For people who have bad credit, obtaining business loans can be difficult if not impossible. Nearly every bank will not provide a business loan if the individual has a credit score below that of 640 (1). However, even if you have bad credit, there are options out there that will help you secure a business loan.
First of all, you need to separate your personal credit from your business credit. Apply for a separate (business) tax number, which will act as a unique legal identity for the business. Such an action can be accomplished if you file your business as an LLC (limited liability company). After establishing your business in some "legitimate" way, you can start securing small vendor and/or supplier credit for the business. Such lines of credit will also start creating a business credit history. Having a history is imperative if you wish to obtain bigger loans eventually. Don't forget to track your business history with the usual reporting agencies, such as Experian and Equifax, to see how things are going over time.
Once you have a business where some credit has been set, try getting a loan through one of the following methods:
Private loans, which are sometimes called hard money loans, are given out by individual investors. The interest rates on such loans are not always the best, and may range up to 20%. There may also be points to pay, and you may need to put up your own equity for collateral. However, if you are still struggling to improve your credit, this loan may be your only option. Fortunately, the application requirements for getting a private loan are not too demanding.
These loans go by several names, including peer-to-peer, social, and person-to-person. Such loans involve groups of individuals lending out money without the aid of a bank, although a third party facilitator may still be involved. Interest rates for such loans are considerably less than private loans (6-20%). Also, depending on your business's credit rating, you may be able to secure a loan with an interest rate below that of a banking institution. Several P2P loan sites have an online presence, and will match lenders with borrowers for just a small service fee. Because many individuals and businesses are having a harder and harder time securing loans, P2P loan agencies have grown quite popular over the years. In fact, it is estimated that P2P agencies will be helping to lend out at least $5.8 billion in 2010 (2).
Private companies and businesses may provide merchant loans. In such a case, the merchant or business lends your business the money and collects a percentage from the loan until the loan is completely repaid. Your actual sales may be tracked (such as through your credit card terminals), and a percentage of those sales may also be collected as interest. Such a loan may actually be to your benefit, since you are usually not pressed to make loan repayments until your business starts turning a regular profit.
Private, P2P, and business loans can work in your favor if you have bad credit- but there are other possibilities too. Be sure to obtain a copy of the Association for Enterprise Opportunity's (3) directory when possible. This organization publishes a list of loan agencies as well as services. The association provides lots of useful loan information for individuals and businesses with bad credit.
- Business Finance: Bad credit start up business loan http://www.businessfinance.com/bad-credit-start-up-business-loan.htm
- "How to use peer-to-peer lending sites to borrow money", by Amy Hoak, Filife, January 28, 2008."Microfinance in the U.S.A. about to explode?" Andrea Chalups, WalletPop, February 17, 2009.
- Association for Enterprise Opportunity. http://www.microenterpriseworks.org/