon, the impact will be negative. It is more effective to have one card and to pay it off in full each month.

Incorporate your business

Incorporating makes your business appear more serious. Once you have legally established your business, set up bills (phone, electric, etc.) in the company’s name. If you need small business loan, banks are more likely to make grant funding to a company that has an established address and pays its utility bills each month than they are to a freelancer working at home.

Pre-pay bills when possible

Vendors may offer discounts for pre-payment. If your company is in a position to pay early at a reduced rate, you can cut your operating costs and ultimately improve cash flow. As an added bonus, vendors whom you pay early will likely serve as credit references if you need them in the future.

Run a lean, profitable business

Every company’s goal is to be profitable. Manage staff schedules wisely, particularly when business is slow. Keep inventory at reasonable levels.

Banks are taking a risk by providing capital to small companies. When you apply for a small business loan or a line of credit, lenders want to be assured that you are a good credit risk. That means being fiscally prudent, paying bills on time, and building a solid credit history. These tips seem rudimentary, yet they are very important. For more information, you can visit Biz2Credit’s credit improvement page.



Short-term business loans

Most businesses will need to borrow money at some stage either to help with cashflow, or to pay for expansion costs, and a short-term business loan can provide the ideal solution. Although recent years have seen a reduction in the number of business loans on offer, there are still plenty of options available to explore.

The providers below are ranked by the following scenario; taking out a loan of £10,000 over 6 months. Ranked by the least you would need to pay back in total over the period.

Rates from 4.5% per year. Terms from 6 months – 5 years

Apply online get a decision typically in 24 hrs

You ll have a dedicated Account Manager from start to finish

Minimum criteria: Two years+ filed accounts at Companies House or formally prepared accounts for non-limited businesses.

Small business loans

Borrow up to 250,000 unsecured and up to 500,000 secured

Terms from one month – four years

If approved, funds are sent within hours of signing your agreement

Early repayment fees do not apply – repay early, pay less

Top-ups and payment holidays available after three months of successful repayments

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Early repayment fees don t apply

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How our site works

We want to show you short term business loans from as many lenders as possible, so you have plenty of choice. Not all lenders want to be included on comparison websites, so we can’t promise to show you loans from every single one. We’ve looked at how much it would cost to borrow £10,000 over 6 months, including fees, and we’ve ranked the lenders from the cheapest to the most expensive. You can find out more about how we work here.

Advantages of short-term business loans

The main advantage of opting for a short-term business loan is that you know your business will only have to make repayments for a limited period of time. You will also usually pay less interest overall than if you opted to repay what you owe over a much longer term, such as five years.

Disadvantages of a short-term business loans

Choosing to take out a short-term business loan may mean that you will be able to pay off what you owe quickly, but bear in mind that your repayments will be much higher than if you opted to repay your long over a medium or long-term period. Interest rates can be very high on short-term borrowing, so it’s worth comparing lots of different loans to ensure you find the right deal for your business’s needs.

What else you need to know

Difficult economic conditions in recent years have made it harder for businesses to borrow money. To apply for a business loan, your business may be required to have a minimum monthly turnover, and you may have to show a set number of accounts, usually two or more years.

Remember too that the actual rate of interest you will be charged on a short-term business loan will depend on your business’s individual circumstances, the amount you want to borrow, and over what period you intend to pay off what you owe.

Alternatives to a short-term business loan

If you don’t think your business will be able to pay off any borrowing over a year or less, then you might want to consider a medium or long-term business loan which can be repaid more slowly.

Other options include using a business credit card for any immediate expenses. These can also be a useful way to manage staff spending. You could also speak to the provider of your business bank account about arranging a business overdraft which can provide you access to funds as and when you need them. You can usually arrange an overdraft for a 12 month period, at which point it will have to be renewed.

Businesses can also raise funds though cashflow finance, which allows then to borrow against the value of their



Small Business Loans

Of the total people who leave their jobs, almost 38 percent cite not being able to work the way they would like to, or the constant nagging of their boss as the primary reason. Another reason people quit their job is because they are considering being their own boss by starting a small business. But it is not an easy task. You need an actual business plan and approach, the proper license(s), and most importantly, the necessary financial resources (typically small business loans) to insure your businesses starts off on proper footing.

As defined by the Small Business Administration (SBA), a small business is any business venture which has less than 500 employees and less than $7 million in annual receipts. In the United States, there are various types of small business loans to satisfy the business plan being presented to the lender.

The Different SBA Loan Programs

Businesses with special requirements (such as those in exports or those operational in rural areas) are covered under this program. This is considered to be the most flexible choice, and also the most suitable one if you have a start-up in mind. The different 7(a) loan programs are:

  • Special Purpose Loans: offers 7(a) loans to those businesses which have been affected by NAFTA, to assist Employee Stock Ownership plans and so on.
  • Export Loan Programs: fewer than 70 percent of the total export businesses in the U.S. have a maximum employee count of 20. The various export loan programs further expand their export activities.
  • Rural Business Loans: this program is aimed at providing a simpler and more streamlined 7(a) process to acquire loans for businesses operating in the rural areas.
  • Microloan Program

If you are in need of small, short-term loans, then the Microloan program is just the right deal for you. You can use Microloan funds for:

  • Purchasing supplies or inventory
  • Purchasing machinery
  • Purchase of furniture

The Microloan fund cannot be used for the purchase of real estate or for the paying off of any existing debts. The maximum Microloan amount is $50,000.

Spanning long-term financial planning, the CDC/504 Programs provide a platform for the development of the community as a whole. The loan sanctioned under this program provides small businesses with fixed-rate financing. These finances are then utilized to acquire assets which are mainly aimed at modernization, such as commercial mortgages, street-improvement utilities, and so on. Your small business should be operated with a profit-seeking intention, but should not be engaged in the investment of real estate.

Loans for Women-Owned Business

Being a women entrepreneur, the world can be yours for the taking if you plan the expansion of your business correctly. It is advised that you visit the SBA Office for Women’s Business Ownership for further information related to the different types of grants and loans available to women and counseling on the same. The National Women’s Business Council is another federal advisory body which addresses various economic issues and offers advice to female business owners.

Small businesses still account for over 80 percent of new job opportunities. The path to own and run a small business is open to everyone. In fact, minority groups and those affected by a disaster can avail the various small business loans which are specifically designed for them. So do not be afraid to stand out of the crowd; you do not need an MBA to make this happen. It can be more rewarding that you ever imagined.



3 ways to get a small-business loan

The recovering economic environment has meant that small businesses have had to be more creative when looking for loans.

However, companies with sound business strategies still can borrow. Options include loans from traditional banks and institutions affiliated with the Small Business Administration, as well as financing from Internet-based lenders.

“For creditworthy, high-scoring small businesses, there is money available,” says George Cloutier, CEO of American Management Services, a consultant to small businesses.

Bank loans

The best place to get a small-business loan is still a bank, says Cloutier. Banks typically offer the lowest interest rates and many have established reputations as trustworthy lenders.

“Many small businesses try three or four banks and then stop looking,” Cloutier says. A more persistent approach has better odds of success.

Calculate business loan payment

Want to calculate your small-business loan payment? Go to Bankrate’s loan and amortization calculator.

“Take out the phone book, target 10 banks and work through that list,” he says.

That strategy worked for Michael McKean. He is founder of The Knowland Group, a company that helps hotels fill up their meeting space.

A few years ago, as the success of The Knowland Group grew, McKean began searching for a bank that would give the growing company expanded access to credit.

“We talked to every bank in our area, at least a dozen,” McKean says. “Many came back with proposals, but the terms were very onerous. Or sometimes they shifted terms.”

Finally, M T Bank came through.

“They just wanted to get our business,” McKean says.

McKean says his company did not approach M T any differently than it had approached the other banks. It was just a matter of being persistent until the right deal came along, he says.

“We did everything right, approaching the right person at each bank,” he says. “We’re a profitable business. I think it was just the … credit crunch that prevented us from getting a loan.”

Cloutier says the key to success with banks is to show past profitability, and to describe a well thought-out plan for future profits.

“If you aren’t making a profit now, you must be able to tell the bank how you will change that in the short term, or you really won’t be able to get a loan,” he says.

He also recommends that businesses start small in their loan requests.

“If you need money for four trucks, ask for two,” Cloutier says. “The bigger the loan request, the harder it is to get it approved.”

SBA loans

Another way to find a bank loan is through the Small Business Administration, or SBA. The SBA can direct you to banks that offer loans guaranteed by the agency. This way, you’ll have the advantage of approaching banks specifically interested in lending to small businesses.

Interested businesses should contact the SBA office nearest to them, which can be found on the agency’s website. Jeanne Hulit, the SBA’s acting administrator, urges businesses to seek a bank that is an experienced SBA lender.

Banks granting SBA loans place increased emphasis on business plans, cash flow and profit forecasts in deciding whether to lend, she says. The SBA also can refer businesses to free counseling centers to improve their performance.

Online opportunities

Another source for loans is the Internet. There are several sites where businesses can seek alternative lenders, such as individuals and small companies.

Interest rates are generally a little higher than what a bank will charge, but it’s much less than what you’ll have to pay on many credit cards.

Look around at different sites, some may charge a one-time fee to list your business, while others are free to list but might have fees reflected in loan rates.

If you’re going to list your company on one of these sites, describe your business in clear and concise language.

Lastly, make sure to investigate the company you are looking to post your business on. These kinds of companies were successful in 2008 and during the recession, but times have changed. Many have since gone out of business. Before paying for anything, make sure the company is legit.



Short-Term Business Loans and Debt Financing

Short term business loans

Both debt and equity financing have a rightful place in all but the smallest of businesses. If we focus on debt financing, most small businesses have traditionally gotten most of their business loans from commercial banks in the form of term loans. Those term loans may have short, intermediate, or long maturities. The different lengths of maturities signify not only different time periods in which the firm can repay the loans, but different purposes for the loans as well.

What Are Short-Term Business Loans?

Small businesses most often need short-term loans instead of long-term debt financing. Most term loans, classified as short-term, usually have a maturity of one year or less. They must be repaid to the lender within one year. Most short-term loans are often repaid much more quickly than that, often within 90-120 days. Term loans with short maturities can help you meet an immediate need for financing without requiring you to make a long-term term commitment.

Purposes of Short-Term Debt Financing

Short-term loans are helpful to businesses that are seasonal in nature such as retail businesses who have to build up inventory for the holiday season. Such a business might need a short term loan to buy inventory well in advance of the holidays and not be able to repay the loan until after the holidays. That is the perfect use for the short-term business loan.

Other uses for short-term business loans are to raise working capital to cover temporary deficiencies in funds so you can meet payrolls and other expenses.

You may be waiting on credit customers to pay their bills, for example. You may also need short-term business loans to pay your own bills; i.e. to meet your own accounts payable (what you owe your supplier) obligations. You may just need a short-term loan to even out your cash flow, particularly if your company is a cyclical business.

Qualifying for a Short-Term Loan

In order to qualify for a short-term loan, you will have to present comprehensive documentation to your lender, whether it is a bank, a credit union, a mutual bank, or some other type of lender. The lender will want, at least, a record of your payment history for other loans you may have had, including payment histories to your suppliers (accounts payable) and your company s cash flow history for perhaps the last 3-5 years. You should also be prepared to hand over your income statement for the same amount of time if the lender requests it. All documentation should be in a professional format.

Your qualifications for a short-term loan will help determine whether or not the loan will be secured by collateral or whether it will be an unsecured, or signature, loan.

Short-Term Versus Long-Term Loan Interest Rates

In a normal economy, interest rates on short-term loans are higher than interest rates on long-term loans. In a recessionary economy, however, interest rates may be low and short-term loan rates may be lower than long-term loan rates. Short-term loan rates are usually based on the prime interest rate plus some premium. The bank or other lender determines the premium by determining what risk your company is to them.

They do this by looking at the documentation you provide them in order to qualify for a short-term loan.

Short-term loan interest rates can be calculated in a number of ways. You want to get your lender to calculate the interest rate in the way most affordable to you. Take a look at the different ways short-term interest rates can be calculated and use this as your guide when talking to a bank loan officer. Also, be sure that you are knowledgeable about the current prime interest rate so you can talk intelligently to the bank loan officer as you negotiate the interest rate on your short-term loan.

Loans for Start-up Businesses and Small Businesses

It is possible for a start-up company to secure a short-term loan. This is because short-term loans are less risky than long-term financing simply due to the fact of their maturity.



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