A constant supply of cash is the passport to business success. Liquid assets of a business are highly reliant on a number of factors such as sales, operational overheads and the size of earmarked cash. A flourishing business does not mean that you will have cash at hand. For instance, you might need to borrow money to scale up your business. Therefore, it is essential that you have the potential to borrow money.
At the time of taking out a business loan, your credit score will be taken into account.
Bear in mind that a separate legal entity of your business does not imply that your personal credit report will not be reviewed.
What if your personal credit history is not impressive?
As you know, your personal credit history plays a paramount role in the approval process; it must be decent. However, a subprime credit rating cannot preclude you from applying for a business loan. Lenders usually check your overall financial condition to make a lending decision.
Your credit score is not quintessential. Your business profitability and other obligations also play an essential role in the decision-making. If your credit score is not stellar, you must do the following:
Many lenders provide bad credit business loans as long as you prove your affordability. Here are the features of business loans with poor credit:
Why does personal credit rating matter?
Personal credit rating is vital to maintain, even though you have a distinct business credit score. Despite a separate legal entity of a business, lenders often examine your personal credit rating because of the following reasons:
Business loans that are available for bad credit entrepreneurs
Here are the types of business loans that you can apply for despite a bad credit rating:
Small business loans are unsecured business loans which are repaid over a duration of months. However, interest rates will be quite high as your credit history is not stellar. Since they are not subject to collateral, there is no risk of losing your valuable asset.
However, if you have given a personal guarantee, which is quite obvious in the absence of collateral, lenders can turn to repossess your personal assets in case your business fails to meet obligations on time.
Small business loans include invoice financing and merchant cash advances, too.
There could be various kinds of unsecured business loans, and each of them works differently. It is recommended that you know how they work so you can choose the right option for you.
Secured business loans enable you to borrow a large amount of money. They are backed by collateral, which you can lose upon payment failure. Since a lender can get their money back from collateral in case of a default, interest rates will be lower than those of unsecured business loans.
The following table demonstrates the difference between secured and unsecured business loans:
|
Aspects |
Secured business loans |
Unsecured business loans |
|
Collateral |
They are backed by collateral. |
They are not secured against any business or personal assets. |
|
Risk |
They are considered risky for borrowers as they can lose their assets. |
They are also risky, but you do not have to fear losing your property. |
|
Interest rates |
Lower interest rates as lenders can cover their money back from your secured asset. |
High interest rates mean that lenders cannot repossess your assets if you default. |
|
Turnaround |
It takes a couple of days to complete the process, as the loan amount is large. |
They are fast when it comes to approval in relation to secured loans. |
Consolidation loans
Businesses that are juggling multiple debts can consider a debt consolidation loan for bad credit. This will help them replace their outstanding small business loans with one large loan to easily manage payments. With the help of a consolidation loan, you can improve your credit history, which will make it possible for you to borrow more money at affordable rates down the road.
Ways to improve your approval chances
Here are the ways to ameliorate your chances of approval:
If you are a start-up, make sure that your business plan is robust. The details on projected profits can make or break it. If possible, try to build a business credit score by paying your suppliers on time and using your business credit card. Income sources should be consistent if you have been trading for years.
Despite a personal guarantee, lenders can't offer you lower interest rates. If you are borrowing a large sum of money, you should consider a co-signer. A co-signer is a co-applicant who will be named in a loan application. It means you both will be responsible for discharging the debt partly or fully. This is possible when you have a business partner.
Since your credibility has come into question, you should try to borrow less money. Lenders will feel reluctant to lend you a large sum of money despite a personal guarantee. Bear in mind that your personal financial condition should also be strong enough to discharge a business loan in case it goes downhill.
You should work on improving your personal credit score, too. Make sure that you:
The final word
You can get a business loan despite a poor personal credit rating because lenders will evaluate your overall financial condition. Try to prove that your business will not struggle to pay off the debt.
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