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Business loans for bad credit: Lending Options to Consider

business-loans-for-bad-credit

We have become a credit-driven society – making business loans for bad credit a challenge to find. Small business owners as well as consumers are adversely impacted by low credit scores.

The Small Business Administration (SBA) provides small-business loans with its 7(a) loan program administered through banks. But you need good business and personal credit to qualify. Most banks will require a personal credit score of at least 680.

Statistics from the National Small Business Association show that 73% of small firms used some type of financing for their business- so it’s normal to need extra funds to run your business from time-to-time.

Small businesses borrow for four principal reasons.

  • Start a Business
  • Purchase Inventory
  • Expand a Business
  • Strengthen your business’ financial foundation

When you need business loans for bad credit where do you go? 

Before applying for any business loan, take time to check your personal and business credit reports and scores to know where you stand but more importantly, check for errors.

Errors and inaccuracies can decrease your personal and business credit scores. Dispute any error and request it be removed (best option) or corrected (2nd best option). Cleaning up credit report errors could give your score a boost.

Types of financing for business loans for bad credit

Merchant Cash Advance

A merchant cash advance can help a business raise capital immediately but typically have higher interest rates. Funding can be provided within a few days regardless of credit history. Merchant cash advances are meant to be temporary cash-flow solutions as opposed to long-term financing like business loans or a business line of credit.

Uplyft Capital
Cash advances must be repaid through daily or weekly withdrawals from the business, calculated as a percentage of total daily sales. The lender assigns a factor fee at the time of approval. That fee dictates the total amount to be repaid, and payments remain in place until the original lump sum is fully repaid.

Uplyft Capital details

  • Credit score required: At least 450.
  • Time in business: 6 months.
  • Revenue required: $144,000 ($12,000 monthly).
  • Loan amounts: $3000 up to $500,000.
  • Loan Term (Months): 2 – 12 months.
  • Financing costs based on factor rates: Range from 1.24 to 1.40.
  • Funds available: Funds automatically deposited into your business account the moment you decide to move forward.

SBA Microloan Program

The U.S. Small Business Administration (SBA) Microloan Program provides loans up to $50,000 to help small businesses start-up and expand. The average microloan is about $13,000. Designated intermediary lenders, often non-profit organizations that help underserved entrepreneurs with experience in lending administer the Microloan program for eligible borrowers.

Microlenders are available throughout the US, each having its own qualification standards. Some may offer financing to small business owners with personal FICO scores as low as 575. Learn how to find microlenders in your local area here.

Microloans  can  be used for a variety of purposes, for example:

  • Working capital
  • Inventory
  • Supplies
  • Furniture
  • Fixtures
  • Machinery
  • Equipment

Microloans  cannot  be used to pay existing debts or to purchase real estate.

Nav business funding

Nav is a financial tech company that helps small business owners obtain financing in the form of business loans, lines of credit, and business credit through a variety of lenders. The Nav platform facilitates transactions between data providers, lenders, partners by matching small businesses with financing options that meet their particular credit profiles. Nav is especially useful for start-up small business owners that don’t have a history of business credit.

Nav’s funding managers can provide you with the best financing solutions available by working directly with lenders to help you get approved.

Business funding features

  • Funding up to $20 million.
  • Some online applications are approved within 24 hours.
  • Get the capital you need for projects large or small.
  • Perfect credit not required.
  • Nav works with revenue-generating startups that are 3+ months old.

Invoice Financing

Outstanding invoices can be used for funding your business, this is known as factoring. With invoice factoring, you sell your unpaid invoices to a lender at a discount. The lender pays you the majority of the amount owed on the invoice upfront, and keeps a portion of the outstanding amount (usually 20 percent) until the invoice is paid.

A factoring fee is charged, plus interest charged on the cash advance. This type of financing is costly and the fees can quickly add up quickly.

Inventory financing

A lender may be willing to overlook bad credit if they have some guarantee that you’ll be able to repay what you borrow. Inventory financing is a form of asset-based lending that allows businesses to use inventory as collateral to obtain a revolving line of credit.

Purchase order financing

Purchase order financing is an arrangement where a third party agrees to give a supplier enough money to fund a customer’s purchase order. This helps a small business that lacks cash flow get access to the inventory to complete customer orders. The purchase order financing company will pay your supplier to manufacture and deliver the goods to the customer.

When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. After subtracting their fees, the company then sends the balance of the invoice to your business.

Actions to take if you can’t get approved for a business loan

Denial is not a one-size-fits-all decision. If you believe you are a good candidate for a business loan for bad credit and have documentation to back it up, consider taking these steps:

  1. First, ask the lender for a detailed explanation for the denial. Automation may play a role in decision making where an underwriter’s eyes never see an application. In cases like this, request to speak directly with someone who can review the application with you.
  2. Be persistent and ask for details. It may be that you are just a few points from an acceptable credit score.
  3. Reduce your debt. A big part of how your score is calculated is the ratio between the amount of credit you have available and the amount of credit you use on your revolving accounts. Getting your debt usage down to 7% like high achievers will likely give you excellent credit scores. However, a goal of using 30% or less of your available credit is acceptable for good scores.
  4. Pay all debt obligations on time. The single most impactful factor in calculating your credit is payment history.  You can improve credit scores by consistent, timely payments for all debt obligations. One late payment can drop a credit score by up to 100 points. Create a track record of on-time payments to contribute to great credit scores.
  5. Work on your business credit. Strong business credit may offer additional financing options.
  • Check your business credit report regularly and verify that the information is accurate and up-to-date.
  • Establish business credit with companies that report trades. Remember, not all business creditors report their trade information.
  • Pay your creditors on time. Historical payment behavior with previous creditors plays a major role in determining your business credit score.

Final thoughts

The lending options for business loans with bad credit are likely going to cost you more. To combat this in the future, use business loans for bad credit to improve your credit history. Part of your business’s financial health depends on your personal as well as business credit scores.

These scores give lenders, vendors, insurance companies, and other entities an idea of how responsibly you use credit. Strong credit scores increase your chances of qualifying for financing and landing the best rates.

Whether you need funds to hire new employees, expand your business, purchase inventory, invest in new equipment, strengthen your businesses’s financial foundation or open a new storefront to increase sales using your own funds from savings may not be an option. Even if you have credit cards, it’s not a good idea to create credit card debt for business expansion.

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