Sometimes, it can be difficult to obtain financing with a poor credit history. While owning your own business comes with its fair share of challenges, obtaining a business loan with bad personal credit can be a real challenging task.
Most places and direct lenders will want you to be in business for more than a year and have excellent gross annual receipts. The same is true for a business you plan on purchasing and any existing business debt you plan to refinance into a new loan.
Some of the more popular options for Business loans with bad credit are:
- Government Small Business Loans
- Long Term Business Loans
- Hard Money Loans
- Collateral Based Loans To Purchase A Business
- Merchant Cash Advances
- Interest Only
- SBA Easy Loans
- Mezzanine Loans
- Venture Capitalists and Angel Investors
- Peer to Peer Lending
Poor credit is considered anything below 675 however, there are a lot of different requirements when trying to obtain a loan. The credit score itself is only one of the many things that lenders are using to asses the risk. The idea that you can obtain a loan with bad credit and no collateral simply isn’t true.
Government Small Business Loans for Bad Credit
These loans are primarily backed by the Small Business Administration, or SBA for short. One of the main requirements for this type of loan is being in business for at least 2 years. In order to get an SBA loan, you must have tried to obtain financing with other lenders.
The SBA has several different programs to help you find some government grants from nonprofits, as well as obtain financing for up to 2 million dollars. The SBA is a federally funded non regulatory organization used to help people obtain business financing.
A VA business loan gives veterans access to guarantee fee discounts for SBA loans. The maximum loan amount is 350,000. This type of government loan is still funded by an outside lender, and there are multiple programs available.
The 7-11 franchise program is one of the best available for veterans, giving a good chunk off of the franchise fees for a given amount of time. Hivers and Strivers is an angel investment firm that will also help veterans of all sorts looking to start a business.
Long Term Business Loans For Bad Credit
A Long term business loan for bad credit borrowers may just be the option needed. Most of these lenders do want to see at least one guarantor at signing, and gross monthly receipts of at least $5000.
This type of long term loan usually requires a minimum credit score of 525.
A long term business loan allows you to pay off the principal balance over a longer-term. These types of loans are looking for consistency in sales within your financial records. For this type of loan, you will need to keep up on your business plan.
These loans start at repayment terms of 24 months or greater, and you must carry the proper business insurance on your business. The lender is more likely to ask the reason for the loan, So, Having your business plan up to date and ready to impress is always a good idea for this type of loan.
Lenders are more likely to lend to a business with a longer track record of success and good cash flow. Having a good solid plan and a good track record of success lowers the risk to the lending company. Since these are installment loans lenders are mostly looking for stability in sales and growth when making a decision.
Hard Money Business Loan Credit
A hard money business loan is usually funded by private investors. They usually have their own terms, but accept real estate as collateral. This is a short term loan for 2-5 years similar to the length of time you would use to pay off your car.
Hard Money lenders are more concerned with the property value than the borrower’s credit. Some, if not all of these loans are usually interest-only loans. Since the type of loan is high risk, these types of lenders usually come at a higher APR.
Depending on the competition in the area, most hard money lenders only lend locally and capitalize on the real estate markets in the area. You may want to use a Hard money lender if you are a real estate investor, or looking to getting into property flipping or have a big construction project coming up.
Loan For Buying A Business With Bad Credit (acquisition)
It can be challenging finding a loan to purchase a business with bad credit. Lenders are investing in the business you plan on acquiring. They want confidence that the money they lend to you is going to be paid back.
There are some alternative options:
- Home equity loan
- Friends and family
- Angel Investors
- Seller financing options
Sometimes using a crowdfunding option may be a good start, asking your customers for a small investment with a promise of future products is a good way to earn some capital.
If you have some capital saved up, you may be able to purchase the business from an individual with the promise to pay on future earnings. If they plan on selling the business in the next five years, starting to work with them, and having the previous owner there to help make the transition smooth, is sometimes an option.
Business Bad Credit Loan No Collateral
A royalty loan is one that is advertised as having no collateral or guarantee. While there may not be a lean on a piece of property, the collateral is your future earnings until the loan is paid back. This is similar to something called invoice financing, and merchant cash advance. The main difference is that you pay the royalty back to the investor, rather than pay an APR on the invoices.
This is mainly an option in manufacturing as a royalty interest is taken after the costs of production, whereas an APR would be used to get the percentage from the sale to the end-user. You are technically leasing your property rights to the company, in exchange for the loan.
A Business line of credit is an option that seldom requires any collateral, and is a good option for a business with bad credit. You can find some lenders online that are relatively easy to borrow from as well as get same-day approval. The APR’s tend to be on the higher side, with a short term repayment period.
Equipment loans also act as their own collateral, the loan amount is used to upgrade of finance the purchase of new equipment. The equipment is the loan’s collateral, and depending on your terms this can be written as an unsecured loan.
Bad Credit Business Loan Guaranteed Approval
If something sounds too good to be true it probably is, the harsh reality is that there is no such thing as a guaranteed approval loan. There are, however, several collateral options for business owners with poor credit.
The myth really comes from horrible advertising, you can still be turned down for a “guaranteed” financing loan if you do not meet the lending requirements. Most of the advertisements for a guaranteed fast approval loan is really what’s called, invoice financing.
Invoice financing is when you hand over your unpaid invoices to the lender, and they give you roughly about 85% of the invoice price in return. The downside to this option is that you’re not seeing the full amount of your invoices paid to you.
So it goes like this:
- You sell something worth 1200 bucks on an annual invoice, you have collected the first payment, so the remaining balance on the invoice is 1100
- You need some quick capital but have poor credit
- You take out a “guaranteed” invoice financed loan for 85% of the invoice
- 1100 * .85= you receive 935.00 for that invoice and the lender collects the rest of the invoice. Your loan fees are 15% of the invoice that you did not collect. (every loan has different terms)
Merchant Cash Advances
This is another “Guaranteed” option because you are using your future sales as a guarantee that the loan will be paid back. This is a costly option as you are paying a fee on every transaction until your advance is paid back.
With higher fees the more sales you make the higher the fees are that you pay, and when sales are down the lender takes the payment according to the terms. This is usually a set percentage of monthly gross receipts.
This option is not the same as a working capital loan, which is used for general expenses like payroll, inventory, and taxes. A merchant cash advance is borrowing against your future cash receipts. Since your merchant account is the one that you use to process your credit card payments, they are almost guaranteed to be paid back.
The merchant cash advance is a good short term option for when you need some emergency funding. Merchant cash advances are usually automatically taken out of your payment from your merchant processor as a percentage.
An advance is just that, an advance on the money that you have already earned, or are projected to earn.
Interest-only Business Loan
This is an option that is what it sounds like; you pay the interest on the loan during the term. At the end of the loan term, you either must re-finance into another type of loan, or pay the principal balance off. This is a really good option for someone in need of high amounts of capital to re-invest into the business.
A new medical practice, or remote office in which you are going to expand to a new area. This type of loan option gives you lower payments. This loan does not need an amortization schedule as the payment calculation is pretty simple.
To calculate payments, you take the principle and multiply it by the apr, then divide by 12.
These loans are usually backed by a mortgage or some type of collateral equal to the principal balance on the original loan. Interest-only loans can be used for a number of different investment type of businesses, but you must have the promise of higher future cash flows. A lot of real instate investors use these types of loans to finance a home to fix up and sell.
One of the main downsides to an interest-only loan is that you don’t gain any equity in the property; you are only servicing the loan. Meaning that you will owe the same amount borrowed at the end of the term as you did at the beginning. You will also owe the same amount if the collateral drops in value.
SBA Easy Loan
It is important here to note that the SBA does not actually lend money, they do, however, provide a guarantee to lenders that your business will be able to pay back the loan. This is personal collateral, which can get some loans approved that may not otherwise have a chance.
With this option, you almost must be in business for over 2 years and meet minimum size standards which vary by industry. You would also need to have an unspecified amount of gross annual receipts which you can find out on their website.
Every lender does have different lending requirements, and some will help you petition the SBA for a collateral backing in the industry that you operate in. These are typically SBA approved lenders that work with the SBA as part of their regular business routine.
You must have also exhausted all possible areas to obtain financing, meaning that you cannot get financing anywhere else.
Some of the requirements for obtaining an SBA loan are:
- Do business in the US
- Be a for-profit business
- Have Invested Equity
- Have Exhausted all financing options
This type of loan is more like a line of credit. It is a Hybrid equity debt type of loan with flexible payment terms. Because it is higher risk and a lower priority in the event that everything goes belly up, these types of loan usually want to see a good track record of success.
It does give you access to capital as well as some good leverage to get other types of financing. If a default occurs on this type of loan, the equity is the first thing to go.
This is one form of equity financing where groups of individuals pool money together to gain a higher rate of return than they would receive with other investments. These investment firms look for promising opportunities that can yield a good return.
Although it may be difficult to obtain financing here, credit is usually not what they are concerned with. This non-traditional form of financing is available when collateral or lack of cash flow is an issue. Most venture capital firms want a good 25% or greater return on their investments.
Most companies don’t qualify for funding through venture capitalist, but not because of credit. Some of the more well-known companies were started with venture capitalists, including Facebook, Apple, and even Starbucks.
An angel investor or seed investor is a private investor that takes a proportionately large size of the business, anywhere from 20-50 percent of profits. However, they can provide ongoing support with your business and are usually experienced in the industry.
Angel investors will sometimes work in groups, specializing in different areas of expertise; this can be beneficial and lower your learning curve quite a bit. These types of groups usually only work in certain areas where they want to improve economic conditions.
These high net worth individuals can also be family members, or business owners looking to give back to the community. The biggest hurdle with angel investors is that you give up control of some of the operational aspects of your business.
The angel investor comes in mainly as a partner. However, money does not need to be paid back if the business fails. This is usually a personal relationship with the angel investor; your local chamber of commerce is a good place to look for angel investors.
Peer to Peer Lending
This type of lending has been gaining some ground lately as big banks rush to compete for the little loan givers. You can borrow anywhere from $25-$50,000 and use the money for anything. People can get approved with poor credit, however, you will pay higher interest rates.
With this type of loan, you will also have to pay some origination fees of usually 2-5% depending on the platform. The repayment term is usually 3-5 years. Most of these lenders can also help consolidate debt, which may help you qualify for a more traditional method of borrowing.
Peer to Peer lending groups are easier to qualify for than an SBA microloan, and you can still use the funds to expand, invest in inventory, or even fund small start-up projects. Since the lending guidelines are more relaxed, it provides more leeway to use the funds for anything you need.
With so many business loan options available it’s a lot of information to take in. Learn as much as you can about each loan program and review this article multiple times if needed. Then reflect back on which loan options you think will work best for your particular type of business and reach out to inquire about each one. It’s just that easy.