Getting a business loan is never a simple proposition. And while the lending situation has improved steadily since the economic crash of 2009, challenges remain, especially for companies with less than perfect credit scores.
One possibility for securing funds that many business owners fail to consider is using their portable luxury assets to secure a collateral loan. For example, Diamond Estate is one company that has assisted hundreds of business owners with cash loans from $2,500 to $250,000. These secured loans allow you to tap the value of your fine jewelry or vintage watch for any purpose your business might have, regardless of your credit rating.
There are, of course, many options for business owners with below average credit ratings to secure needed funding. Most of these options will not be from traditional sources, and the increased risk of these loans is often reflected in higher interest rates. In the following article, we will review some of the possible funding options.
Business Credit Cards for Businesses with Bad Credit
Business credit cards can provide business owners with poor credit histories access to debt financing. But again, the risk associated with lending to a business with bad credit will be reflected in higher interest rates. As you search for a credit card, beware of amazing offers, like no introductory APR (Annual Percentage interest Rate). Be sure to read the fine print. You are likely to find hidden fees and terms that could find you drowning in high interest rates.
As a business with poor credit, you probably won’t find a card with any lower than 15% APR. Try looking for a credit card through your local credit union. These are usually not-for-profit entities and are more likely to accept an application from a business with a less than stellar credit rating. In addition, federal credit unions are not allowed to charge interest rates in excess of 18%, even if you miss a payment.
Revenue Based Loans for Businesses with Bad Credit
If your business has a proven track record of regular bank deposits, a revenue-based loan could be an option, even if you have a poor credit rating. These loans are based on the deposits going into the business bank account on a monthly basis. Usually, a business can obtain a loan equal to 10% of its annual gross deposits. Loan terms can be as long as 18 months, and rates are generally higher than a traditional bank loan. Repayment is made in small increments on a daily basis via electronic transfer of funds.
Credit Card Sales Advance for Businesses with Bad Credit
This type of funding, also known as a merchant cash advance, can provide your business with a lump sum of cash in exchange for a portion of future credit card sales. For businesses with a steady income from credit card receipts but bad personal credit, a merchant cash advance may be a viable option for securing a loan. The majority of merchant cash providers claim a fixed percentage of your daily credit card receipts, and will often approve funding in as little as 48 hours. But be sure to shop around. The rates these companies charge can vary greatly, from as little as 12 % to as much as 38 % of your credit card receipts.
Friends and Family Loans for Businesses with Bad Credit
At some point, more than 50% of all business owners turn to family and friends for some kind of financing. Chances are that your friends and family want you and your business to succeed, and they will be willing to arrange a loan to you, even with your poor credit rating. Be sure to consider whom you ask, and how you ask, carefully. Make sure you have a solid business plan in place and that you can present your situation professionally. And remember that your family and friends may have assets that they might not have considered, like a piece of fine jewelry or vintage timepiece that could be used to secure a collateral loan to help your business.
Another way a friend or family member can help your business is by becoming a credit partner. If your family members have good credit ratings, they may be able to help your business obtain lines of credit in the form of business credit cards. While this method does carry some risk to the cosigner, some business credit cards will not appear on the credit reports of the cosigner unless the business goes into default. Make sure to research the particular details of these types of cards before you go to your potential credit partner for assistance.
Micro Loans and Web-based Lenders for Businesses with Bad Credit
There are many web-based lenders that offer micro-loans to businesses with less than perfect credit. These small loans, typically from $5,000 to $25,000, are offered in a variety of forms, varying in both how they spread the risk to their lenders and how the loans are priced. The interest rates on these loans will tend to be high for borrowers with bad credit, with some companies charging more than 20% interest.
You should also check within your local community for state subsidized micro lenders. Often there are community based non-profit organizations that have programs for business owners with poor credit. And don’t forget about the Small Business Administration’s micro loan program, which also lends funds through non-profit community based lenders. These types of micro loans often feature lenient credit requirements, making them ideal for business owners with poor credit.
Home Equity Loans for Business with Bad Credit
Another way to secure a loan for a business with poor credit is to borrow against your home equity (the difference between what your home is worth and how much you still owe on the mortgage). In these types of loans, your home is used as collateral, and the more equity you have in your home, the more favorable the terms of the loan will tend to be. You should be well aware of the risks associated with using a home equity loan to fund your business. If your business should experience a downturn, your personal property could be subject to forfeiture, making this option especially risky.