You have decided to start a business and you need an extra supply of funds to hit the ground running, but your bad credit history comes in the way. Can you secure a loan? Getting a business loan is not as easy as any other short-term loans. Your lender will look over your business revenues, the duration of your business and repayment plan. You cannot get the loan unless you satisfy your lender in all terms. Getting a business loan becomes more difficult when you have a start-up.
Traditional lenders will require you to have a good credit rating before approving these loans. However, private money lenders accept an application from borrowers with stellar credit history. Numerous factors can affect your business credit rating. Not knowing where you are slipping up and what influences your business credit score is rife.
Credit scores are important
Business loans do not act as a personal loan. If you need money to fund your start-up, the lender will make the decision based on your personal credit rating. If your business is a few years old, the lender will analyse your business credit score too.
Your personal credit score will inform the lender of:
- Payment history
- Length of credit history
- Credit capacity
- Total number of accounts
- Credit utilisation
- Hard credit inquiries
According to Experian, the range of personal credit score varies from 560 to 990, and the score must fall between 721 and 880 to secure a business loan. However, the lender will also consider your business credit rating.
It varies from 0 to 100. The higher the score, the better financial position a company is deemed to be in. This number indicates a company’s credit obligations.
It is calculated after taking into account the following factors:
- The size of your company
- Your industry’s risk factors
- Your relationship with vendors
This score is not calculated on the basis of your personal information rather information from current account providers, credit card companies, publicly accessible data and your payment behaviour to other companies.
|Credit Score Range||Risk|
|91-100||Very low risk|
|51-80||Below average risk|
|0-20||Very high risk|
Direct lenders generally consider both types of credit scores and they turn down the application if they suspect that it is risky, but a few of them like British Lenders allow borrowers to apply for these loans despite bad credit rating. However, the interest and fees can be significantly higher. If you opt for a bad credit small business loan, make sure that you have chosen the best deal and you will not fall behind repayments. Focus on APR (Annual Percentage Rate) of all options available to you before grabbing any offer.
Having said that you are likely to have your application rebuffed in case of poor credit rating, you should consider other options:
- Bad credit loans
As the name suggests, these loans particularly target borrowers with bad credit file. The lender will approve your loan application without asking for guarantor and collateral. The interest rates will be higher, but you can get a better deal after research. British Lenders makes all possible efforts to provide bad credit loans with competitive deals. Another good thing about these loans is you do not need to pay the whole of debt in a lump sum. The term of these loans varies from three months to 36 months. Instalments make the loan manageable.
- Secured loans
If bad credit loans are not your cup of tea for whatever the reason, you can take out secured loans. The term of these loans is likely to be longer than bad credit loans. The lender will allow you to borrow money at a lower interest rate as you have secured it. This minimises the risk to be borne by the lender as they can recover money by liquidating the asset if you fail to pay off the debt permanently.
- Merchant cash advance
It is a kind of loan. A finance company provides you with cash in exchange for a percentage in your revenues or profits. You can use these funds the way you fancy. However, you must remember that it can be very expensive if your credit history is not stellar. Before choosing this funding source, make sure that your business will not suffer due to a reduction in cash inflows.
The bottom line
No matter which kind of funding source you opt for supplying cash to your business, you cannot underestimate the importance of improving credit score. Try to pay your bills on time. Maintain good financial behaviour with your vendors. Never close all credit card accounts, otherwise, your credit utilisation will go up hindering your capacity to borrow money. Getting a business loan is painstaking. Make sure that your personal and business credit history is good.