You may be wondering how you can obtain a small business loan with bad credit. The good news is, it's actually possible to get some business financing, even if your personal credit rating is poor.
Lay the Groundwork
Begin by taking a look at your credit rating. How bad is it really? Most Americans have a "fair" credit rating, which is a FICO score of 640-680. Anything below 640 is considered a bad rating, and anything above 680 is considered really good. To see your FICO score, you can obtain your credit report from the three main credit reporting agencies: Equifax, Experian and TransUnion. Once you get your report, check it carefully for inaccuracies and errors, which can lower your score.
If your personal credit rating is poor or borderline fair, begin to lay the foundation for good business credit. Establish a phone and Internet account in your business' name. Obtain a secured business credit card. Make sure these accounts report to the credit bureaus, and make your payments on time every time. This will start you on the path to good business credit.
Secured Small Business Loans
There are secured small business loans available for almost anyone, regardless of credit history. That's because the loan is secured for the lender with the promise of collateral if you default on the payments. This collateral can be in the form of accounts receivable, inventory, equipment or other property which will be seized if you cease making payments. However, since having collateral presents a lower risk to the lender, the interest rate on secured business loans is generally much lower than on unsecured loans.
Unsecured Small Business Loans
There is an unsecured loan available even to business owners with bad credit; it's a kind of cash advance based on your future credit card sales. To qualify for this kind of loan, you have to own a business that is retail, restaurant or service-oriented, and that accepts credit cards. You will need to provide the lender with at least 6 months of bank statements, credit card statements and a lease agreement (if applicable) in good standing.
Because this line of credit is unsecured and the risk to the lender is greater, expect to pay a huge amount of interest: sometimes 30% or more. This can put you at risk of draining your profits just to pay off the loan, so make sure this is a situation you can handle. Also, make sure you are dealing with a reputable lender. If the deal sounds too good to be true, it probably is.
Loans from Friends and Family
If you have friends or family who are willing to invest in your business, it might be worthwhile to check with them if you cannot obtain a loan from the bank. If you choose to go this route, make the agreement as formal as possible, signing papers and making payments just as you would to a bank. Borrowing money from loved ones is a sticky situation, one that can lead to hurt feelings, so it's in your best interest to handle everything in a businesslike manner.
Educate yourself about your options, and assess exactly how bad your credit situation really is. Once you have a clear view of your situation, you can decide which of these loans are available to you.______________________________
Sarah Baker is a documentary filmmaker and writer currently living in New Bern, NC. Her first book, Lucky Stars: Janet Gaynor and Charles Farrell, will be published December 2009. Read more about her.