There’s no debating it - there’s no benefit to having a bad credit score.
But life happens. People face dire situations with the loss of a job, illness or other situations out of their control, which can result in a bad credit score.
That doesn’t mean you should despair about getting a loan for your small business. Do a web search and you can find hundreds of financing options for people with bad credit scores. The tricky part is trying to sort out legitimate offers from those that could make your situation even worse.
Get Your Credit Score
For small business owners, your personal credit score is as important as your business credit score. So you’ll need to know both scores, if you have them, before you begin your search for a loan. There are several ways to get your personal credit score, including
- Check your credit card statements or loan statements – some credit card companies and banks provide it for free.
- Purchase it from one of the three major credit bureaus that provide credit scores: Equifax Inc., Experian and TransUnion.
- Use a credit score service, such as myfico.com.
Your FICO credit scores will range from 300 to 850, with 300 to 629 considered a “bad” credit score.
If you want to establish a business credit score, you need to take action yourself. First, you will need to authorize your business vendors to report your payment history to one of the major business credit bureaus (Dun & Bradstreet, Equifax Inc., and Experian). Business credit scores range from 0-100, with 75 or above considered a good score.
Going to the Bank
Simply put, major banks are not keen on making loans to small business owners with poor credit scores, particularly start-up or young companies. Major banks approve about 20 percent of all small business loan applicants, and smaller local banks about 50 percent. Typically, you will need a personal credit score of at least 640 or a business credit score of at least 75, along with three years of financial documentation and detailed business plans
Small Business Administration (SBA)’s loans are obtained through a bank or other financial institutions under the backing of the SBA. But generally you will need a personal credit score of at least 650 to qualify.
There are other SBA programs, such as when banks make loans with real estate as collateral. These are considered commercial mortgages with an SBA guarantee. However, you must seriously consider if you are willing to use your house as collateral given the consequences if you default.
Alternative lenders offer small business owners with lower credit scores far more opportunities. For example, BFS Capital’s minimum personal credit score is 550. The interest rates will be higher than standard banks, given the higher risk. But alternative lenders can provide more stability than other types of loans. For example, if you do use your house as collateral and the real estate market crashes, your interest rate could spike if you have a variable rate loan.
Be careful in weighing your options with the hundreds of alternative lender companies. One easy way to sort through the option is to look at the lender’s rating with the Better Business Bureau (BBB). While lenders such as BFS Capital have A+ ratings, others have lower or no rating, making them a risky choice.
There are other solutions such as microloans (under $50,000) from non-profits and the SBA microloan program, which generally have more lenient terms. Many of these programs are targeted for businesses located in economic empowerment zones, women or minority-owned businesses or specific industries.
You could also take out cash advances or increase your line of credit on your credit cards. The high interest rates make these types of loans very costly and should only be considered for very short-term loans.
Some small business owners decide to take on a partner as a co-signer for a loan to mitigate a poor credit score and increase the chance of obtaining a loan. However, the risks involved in bringing in another person into your business must be considered carefully. You need to fully identify every scenario possible and the consequences with your potential partner before signing the paperwork to protect both parties.