Those who claim that you can get a business loan from the bank with bad credit and no assets typically fall into one of two categories: 1. institutions that offer bank loan alternatives which do not rely on personal credit, or 2. loan sharks just waiting to steal your money.
Here is a non-biased look at what it will take to get financing for your business with poor credit.
The Truth About Poor Credit and Business Financing
Reading some of the articles offering business financing “advice” to business owners struggling with their credit, you’d think the financial meltdown of the last 5 years didn’t happen. I’m appalled at what some of these articles (a few from reputable sites) suggest: get a payday loan, sign up for a bad credit loan loaded with exorbitant fees (to mitigate the “risk), offer your house or life insurance policy up as collateral to secure the loan… Huh? You might as well tell them to go jump off a bridge.
The truth that is just being shoved under the carpet is that bad credit and business banks loans mix about as well as oil and water. Bank issued business loans for small companies have historically been hard to come by, even when times were good and the economy was strong.
You can practically disregard any reports that small business lending has been on the rise. Where small business lending is happening, it’s only for those individuals and proven businesses with sterling credit. Once you add bad credit to the mix, the banks won’t want to touch you- especially these days. Realize that the minute you walk into a bank and request a business loan, they will run a personal credit check on you. If you have less than perfect credit or bad credit, then they won’t even get to the financial analysis of your business or startup idea.
Many banks have a credit score cut off below which they will not lend. So if your FICO score is, say, 600, it won’t do you any good to apply to a bank that has a cut off at 650. You should therefore first check what your credit score is. You can find a list of free credit scores websites listed at www.cafecredit.com. A free report from each of the three main credit bureaus: Experian, Equifax, and TransUnion, can be obtained once a year from the government-backed annualcreditreport.com. You should then check with the bank beforehand to see where they have set their cut off.
Business Financing Options Where Bad Credit is an Issue
If you are starting or running a small business with a less than desirable personal credit rating, you don’t have to quit your search for business financing completely. Depending on your business model and how bad your credit is, there may be some things you can do to secure the funds you need whether it is for business startup, capital finance, or growth. Here are the top alternatives:
Build up your credit and apply later
. If your business or business startup idea can wait a bit, then one of the best options is making an effort to improve your personal credit score. This includes checking your credit profile for any errors and disputing these errors with the respective credit agency, consistently making payments on old, outstanding debt, and keeping new accounts current and in the black. You may also want to start your search for a bank loan at a community-based bank or credit union, since their credit cut off may be a little lower and therefore more easily attainable. See my post on building up business credit for more information.
Get a business partner or co-signer with good credit.
In some cases, you may be able to circumvent your poor credit by bringing in another individual whose credit profile is considerably better that yours. Either your business partner can be an active member of the business or a “silent partner.” What ever path you chose, just make sure that you have a thorough partnership agreement in place that has been checked by a legal professional (here is one of those places where you shouldn’t skimp in the name of “frugality”). This is even more important if your business partner is a friend or family member.
Seeking loans from non-bank financial institutions.
If your financing needs are relatively modest then you may have several alternatives for funding that may not be directly tied to your credit profile. You could, for example, check in with your local small business development center or chamber of commerce to see if there are any community-based lending programs available for business owners and entrepreneurs. You could also try the micro-financing route via several possible sources.
Offer collateral, but not your house.
Lastly, if you do happen to have valuable assets that could be used to secure a loan, proceed with caution. Make sure that you are very clear about the terms of the loan, and that you have done your best to minimize the investment risk, such as conducting adequate market research. In such a case, you may want to consider taking out a business insurance policy so you don’t lose everything should the business fall into some hard times.
Bottom line, even if you are struggling with bad credit there may be some options for business financing available to you. But in order to secure a business bank loan in particular, you need to address your credit rating. There’s just no way around it.