A low credit score won’t freeze you out of the market for a small business loan, but it does mean you have to be more informed about the options.
If your credit score is less than ideal, many lenders will not want to work with you, including most major banks. However, unscrupulous lenders may take advantage by charging exorbitant rates or other terms that could put you in a significantly worse financial situation. This means you really have to understand your situation and look at the reputation of any lender you are considering.
Know Yourself and Your Business
Before pursuing any options, you need to know your credit score with the three major credit bureaus: Equifax Inc., Experian and TransUnion. You should review each report carefully to make sure there are no errors. FICO credit scores range from 300 to 850, with 300 to 629 generally considered a “low” credit score.
After getting your credit scores, remember that business loans are generally based on cash flow calculations. Your chances for getting a loan will depend on whether you can afford to make payments.
Major banks will require you to submit at least the last two to three years of your business’ performance. Other lenders often require new businesses to have projections, a solid business plan and show that your business is currently generating revenues.
If you have been rejected for a small business loan in the past, review the reason for the rejection. Lenders are legally required to provide the reason. You can use this information to identify your weaknesses and remedy them if possible in your next application. It is important to make sure you have a reasonably good chance of having your loan approved, as each loan application is noted in your credit score and could have a detrimental impact.
Once you gain a full understanding of your business’ financial situation, you can determine how much you need and how much you can afford to repay. With this information, you can approach lenders more confidently and also more easily spot an unscrupulous lender who is offering an amount that is out of whack with your financials.
Know Your Options
It’s not easy to get a small business loan with a poor credit score from a major bank. In recent years, nearly 80% of all applications are rejected, with many due to low credit scores. Major institutions typically have rigid requirements regarding credit scores. Local banks can be more flexible and approval rates hover around 50%, but again, these smaller banks also tend to focus on loaning to those with higher credit scores.
Alternative lenders offer small business owners with lower credit scores a better chance at securing a loan. For example, BFS Capital’s minimum personal credit score is 550. You should note the interest rates will be higher than major banks.
There has been a surge in the number of alternative lenders on the market, so you need to be cautious. An effective way to identify reputable companies 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, which should cause you to pause and decide whether you want to work with them
Beyond Traditional Loans
Consider whether the following types of other funding solutions might suit your situation:
- BFS Capital and other alternative lenders offer Merchant Cash Advances, which are short-term loans paid in a lump sum to a business owner in exchange for a portion of a company's future credit card sales. Interest rates are typically higher than traditional loans, but it may be a good option for businesses that have a lot of monthly credit card transactions.
- There are non-profit organizations dedicated to providing microloans to startups owned by women and minorities and businesses in economic empowerment zones. For example, Accion will grant loans up to $50,000. Loans are also available through the Small Business Administration’s (SBA) Microloan Program, which lends funds through non-profit community-based intermediary lenders.