The Main Loans That You Can Get With Bad Credit Scores

Whether you’re an entrepreneur who’s ready to launch a new company or an established business owner seeking to grow and expand, you know just how important a source of financing can be.

Loans are a popular source of capital for business owners. However, what if your FICO score isn’t that high? If you know how to get a business loan with bad credit you’ll increase your chances of obtaining financing for your business.

Here’s what you need to know when applying for bad credit business loans.

What Are Bad Credit Business Loans?

If you have a low FICO score or if your business hasn’t been operating for long you may not qualify for a traditional business loan provided by a large bank or loan provider. That’s where bad credit business loans can be extremely useful.

• A bad credit business loan is designed specifically for customers with low credit scores
• The lending criteria for bad credit business loans may be less strict than those of other loans
• The APRs for bad credit business loans are usually higher while the repayment period may be shorter - typically two years or less

Before applying for a bad credit business loan find both your personal and business credit scores and assemble a few documents related to your business. The other requirements are covered in more detail below.

What Are The Lending Criteria When Applying For Bad Credit Business Loans?

Increasing your chances of bad credit business loan approval begins with a better understanding of the criteria lenders use to assess applications. These include:

1. Credit scores - Both your personal and business credit scores will be assessed by the lender.
2. Debt-to-income ratio - This is the ratio of your monthly debt payments divided by your total income, both for you personally as well as your business.
3. Company cash reserves - Your business should have at least 3 months of expenses in cash reserves, and some lenders prefer double this amount or more.
4. Collateral – These assets owned by your business (like equipment and vehicles) may be used to guarantee your loan. If your business exhibits reasonably good turnover and more importantly, if your cash flow is healthy, you may stand a good chance of being approved for a bad credit business loan.

Your personal and business credit scores will play an important part in the loan application process. Here’s how they work.

Personal Versus Business Credit Scores

You’ve probably checked your personal credit score (also known as your FICO score) in the past before applying for credit.

• This score is calculated by the three major credit bureaus (Experian, Equifax, and TransUnion) and ranges from 300 to 850. A score of 500 or less is generally considered bad.

Business credit scores are also calculated by Experian and Equifax, as well as by a specialized business credit bureau called Dun & Bradstreet (or D&B for short).

• Experian’s business credit score ranges from 1 to 100, while Equifax’s runs from 101 to 992. D&B rates businesses between 101 and 670.
• Each of these scores indicates the bureau’s confidence in a company’s ability to honor its debts. Accordingly, the higher the score, the more trust they place in your business.

Improving Your Business Credit Score

It may be easier to obtain bad credit business loans with a low credit score compared to other types of loans. However, improving your business credit score is always a good strategy to reduce your loan APRs. Here’s how.

• Pay your bills on time - A business that settles its credit installments and pays its suppliers on time will see its credit score increase.
• Have your timely payments recorded - Contact your creditors (including suppliers) and ask them to report your timely payments to the credit bureaus.
• Query any incorrect info - After you check your credit report, follow up with the bureaus on any wrong information that you’ve picked up.
• Separate your business and personal finances - By registering an LLC, you’ll prevent your personal credit score from affecting your company’s score.

Bottom Line

Bad credit business loans are a good source of capital for a new or expanding company - even if you or your business don’t have a perfect credit history.

Taken together, knowing your personal and business credit scores, having sufficient business cash reserves, and lowering your debt-to-income ratio are all beneficial strategies for improving your likelihood of loan approval.