You want a business loan, bad credit is holding you back, is there hope for you?
The short answer is yes, but the more correct answer is maybe.
I know I’m waffling a little with my answer, but it all depends on a couple of factors. Let’s look at this from the perspective of the bank. There are a lot of things a lender is going to look at to determine whether or not they’ll give you a loan. In reality, we can boil them down to three things:
1. Can you pay? Any lender, before they give you a loan, wants to make sure you can repay the loan. They’ll be looking at your annual revenues and cash flow to determine if you have enough income to make the loan payment that is likely to be due next month. Most of the lenders I’ve spoken with understand the last few years have been tough on small business owners. Many of them are even willing to make allowances for a bad credit score if revenues and income will justify a loan. That being said, the bank might not be where you’ll find success. But you might be able to find success with an alternative lender that offers specialty financing to meet specific small business needs. A merchant cash advance (MCA) lender, a lender who specializes in equipment loans, or a factor may be able to help you meet short-term capital needs—even if you have bad credit.
Although you will likely pay a premium for this type of financing (read higher interest rates), they offer quick access to capital and don’t require most borrowers to meet the same credit requirements as the bank or credit union. For many small business owners strapped for cash, the access to capital is well worth the costs associated with this type of financing. In many cases, at a cost much less than a credit card, you can find cash even if your credit score is less than perfect—provided you can demonstrate your ability to repay the loan.
2. Will you pay? This is why lenders give so much weight to your credit score. The hard truth is: your credit score is considered a reflection of your willingness to pay. Granted, there are situations where a small business owner might have a less-than-perfect credit score because of circumstances out of his or her control, but be aware, most lenders will look at your credit score as a measure of your willingness to meet your obligations. That’s one reason why some of the alternative loan options mentioned above come along with a higher interest rate. The higher interest rate is to compensate for the higher risk they take in making the loan.
However, the higher interest rate is also the cost many borrowers with excellent credit are willing to pay for access to loan proceeds in hours or days vs weeks or months. What’s more, most of these non-bank lenders have a higher cost of capital than does a bank or credit union—making the cost of funds a little more expensive right out of the gate. If you have good credit and don’t need the capital immediately, a traditional term loan at the bank may be the best option. But we’re talking about borrowers that don’t fit in that category today. If you can demonstrate the ability to repay a small business loan, are able to demonstrate a willingness to repay a loan (by leveraging collateral like your credit card transactions in the case of an MCA loan or hard assets like equipment with an equipment loan) it is possible to get financed even if you have poor credit.
3. What if you don’t pay? Lenders are a very risk averse bunch—especially traditional lenders like banks and credit unions. This is why collateral is important to small business owners. As mentioned above, with MCA lenders for example, it’s sometimes the collateral that even makes the loan possible. Earlier today I was speaking with a very successful small business owner who shared how he had put his cars and home up as collateral for a loan they used to start their business. He said knowing his home was at risk was a real motivator for him. He understood that if he defaulted on his loan, he would likely lose his home.
Sometimes I hear from borrowers who have defaulted on their small business loan and are afraid they’ll lose their collateral. Although there are some lenders who might work with you, the reason they like collateral of some kind is to help them recoup the loss caused by borrower non-payment.
That’s one reason why, good credit or bad, if you don’t need to borrow, don’t. I grew up in a small business family. My Dad was very good at identifying the things he really needed to do business (and was willing to borrow for) and the things he could likely do without and wouldn’t borrow for. I think this is a great skill for any small business owner to understand. Putting valuable collateral at risk to borrow money for something that isn’t essential to doing business, just isn’t a good idea.
If you’ve had success finding a small business loan with less-than-perfect credit, I’d love to hear your story.