If you’re looking to get a small business loan but have bad credit, you may be wondering what your options are. Fortunately, there are a few things you can do to improve your chances of getting approved. Read on to learn more.
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Check Your Personal Credit Score
Before you start researching small business loans, it’s a good idea to check your personal credit score. The higher your credit score, the better your chances of securing a loan with favorable terms. You can get a free copy of your credit report from each of the three major credit bureaus – Experian, Equifax and TransUnion – once every 12 months at AnnualCreditReport.com.
If your personal credit score is below 600, you may have difficulty qualifying for a small business loan. In this case, you may want to consider alternatives such as business credit cards or short-term loans. You can also work on building up your personal credit score by paying all of your bills on time and maintaining a low balance on your credit cards.
Consider a Microloan
Microloans are a type of loan offered by nonprofits and community organizations that are typically geared towards small businesses and entrepreneurs. Microloans tend to be smaller in amount than traditional bank loans, with an average loan size of around $13,000. They also tend to have a lower interest rate than other types of loans.
One of the main benefits of microloans is that they can be easier to qualify for than other types of loans, even if you have bad credit. This is because microlenders are often more interested in your character and your business plan than your credit score.
If you’re thinking about applying for a microloan, some of the places you can look for potential lenders include the Small Business Administration (SBA), local community organizations, and online lenders.
Get a Loan Guaranteed by the SBA
The SBA’s loan guarantee program is the most popular way to get a small business loan with bad credit. With this program, the SBA guarantees that if you default on your loan, they will pay the lender back.
This gives lenders a lot of confidence when lending to businesses with bad credit, and as a result, they are often willing to offer much better terms. In particular, you may be able to get a lower interest rate and/or a longer repayment term.
To qualify for an SBA-backed loan, you will need to meet the eligibility requirements of the specific program under which you are applying. For example, the 7(a) program generally requires that you have a credit score of 640 or higher.
Get a Secured Business Credit Card
One way to get a small business loan with bad credit is to get a secured business credit card. This is a credit card that is backed by collateral, such as a savings account. This means that if you default on the loan, the lender can take the money out of the account to repay the debt. This type of loan is easier to qualify for than an unsecured loan, but it does require that you have some collateral to put up for the loan.
Find a Cosigner
A cosigner is an individual with good credit who agrees to sign your loan with you. The cosigner agrees to take on the legal responsibility of repaying the debt if you default on the loan. This makes lenders much more likely to approve your loan because they know they have someone else to rely on if you can’t make your payments.
One downside of using a cosigner is that it puts a lot of pressure on your relationship with that person. If you default on the loan, not only will your credit score take a hit, but so will the cosigner’s. Make sure you are confident in your ability to repay the loan before asking someone to cosign.
If your business is young and you don’t have much in the way of business credit, you may still be able to get a loan by using collateral. Collateral is an asset that can be used to secure a loan. If you default on the loan, your lender can seize the asset and use it to repay the debt.
For example, let’s say you need a $10,000 loan to buy new inventory. You might be able to use your personal vehicle as collateral. If you default on the loan, your lender could repossess your car and sell it to repay the debt.
Of course, this isn’t ideal. You could lose your personal vehicle if you can’t repay the loan. And, if you default on a secured loan, it will also damage your personal credit score. But if you have no other option, using collateral may be a way to get the funding you need.