Bad credit does not mean you can't fund a business. If you have been in business for a short time, you won't have a business credit rating, so business lenders then have to focus on the business owner's personal credit to determine creditworthiness.
Traditional lenders want to see scores in excess of 680, and the credit needs to have multiple credit line histories. But times have changed with the advent of short-term business loans. Due to the short term nature of these products, these business funders/lenders can offer business funding with scores as low as 500 with limited sub-prime credit histories, providing business capital in cases where the business owner has bad credit.
What Business Financing Products Accept Bad Credit?
The most common types of business funding that allow for bad credit are Short-Term Business Loans and Merchant Cash Advances (also known as Future Sales Receivable agreements). Future Sales Receivable agreements(MCA's) are defined as loans or funding that have repayment periods of 4 months to 18 months with weekly or daily payments and have higher approval rates than that of long-term business loans.
These products, because they accept bad credit, mitigate their risk of default by shortening the term, and charge higher costs and fees than that of long-term business loans. It's essential to make sure that you're putting this type of funding to good use and weighing the terms carefully.
Additionally, invoice factoring, which does not factor in business owner credit but that of the businesses they invoice, is also a product that is available for business owners with bad credit.
I get asked this question all the time. "Can I get a small business loan with bad credit" and the short answer is yes. But, let's dig into the ways in which both business lenders and funder's look at credit.
What type of Credit Reports do Business Lenders and Funders Look at in Determining My Credit?
It's important to know that it takes many years to build up business credit, and there are no one source lenders, and funders look at in building a business score. In fact, many business lenders and funders develop their own business score models using many different sources that business owners would never know about. These include public records, vendors, Dun & Bradstreet, as well as social media posts, reviews, and ratings.
As a Business Owner, Does My Personal Credit Play a Role in the Decision?
What Business lenders and Funders heavily rely on is the personal credit of the business owner(s) by using Experian, Equifax and/or Trans Union.
Many applicants don't realize that the personal credit of the business owner is an important factor in deciding the creditworthiness of the business. It depends on the business lender which credit bureaus they use.
What is Defined as Bad Credit?
Poor FICO scores of business owners with bad credit will range depending on the business lender/funder or bank reviewing the application. But, as a general rule of thumb, Prime Credit scores are 720 and above, Mid-Prime 680 to 719, poor 600-679, and Sub-Prime below 600 into the 400's.
Less than Prime scores can be viewed as bad credit.
Alternative Business Lenders provide options for business owners with a spotty credit history. Most of these lenders/funders will offer terms at all credit levels from Prime to Sub Prime/Bad Credit. A few lenders have no minimum credit score requirement at all!
Is a Hard Inquiry Going to Hurt My Credit?
Not necessarily.
It's always crucial to shop around to get the best offer for you and your business. Comparison shopping is a smart thing to do, and your FICO score considers ALL inquiries within a 45-day period for a business loan as a single credit inquiry.
Many times, lenders discourage shopping around due to scores dropping, but that may be bad advice, as they may just be looking at trying to close a sale instead of looking out for your best interest. To learn more check out https://www.myfico.com/credit-education/faq/credit/how-do-inquiries-impact-credit-scores
What is a Soft Inquiry on My Credit?
A soft inquiry is when you check your own credit, or a lender checks your credit for a pre-approval of an offer. Soft inquiries will not show up on your credit report and do not impact your credit scores because they're not considered in credit scoring models. Soft inquiries are not disputable, but you have a right for them to be disclosed to you.
How is My Credit Score Calculated?
FICO scores use many different pieces of credit data to determine the score, but it's broken down into five main categories.
Not so simple, is it? Many times consumers will say if I didn't have so many inquiries, my credit would be so much higher, but the reality is the credit bureaus look at so many data points in determining your overall score.
If you're a credit junky like me here's a source of information related to what's evaluated in your FICO score https://www.myfico.com/credit-education/whats-in-your-credit-score
How to Improve Your Credit Score?
If you want to improve your credit score, in many cases, you may need to be patient. Improving your credit score can take some time, but there are ways in which you can make a dent in it quickly. There are some steps you can take to get the process going for improving your credit.
Steps to Improve Your Credit Scores
Step 1: Get a Complete Copy of your Credit Report. Get a copy of your credit report that covers all three bureaus, Experian, Equifax, and Trans Union. Look at all of the trade lines and see if there are any errors on the report, and that all current and former trade lines are accurate. If you see any errors contact that creditor and provide supporting documentation or ask for supporting documentation to support the claim that it's a mistake. Dispute any inaccuracies on your credit reports.
Step 2: You can get credit for making utility and cell phone payments on time. Not many consumers know about this, but this is a real new opt-in feature where consumers can now allow the credit bureaus to connect to their bank account to identify both utilities and telecom pay histories.
Step 3: Payoff, settle or work out payment plans for bad debt. Contact any creditor who you have a bad debt with on your credit report and try and resolve by making settlements and paying off or getting on a payment plan to do so. Once paid in full, submit to credit bureaus.
Step 4: Request any increases to your credit limits on credit cards. Fico calculates total outstanding debt verses credit availability. This is called the credit utilization ratio. Lenders typically like to see 30% or less debt balance to the credit limit. The more availability you have, the better.
Step 5: Don't close unused credit cards. Keeping unused credit card open improves credit availability.
Step 6: Re-establish new credit without credit. It's hard for the credit algorithms to calculate great scores, so if you lack credit, start to open credit cards and demonstrate to the bureaus the ability to make timely payments and manage debt. Even a secured credit card helps if you have really bad credit.
Step 7: Don't apply for too much credit in 3 months. Applying too often can lead to a lowering of scores, but don't worry if you are just looking for a few items as it is not a major impact.
How long will it take to improve credit?
How long it will take to improve your credit can be complicated. The simple answer depends on what kind of damage there is. A lot of times, there is no quick fix and requires patience. Delinquencies and bad debt, even if paid in full, will remain on credit for 7 years. So, resolving those bad debts now will show improvement in a couple of months, but it will take some time to show large increases in credit rating.
The bottom line is don't procrastinate start now on correcting and resolving issues as it will pay off big time in the long run.
The Bottom Line About Getting a Business Loan With Bad Credit
There are short-term business funding solutions available for business owners with bad credit. These products are not all the same. Find and compare terms or find a company that will assist in the comparison so you can get the best bad credit business loan terms possible. Simply put, shop, compare, and you will save!
