Think You Can’t Get a Business Loan With Bad Credit? Think Again!
by Carrie Hinkel on March 20th, 2008
Just because your personal finances are a mess and your credit score has hit rock bottom doesn’t mean that your business it out of luck when it comes to getting approved for a loan. Yes, really! Many small business owners rely on a home equity loan to get their businesses off the ground; but for others that’s not even an option. So, without a personal loan to fall back on, what can you do to give your business a much-needed cash boost? Actually, you have more options than you might think.
First things first
If your personal credit score is less than 640, then you will most definitely want to separate your personal credit from your business credit. All you need to do is obtain a tax ID number or Employee Identification Number (EIN), rather than using your social security number.
Building your credit history
One you have a clean starting point for your business, it’s time to start building a loan-worthy credit score. You may want to start by getting a business credit card; however, you must be certain that you can pay off the balance in full, each and every month. Also, begin to build credit lines with your vendors and suppliers. The more you can show banks and lending institutions that you have a history of making payments on time, the better.
Obtaining a business loan
Once you’ve successfully implemented the above techniques, you’ll be well on your way to getting the larger loan you desire. However, building a stellar credit score takes time and, as with many small businesses, you may not want to wait years before the bank is ready to trust your business as a borrower. However, there are several ways you can get your business a loan, based just on the small credit history your business has. First, you can work your way up to that large loan with the "loan ladder" approach. That means you get a smaller loan, pay it off quickly and then get approved for a larger loan, etc. It may take several steps, but eventually you’ll prove to the bank or lending company that you are ready for that mega-size loan.
There are also two options that help to share the risk between lender and borrower. The first option is to get a collateral loan. This means that you are putting your assets as security against the loan. This can be expensive office equipment, land, office building, home, etc. This makes getting a business loan easier but, of course, it also increases the risk to you. The second option is to get someone with good credit to co-sign your business loan. This could be a family member, friend or business associate. Doing this will increase both your chances of getting a loan and the loan amount itself. Something to think about with this option, however, is the personal repercussions you may face if you end up defaulting on the loan.
Another option is a bad credit business loan. While this is a high interest loan with hefty penalties for late payments, it is at least an option for you when nothing else is available. Plus, if you can pay the loan off in good standing, you’ll be one step closer to getting that "perfect" business loan.
So you see, even though you may have made some mistakes in the past with your personal finances, you can start fresh with your business credit. However, it’s important that you learned a few things along the way and don’t fall into the same pattern once again.