A lack of adequate working capital is one of the major reasons why many small businesses fail. While you can address this problem with funding from a bank, most conventional lenders will require you to prove your creditworthiness to qualify. This hurdle forces many impacted investors to look for alternative sources of finance. Here’s a look at how you can get a business loan despite bad credit to finance your everyday operations.
Why You Should Mind Your Credit Score
When you approach a lender for a loan, they’ll use your credit score to measure your risk level. A higher score (such as 650 or higher) shows you’re very likely to pay back your loan.
You can boost your qualification for a commercial loan by improving your credit score and demonstrating the following healthy borrowing habits:
- Payback on time: Consistent late payments can hurt your standing with lenders. Avoid rolling over your credit balances to the next month.
- Don’t keep large credit balances: Most lenders will see you as a risky borrower if you have high outstanding balance amounts. Try to keep your credit utilization ratio below 30% to keep your score healthy.
- Don’t have too many loans: Every time you open a new credit line or apply for a new loan, the lender looks into your credit report (hard inquiry), which can hurt your score.
- Keep business and personal expenses separate: Separating these financial accounts can help you keep a stellar credit score under your business name, even with a poor personal credit record.
- Leverage combined credit histories: You can improve your standing with lenders by adding business partners with a healthy credit history and more collateral options.
Tips to Obtain a Business Loan with Bad Credit
It’s harder to get a small business loan with a credit score of 300-629. As you work to improve your rating, explore these strategies to boost your chances of loan approval:
- Get your credit report: Get your free annual credit report to know where you stand in terms of personal and commercial credit.
- Provide collateral: Valuable personal assets, accounts receivable, or investment accounts can increase your creditworthiness.
- Include a co-signer with good credit: Adding a co-signer with a better score can reduce the risk that a bank assumes by lending to you.
- Find a suitable lender: Eligibility requirements vary by factors like bank and type of financing. Look for a lender that will accommodate your financial situation, including bad credit.
- Reduce the loan amount: A small loan may be easier to get when you have a low credit score.
Types of Commercial Loans You Can Get with Bad Credit
Financing options for small businesses with bad credit include:
- Conventional loans, although these usually attract higher interest rates for risky borrowers
- Research to see if you qualify for a credit union microloan of around $50,000 or less
- Try reputable FinTech lenders offering low-interest financial services through technology like mobile apps
- Take a merchant cash advance when experiencing cash flow issues, but beware of its high-interest rate
- Find out if you qualify for a business credit card to finance your operations
- Get a home equity loan if you own a house, but remember you’re using the property as collateral
- A sales-based loan is an option if you have a credit score of above 550 and your annual business revenue exceeds $100,000
- If you can make a compelling case, you may convince your friends or family members to back you up financially
Explore multiple financing options to grow your company when you’re facing working capital deficiencies. If you’re looking for a small business loan in Ventura County, contact us at the Economic Development Collaborative in Camarillo, California. We’re here to provide strategic guidance and resources to help businesses succeed.