Business Loans For Bad Credit To Consider
When your business requires third-party financing, but your credit is poor, there are a variety of business loans for bad credit that you can consider. The financial lender will consider both your personal and business credit history in the loan approval process. Since traditional lenders (banks) have high credit level lending requirements, your business will be most successful looking to alternative lenders for its financing needs.
To begin with, you should determine your current personal and business credit scores. FICO defines personal bad credit to be credit scores ranging between 300 and 629. Your business financial profile and credit score will tell your financial lender, vendors, suppliers, and business partners how likely you are to repay them on time. Normally both the owner’s personal credit and business financial profile will be considered in the financial process.
You should then research the credit requirements of financial lenders to determine whether your business will qualify. If your business does not qualify and your financing needs are not urgent, you may choose to focus on ways to improve your personal and business credit, and apply for a business loan once your score has improved.
Let’s review business loans for bad credit situations to determine which is right for your business:
1 – Working Capital Financing
Of the business loans for bad credit options, working capital financing is the most “general purpose” type of loan for a small business with credit issues. Normally it is a short-term unsecured business loan secured by the creditworthiness of the business owner. Normally an unsecured business loan is more expensive, with shorter payment terms and loan amounts since there is more risk to the financial lender.
2 – Inventory Financing
Inventory financing allows a business to purchase products for future sale, with the inventory serving as the secured loan collateral asset. If your business is manufacturing, than the inventory will likely be raw materials that are developed into finished goods as required by your customers. This type of financing allows businesses the capital required prior to anticipated sales, especially peak period sales.
3 – Equipment Financing
Equipment financing is a type of secured business loan that allows a business to borrow capital to purchase equipment (e.g., machines, tools, technology, and more) to improve productivity, enhance competitiveness, support customer growth, and increased profitability. Since the equipment serves as the loan collateral to the lender, this business loans for bad credit option is dependent upon the value of the equipment (and ease to liquidate in case of loan default) rather then your personal credit score or business financial history. Once the equipment financing loan is paid off, the lien on the asset is discharged and your business has full control of the equipment. This financing option may be more desirable versus a lease/rent agreement for the equipment.
4 – Invoice Financing
Invoice financing, also known as accounts receivable financing, is a way for a business to borrow capital against the amounts due from its customers. While technically not a loan, it is a financial option your business can use to improve cash flow and pay expenses without having to wait until your customers pay their invoices in full. Your business invoices serve as collateral to the lender, who provides a cash advance of approximately 85% of the invoice amounts. Once full payment is received by the lender, your business will receive the remainder of the invoice, less financial processing fees. Since your business invoices serve as collateral to the lender, this business loans for bad credit alternative reflects that it is your customers credit worthiness, not your business, that is the determining factor.
5 – Merchant Cash Advance
Among the merchant cash advance financing benefits is that it is a sales transaction between your small business and the lender, rather than a conventional financial loan. Specifically your business is conducting a sales transaction of future credit receivables to a third party for capital, with no commitment and risk of fixed payment schedule. Because of this, a merchant cash advance is not reported on the business’ credit report and does not require assets to be pledge as collateral. Hence, less risk to your business. While not technically a loan, it is a viable alternative for business loans for bad credit when necessary for short-term capital, but at a high relative cost.
6 – Business Credit Card
A business credit card provides a new source of credit capital (in the form of an unsecured credit line) that you can use to cover your business’ expenses. The financial lender approval process will focus primarily on your personal credit score, since the business is not pledging any asset collateral. Using a business credit card allows you to separate your business from personal expenses, which helps build your business credit profile which will lead to improve future financing options. Responsible use of a business credit card should be part of your business’ portfolio of financing alternatives.
Business Loans For Bad Credit – Conclusion
A variety of business loans for bad credit financing are presented for small businesses with poor or limited financial history. For those types of financing that are asset secured, the lender approval criteria will be primarily determined by the value of the asset pledged. For financing options that are unsecured, the business owner’s creditworthiness will be of more importance to the lender in the approval process. Depending upon your current business situation, these financial solutions may fit your business needs, now or in the future.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.