Business loans are not like small cash loans or payday loans. You will likely get the loan despite a bad credit rating when you have to borrow a small amount of money to fund your emergency. There are two reasons – the size of the debt is not big; you are to repay it in a period of two weeks in a lump sum, and you are funding your unforeseen expenses with this money.
However, when you are borrowing money for your business, the amount of money will likely be more extensive.
A lender will assess your repaying capacity and, above all, your business performance so they can ensure that you will not fall behind repayments.
However, the entire loan is to be repaid in instalments, and the size of these loans is not too small, so it involves a lot of risk on the part of the lender. This is why it can be challenging to have a lender sign off on your business loan in case you have a bad credit rating.
A poor credit score shows your inability to fulfil financial commitments. A lender will call your credibility into question, and they will likely turn down your application.
The question is whether you cannot get a business loan approved if your credit report is not perfect. A poor credit rating can make it challenging for you to get a business loan, but it does not mean that lenders have shut their doors.
Before you get to know how you can get a bad credit business loan, you should know it is necessary to take on debt.
Why are you looking to borrow money?
Bad credit business loans can be a bit expensive. It is not that easy to repay these loans. This is why it is suggested to ask yourself why you need to borrow money. You may have a couple of reasons. For instance, you need money to fund your working capital, buy equipment, or hire people.
Ask yourself if that is necessary or urgent to borrow money. Is it possible to wait for some time or find an alternative?
Suppose you can manage to survive your business without taking on debt. In that case, you should avoid taking out a business loan, and in the meanwhile, try to find out the ways to improve your credit score so in future, you can borrow money at affordable interest rates.
How can you get a bad credit business loan?
Getting a business loan approved can be quite complicated if you have a less-than-perfect credit score, but you still have some scope to earn money. Here is how:
Since not all types of lenders approve applications with a bad credit loan, it is suggested to apply to those who actually accept poor credit applications.
If you randomly keep applying to lenders to have your business loan approved, your credit score will further go down because of multiple hard inquiries.
This is why it is suggested to do research beforehand. Visit the websites of all lenders and find out if they have a clause of entertaining applications from people with bad credit ratings. Apply to only those lenders who entertain applications of bad credit business loans as well.
Most borrowers do not bother researching and applying to even those lenders who straightaway turn down applications from bad credit borrowers. This results in multiple-times rejections, which leads to a further plummet in your credit score.
This is also one of the reasons why your credit score becomes from bad to worse and makes it all but impossible to borrow money at affordable interest rates.
Put down collateral
Sometimes even those lenders may raise objections in approving your applications that accept applications from bad credit ratings. If they approve, they will likely charge high-interest rates, and it can be quite difficult for you to pay that much money.
If you want to avail yourself of a good credit rating, you should try to put down collateral. When you put down collateral, it becomes a secured business loan. Since you are reducing the risk of the lender, you can get the benefit of competitive interest rates.
However, note that you will have to put down collateral of a higher value. This is because if you make a default, your lender can cash out that asset.
Although putting down collateral can help you avail yourself of competitive interest rates, you will likely lose your valuable assets in case of a default. This is why it is crucial to analyse your repaying capacity before you decide to secure your loan against a valuable asset.
Arrange a guarantor
You may be reluctant to secure your business loan against a valuable asset because there is a risk of losing that. Therefore, you can seek an alternative, and that alternative is arranging a guarantor. If you arrange a guarantor, you will likely get money at affordable interest rates, provided the guarantor has a good credit rating.
If you arrange a guarantor who enters into a loan application, the lender gets the right to call upon the guarantor to pay down the instalment in case you make a default. Since it reduces the risk on the part of the lender, they will not mind approving your loan at affordable interest rates.
The guarantor can be anyone, including your spouse, friends, and the like. Though you can get money at affordable interest rates by arranging a guarantor, it is crucial to note that the default you make will not just impact your credit history, but the guarantor’s as well.
This can destroy the relationship if you do not stick to your financial commitments. Therefore, you should carefully analyse at the time of arranging a guarantor.
Apply for a smaller loan
You can think of applying for a smaller loan if both options seem to be quite challenging for you. You should try to borrow a smaller amount of money. Before you put in the loan application, you should calculate the total amount of money you will likely pay.
Although you cannot get an accurate estimation, you can know how much you will likely pay off in total. Find out if you will be able to repay your debt. Try to understand the minimum amount you need to fund your business.
Use no credit check facility
There are a couple of lenders who offer business loans with no credit check. No credit check facility means the lender will not run a hard credit check to analyse your repaying capacity. In this way, you can escape having search footprints on your credit report.
The lender will run a soft credit check to analyse your repayment ability. However, note that business loans with no credit check come with higher interest rates. Make sure that you will easily tackle the repayments.
The bottom line
Getting a business loan approved with a bad credit rating can be challenging, undoubtedly, but it does not mean that doors to all lenders are close to you.
The tips mentioned above can help you get business loans despite a bad credit rating. However, it does not mean that you will never try to improve your credit rating.