Bad Credit Small Business Loans

If you have ever considered starting your own business, you know that it is not cheap.  Always a risky business, it can be difficult to get financing even if you have good credit – and qualifying for bad credit small business loans is even harder.  However, there are ways around this to get your money.

The most important step is to separate your personal credit from your business credit.  Otherwise, the chances of qualifying for financing are practically non-existent.  Many smaller lenders and specialty lenders focus on a combination of business and personal credit scores.

The difference between your business and personal credit score is that your business credit score is not connected to your Social Security number.  This seemingly insignificant difference can be the crucial difference as to whether or not you will get financed.

If your personal credit is bad, you will need to build your business credit.  First you will have to obtain a tax ID number and legal entity for your business.  Once you have those, you can qualify for vendor and supplier small credit lines.  These can then be used to create favorable credit history.  As your business credit rating goes up, you will be able to qualify for better loans.

There are some tricks to being able to borrow money as a small business.  First, start by being prepared.  When you apply for bad credit small business loans you will need to tell the lender exactly how much you need, why you need it, and how you can pay it back.  These are sometimes referred to as the “five C’s of credit”:  character, cash flow, collateral, capitalization, and conditions.

Character is based on your credit history and repayment trends.  By establishing a separate business credit rating, you can help show that you are able to pay your debts back on time.  If there have been issues causing you to be late with payments, you will want to be upfront about them from beginning.

Cash flow is how much money you have coming in and out, both historically and predicted for the future.  Lenders want to know that you will have the money coming in to be able to repay the loan and run your business.  Be sure to prove and document any and all assumptions for your cash flow predictions.

Collateral is something that you own that you can put up against a loan.  Should you default; the lender can claim it and resell it to recoup their losses.  With bad credit small business loans, the items purchased with the loan can be used, but if there is not enough collateral or if the money is used for something other than an asset purchase the bank may want a form of personal collateral.  This can include any high-value items that you own, such as a house or car.

Capitalization is the resources that a small business has including equity, retained earnings, and fixed assets.  You do not have to be fully capitalized to qualify for bad credit small business loans; however you do have to prove that the current capital you do have is being used efficiently and be able to justify why you need a loan.

Conditions are factors that affect the business but are external to it.  These can include the industry, market, and environment that may produce possible threats and/or opportunities.
By taking the time to become prepared and develop a relationship with your lender, you increase your ability to qualify for a bad credit small business loan.