How To Avail a Business Loan with Bad Credit?

January 03, 2022

Are you someone who possesses a bad credit history and is pondering whether your business loan application will be approved or not? Worry no more! Well, acquiring a business loan with bad credit might be difficult but not impossible. Some lenders specialize in startup loans and even offer business loans to less creditworthy borrowers.

We have encapsulated quite a few things that will help you avail of a business loan with bad credit. Keep scrolling to understand what odds you need to fix to get the approval of small business loans with bad credit.

Before digging deep, figure out the key reason for availing a business loan, as you will repay the debt for years.

Key Reason to Attain a Business Loan

Before you decide to avail of a business loan, invest your time in the evaluation. Figure out why there is a need for financing. You need to come up with a solid reason when you are applying for a business loan.

Count on the following set of questionnaires to determine your need for financing:

  • Will the borrowed funds aid in the increment of overall business efficiency?
  • Does the access to funds make your business more competitive?
  • Will it help to increase the sales or production capability?
  • Is there any other alternative to maintain the business flow without financing?
  • Can you opt for crowdfunding and stock offering?

These questions will help you decide whether you should move further with small business loans with bad credit or not. You can use small business loans for multiple purposes, but it is not the only option to rely on.

Have a clear purpose for availing of a business loan that defines how the funds will improve business performance.

Now when you know the reason for which you need finance, the next thing to consider is eligibility criteria for a business loan.

Business Loan Eligibility Criteria

To know your creditworthiness for a business loan, primarily you must know the business loan eligibility criteria. Lenders can offer a business loan to any individual who has a legitimate business with a good turnover. However, banks and finance providers have set eligibility criteria to validate the business loan approval.

Lenders consider the following parameters to determine your creditworthiness for loan approval:

  • Type of business (Proprietorship/ Partnership/ Private Ltd. or Public Ltd.)Annual business turnover
  • Overall profit made by the business in last three years
  • Business cash flow
  • Business track record

With all these details into account, lenders can determine whether a business loan can be sanctioned or not.

Factors to Check Your Eligibility

Until now, you are already aware of the fact that you have bad credit, and things are going to be odd contrary to an applicant with a good credit score. The best part of this situation is that a credit score is not the only factor that the lender will consider. So the ball is still in your court.

Count on the below-mentioned factors to evaluate your business loan borrowing eligibility:

Personal and Business Credit Score

To figure out your eligibility, lenders count on your personal credit score together with the business credit score. You must have a credit score of at least 530 to get approval for a business loan with bad credit. At the same time, your business credit score ought to be 680 or above in order to unlock the benefits of more favourable financial services.

Business Tenure

After credit score, lenders count on your business tenure. Since how long your business has been there matters a lot. It helps out in determining your business creditworthiness for loan approval. A business that has been operating successfully at least for one year or more has better chances for loan approval.

Annual Revenue or Turnover

The annual revenue of the business provides insight into the repaying capabilities. Being familiar with the business turnover helps to determine whether the requested amount can be sanctioned or not. Although, startups that don’t have enough financial records can count on future projections. It thoroughly depends upon your capability to make the lender understand that you will be reaching the highest pinnacle in the upcoming years. It will help you to get easy approval for startup business loans with bad credit.

Business Cash Flow

Cash flow depicts the venture’s overall in and out cash for a specific time frame. Similar to revenue, this figure helps the lender understand how the borrower is going to cover the debts monthly. In general, cash flow is considered an excellent indicator for computing the risk factors.

Existing Debt Load

Possibilities are you might have existing debts to repay, which might affect your borrowing capabilities. Current business debt load helps determine how you manage your business money along with the ability to meet financial obligations. If you have a high debt loan, then the chances of availing of a business loan with bad credit might decrease. Thus, try to keep the debt load as low as possible to increase the chances for a business loan approval.

Purpose

A few lenders count on the business funds, whereas others stick to the key purpose for which you have applied for a business loan. For instance, banks find it more favourable to sanction a business loan that has been applied to increase the sales capability of the business.

After figuring out that you can cope with the eligibility criteria of a startup business loan with bad credit, look for the available financial services.

Compare Available Business Lending Options

All lenders do not offer the best business loans at the lowest interest rates; thus, you have to look for available possibilities and pick the best one out. If you are looking for small business loans with bad credit, count on lenders with lenient eligibility criteria. You can also look for guaranteed startup business loans with no credit check, but all you have to do is explore and compare.

Certain lenders offer a business loan at a lower credit score as compared to the traditional banks or credit unions. Make a list of these lenders, and select the one that perfectly fits your business needs.

You need to understand that you might not get the best interest rates, as these are reserved for creditworthy borrowers. However, you still need to compare the possible lenders to crack the best deal. A lender with a 13% interest rate will surely be better than the one offering the same amount at 20%. In addition, look for a lender who offers a quick application process.

The best business loan usually orients around the following pointers:

  • Current business requirement
  • Strategic needs coupled with a tactical business need
  • Ongoing decisions
  • Loan amount
  • Applicable interest rates
  • Business loan processing fee
  • Applicable prepayment or foreclosure charges

If you have any plans to repay the loan amount before completion of loan tenure, look for a lender with the lowest prepayment charges.

If you have thought to pay the amount as per the opted loan tenure, count on the lender offering the lowest processing fee.

Now, when you have a lender, the very next thing to count is loan documents. To avail of a business loan with bad credit, you need to prepare certain documents beforehand.

Be Ready With the Required Documents

Lenders usually ask for a specific set of documents to put forward the verification process. As a borrower, you need to be prepared with requisite documents beforehand. In case of a business loan, you have to provide personal as well as business documents.

Certain lenders also ask for a business plan, demonstrating your ability to repay the borrowed amount. With documents, you will have to provide a detailed business plan together with the revenue projections.

You will have to provide the below-mentioned documents to move forward with the business loan application:

  • PAN Card: Firm and Individual
  • Identity Proof
  • Address Proof
  • Business Address Proof
  • Bank statement (last six months) together with latest ITR
  • Balance sheet, Profit/Loss account (last two years)
  • Continuity Proof / Trade Licence

Prepare these documents beforehand to seamlessly avail of a business loan with bad credit. So, all set with the documents? What about your business plan? Have you thought about it yet? What are the things that you need to consider while preparing your business plan? All these questions might sound tricky but can be answered with clear thoughts.

Pen Down a Comprehensible Business Plan

If you are thinking of applying for a business loan without a business plan, it’s high time to drop the idea. Lenders go through certain factors, and a business is one of them. A formal document highlighting the business projection, key goals, and the steps to achieve these goals is highly important.

Additionally, your business plan must include an executive summary of your venture. You will have to prepare a business plan with the agenda of explaining the repayment capability.

Here is a list of sections that must be present in your business plan:

1. Illustration of Products and Services

This section describes how your product or service is beneficial for the customers. Consider it as an opportunity to explain how your products and services are better compared to the others available in the market.

2. Market Analysis and Market Strategy

The market analysis revolves around the target customers. Don’t forget to add demographics to make it more authentic and readable. Add a marketing strategy that you will stick around to promote your product and reach out to the target audience. It should also include a marketing budget.

3. Organization and Management

The presence of an organizational chart helps to determine how your business operates. This section must include details about the management team, advisors, accountants, and much more.

4. Finance

The finance section of your business plan will depict the money-making mechanism. It must comprise the current and future projection of how the company is going to make profits. For a well-established business, you will have to add income statements along with cash flow statements.

However, this format may vary from one industry to another. So, try to give a brief about who you are, your offerings, how you work, your team, and your projection.

Hopefully, you have fixed all your odds and ends. Now you can submit your business loan with a bad credit application to the lender.

5. Submit Your Loan Application

When you have prepared everything, including the business plan and loan documents, submit your loan application to the chosen lender. Remember, the application process may vary from one lender to another. Usually, lenders allow you to submit an online application. Thus, get in touch with your lender to know about the application process.

Types of Small Business Loans for Bad Credit

Obtaining a business loan with bad credit can be perplexing. To deal with such challenging situations, lenders offer several finance products. Here is the list of most common business loans which are available for business persons with bad credit profiles:

1. Term Loans

It is a traditional type of finance in which businesses can avail a lump sum amount of payment. The borrower has to repay this amount over a set time frame. Term loan comes with flexible repayment tenure of three months to ten years.

2. Business Credit Cards

With the presence of business credit cards, you can easily and conveniently cover business expenses. You can then repay the amount in instalments or outright as soon as you receive the payment from your end customer. You can easily avail a business credit card through quick approval from the bank without going through a rigorous process.

3. Invoice Factoring

Invoice factoring is a finance product that allows you to avail loan on your outstanding invoices. Usually, you get 85% of the invoice amount through invoice factoring. When you avail of such a loan, the factoring company becomes liable to perform payment collection and repay you the leftover amount after deducting the borrowed amount. Additionally, the company will charge a factoring fee.

4. Invoice Financing

Invoice financing is similar to invoice factoring, apart from the payment collection term. In this finance product, the business itself will be responsible for the collection of payment. Invoice financing is the foremost choice for business owners with bad credit scores.

5. Equipment Financing

As the name says it all, this type of finance is used for the purpose of a machinery purchase. If you have to purchase any sort of machinery for your business, then you can count on equipment financing. This is considered a secured loan as it is associated with collateral. These loans come with a flexible repayment tenure of 25 years at maximum.

Tips to Avail a Business Loan With Bad Credit

Qualifying for a business loan approval might get difficult when you have a low credit score. You can pin your hopes on the following tips to avail of a business loan with bad credit:

  • Pen down your business plan by clearly focusing on the technicalities of generating revenue.
  • Look for a co-signer or co-borrower with higher personal credit. Having such a co-applicant will increase the chances of loan approval.
  • Provide valuable and authentic collateral for securing your business loan. It will help in reducing the involved risk specifically for the lender.
  • Count on tips to improve your credit score a year before applying for a business loan.

Bottom Line

The thought of availing a business loan with bad credit might seem daunting, but it is not that difficult and definitely not impossible. You can also qualify for a business loan even after having a low credit score. Start by figuring out your financial needs, eligibility criteria, potential lenders, available finance products. Just keep an eye on the lenders that are offering loans at a lower rate of interest.

Frequently Asked Questions (FAQ’s)

How to get a startup business loan with bad credit?

You can easily get a startup loan with bad credit by digging deep into your business needs, business loan eligibility, possible lenders, available products, documents, and credit score.

Can I get a business loan with a 500 credit score?

Yes, you can get a business loan with a 500 credit score. Although, you will get a business loan at higher interest rates. So, choose wisely after comparing the available options.

What credit score is needed for a business loan?

For a business loan, you must have a credit score ranging from 700 to 900. It will help you acquire a business loan at a lower rate of interest.

What other types of business financing can you get with bad credit?

You can get a term loan, invoice factoring, invoice financing, business credit card, and equipment financing even after having bad credit.

What can you do if you are denied a bad credit business loan?

If you are denied a bad credit business loan rigorously, don’t apply to other lenders. Take some time, improve the associated factors such as credit score, and then re-apply for the loan after 6 months or a year.

What documents are needed to apply for a business loan with bad credit?

To avail a business loan with bad credit, you need to provide identity proof, address proof, business proof, bank statement, ITR, cashflow and profit, and loss statement.

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Category:Business Loan

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