Imagine you want to start a business and need a loan for it. However, upon checking your finances, you realize that you have a bad credit score. As a result, lenders might not be too convinced to give you a business loan.
A soon-to-be business owner failing to secure a business loan is not an uncommon phenomenon. In fact, according to Bloomberg, around 22 percent of loan applications in the US were rejected last year. Many of these applications were for business loans.
In fact, in the UK, 2021 saw almost 50 percent of small business loan applications being rejected, according to The Times. A lot of these rejections were caused by the fact that the businesses didn’t have good credit scores to back their loan applications.
Whether it’s your business credit or personal credit, you need a good score to secure a business loan. That being said, what many don’t know is that you can still secure a loan with bad credit. You just need to go through a bit of a lengthy but necessary process. Here’s how.
Understand Your Credit Situation
Before you dive into the loan application process, you must first understand where you stand on your existing credit situation. For that, you need to get a copy of your credit report and review it thoroughly.
Keep an eye out for any sort of financial or information inaccuracies, errors, or outdated information. These minute details can negatively impact your overall credit score. Upon spotting any such discrepancies, immediately report the matter to the concerned authorities and correct them.
In many cases, you might want to build business credit without using personal credit. That’s when you don’t want to entangle your business finances with your personal ones. For that as well, you’ll need good business credit scores.
According to eCredable, it can take between six months and a few years for you to get your business credit to your desired state. Under such circumstances, you can either wait for that to happen or simply explore a different route.
Either way, understanding your credit situation is a vital step in securing a business loan. Without doing so, you’ll never realize what’s actually wrong with your credit scores and what it might take to get them fixed.
Explore Alternative Lenders
With a bad credit score, traditional banks and financial institutions will surely reject your loan application. Even then, if you want to secure that loan, don’t lose hope.
There are alternative lenders like peer-to-peer lending platforms and community development financial institutions who often have more flexible lending criteria. For them, your poor credit score might not be a decisive factor in accepting your loan request. They may be more than willing to work with you and lend you the money taking into account other factors beyond your credit score.
However, as pointed out by NerdWallet, alternative lenders may charge higher interest rates or require collateral. Even then, they can be a viable option for securing the funding you need. Be sure to carefully research and compare different lenders to find the one that offers the best terms and conditions for your situation.
Develop a Solid Business Plan
One of the most effective ways to convince lenders to overlook your bad credit is by presenting a well-thought-out business plan. A comprehensive business plan demonstrates your commitment to your business’s success and your ability to repay the loan. Include financial projections, business strategies, and a repayment plan that outlines how you’ll use the loan to generate revenue and pay it back.
Your business plan should also address how you plan to mitigate the risk associated with your bad credit. By showing lenders that you have a solid plan in place and that their investment is low-risk, you’ll improve your chances of getting approved.
Build Relationships with Lenders
Building relationships with lenders can be a long-term strategy to improve your chances of securing a business loan with bad credit.
Start by approaching local banks, credit unions, and CDFIs, and explain your business goals and financial situation. Even if they can’t approve your loan today, they may offer guidance on improving your credit. Networking within your industry can also lead to valuable connections with lenders who understand the unique challenges faced by businesses in your field.
As you can tell from our discussion so far, having a bad credit score may disqualify you from securing a traditional loan. However, there are other alternatives and actions you can take to get the funding you need for your business. Therefore, if you ever find yourself in such a situation, don’t hesitate to act in accordance with the tips we’ve shared above.
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