Getting a small business loan with bad credit
Even if you have bad credit, it is possible for you to get a small business loan. It is going to take some work and some organization, but chances are that you will be able to find a lender if you can demonstrate an ability and a willingness to follow through on your loan and pay back the money that you have borrowed.
If you have bad credit, chances are that you will not be able to qualify for particularly low interest rates on your small business loan. However, if you can demonstrate a sizable amount of collateral that can be used to secure your loan, you might be able to lower your interest rates and secure a loan.
One of the most important tools that anyone can have when it comes to small business loans is knowing what lending institutions will look at when they are deciding whether or not you are a risk that they are willing to take. Everyone needs to be prepared to demonstrate an ability to repay the loan; if you have bad credit, then you need to be doubly sure that you can demonstrate an adequate amount of collateral, a detailed and viable business plan, and a dedication to repaying your loan.
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Here's what banks will look at when they are determining whether or not they will give you a loan, and at what interest rate your loan will be set.
- Your ability to repay the loan
When you put together your loan package, you need to demonstrate your ability to repay your loan. There are two sources necessary for repayment of loan: the actual cash flow from the business itself, and a secondary source of repayment, like your collateral.
If you own a business that has been in operation already for a number of years, then you will have better chance of securing a loan on good terms. Already established businesses have proven that they can turn a profit. This means that chances are that your business will not go under. If you are starting up a business, or if your business has been struggling, then you need to put forward an especially detailed and precise plan of how the business will be able to make enough profit to repay the loan in your loan package.
Also look carefully at your possible sources of collateral. If you have bad credit, then collateral is going to be especially important as banks will trust your collateral more than your history of repaying loans. Put together a strong argument, and look at various assets that you are willing to risk. - Your credit history
You won't be able to avoid a bank looking at your credit history when they are considering you for a small business loan. Even if you know that you have bad credit, you need to look carefully at your credit history reports to make sure that your credit isn't being lowered even further through mistakes on your credit reporting! - Banks will look at your equity
Banks and other lending institutions are going to look carefully at your equity. Where can you get equity? Either through retained earnings or cash that is invested in the business by the small business owner or other investors. If your liabilities or debt is more than 4 times the amount of your equity, then you will probably not be able to get a loan.
All three of the major credit reporting institutions offer free credit reports once a year. Get a hold of these reports. Go through them carefully to make sure that everything is correct. Remember that it takes about a month for mistakes to be cleared up.
If you have defaulted on any loans or demonstrated a history of not paying off bills on time, you need to be prepared with an explanation. If your bad credit is due to a major traumatic event, such as a divorce, a big medical problem, or something else along those lines, be able to show that you have had good credit before and after the incident, and that you have tried hard to pay off those debts.
No matter what, you are going to be investing some of your own money into your small business. Different loans will require a different amount of investment made by you personally.
