How to Get a Business Loan with Bad Credit

Can you get a business loan with bad credit? If you already own a business, it’s a little easier. For starting a business, it’s a little more difficult.  You don’t have all the options you may have if your business is already established. For example, you do not have receivables to finance or credit card purchases to use to get a merchant cash advance.  That does not mean there are no options however. 

Can You Get A Business Loan with Bad Credit to Start a Business? 

There are options for starting a business, even if you have no money and less than stellar credit. Some of the options are loan options, and some of them are something different all together. You can get a business loan with bad credit, but it will not come without a cost. 

Collateral

Most of the options for a business loan with bad credit are going to require collateral. Here are some of those options. 

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

SBA Loans

There are many SBA loan programs.  For starting a business, the 7(a) program seems to be the most useful.  As the Small Business Administration’s flagship loan program, it offers federally funded term loans up to $5 million. You can use the funds for a number of things, including  expansion, purchasing equipment, working capital, and even starting a business.  Banks, credit unions, and other specialized institutions in partnership with the SBA process these loans and disburse the funds.

The minimum credit score to qualify is 620, and there is also a required down payment of at least 10% for the purchase of a business, commercial real estate, or equipment. The minimum time in business is 2 years. In the case of startups, business experience equivalent to two years will suffice. Here’s the kicker. You have to have collateral worth up to 50% of the loan to get approval with the minimum credit score.

The 7(a) is by far the most popular of the SBA loan programs, and the funds are available for a broad range of projects, from working capital to refinancing debt, and even buying a new business or real estate.

401K Loan

If you have a 401K, you can take a loan from it to fund a business.  You will be paying it back with interest, but the interest is being paid to yourself.  Yet, there is an even better option than this for 401K financing to start a business. 

The IRS calls it a Rollover for Business Startup (ROBS).  Why is it better than a 401K loan?  First of all, not all plans allow for loans.  If your plan does, the IRS will only let you borrow up to 50%, up to $50,000, before you have to start paying taxes.

Also, with a 401k loan, you would be paying interest.  That isn’t terrible, as you are paying interest to yourself. However, you will be making monthly payments, whereas with the 401K Rollover for Working Capital, there is no payment.

This is a unique program. It allows you to tap into your existing retirement account without penalties or taxable distributions. You also avoid loans, banks, or credit checks. There is no debt and no monthly payment. 

The lender will ask for a copy of your two most recent 401(k) statements. If the plan has a value of more than $35,000,  you can get approval. This is true even if you have really bad personal credit. You can get however much of your 401(k) is “rollable.” 

The plan you use cannot be from a business where you currently work. It will have to be from previous employment. Also, you can’t still be contributing to it. 

This type of funding can also help you build business credit

Guarantor

If you do not have collateral and you have bad credit, you are probably going to need a guarantor.  You can use a guarantor to get most types of loans.  One great option is the Credit Line Hybrid. 

A partner, friend, or family member with good credit can work as a guarantor.

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

Credit Line Hybrid 

This is unsecured business funding.  It allows you to fund your business without putting up collateral, and you only pay back what you use.  

If you don’t have a guarantor, you have to have a minimum credit score of 680.  In addition, you can’t have any liens, judgments, bankruptcies or late payments.  Furthermore, in the past 6 months you should have fewer than 5 credit inquiries, and you should have less than a 45% balance on all business and personal credit cards.  It’s also preferred that you have established business credit as well as personal credit. 

Typically, approval is up to 5x that of the highest credit limit on the personal credit report. Often, you can get interest rates as low as 0% for the first few months, allowing you to put that savings back into your business. 

The best part however, is that these accounts help build business credit as well. 

You can use the cash you get from the Credit Line Hybrid to fund a down payment on an SBA loan if needed. 

What If You Do Not Have Collateral or a Guarantor? 

What if you cannot get a business loan with bad credit? Maybe you don’t have collateral or a guarantor? There are a few other possibilities.  You can work with a crowdfunding crowdfunding company. The problem with crowdfunding is that, despite some companies finding success, success is the exception rather than the rule. 

Angel investors are an option as well.  These informal investors are often family or friends, but not always.  

Another option is alternative lenders.  These are non-bank lenders that will sometimes offer loans to businesses with lower minimum credit scores.  They do look at other factors, like time in business and income.  In fact, most of the time you have to be in business for at least 6 months. 

That makes it hard, though not impossible, to get funding from alternative lenders to start a business.

Learn more here and get started with building business credit with your company’s EIN and not your SSN.

You Need a Plan, and Business Credit

Ok so, you need to figure out how to get the funding to start.  Explore all your options, including  finding a guarantor, collateral, or tapping into your 401K.  Often the best idea is to combine two or more funding sources to get things rolling.  Still, however you start, begin building your business credit profile from the start. 

Your business credit profile is similar to your personal credit profile, except that is solely for your business.  It includes your business credit score, which is a way that lenders can determine how likely your business is to repay its debt, apart from you the owner. 

The thing about a business credit score is, you have to be intentional about establishing and building it. The first step is setting your business up properly to be fundable from the start.  Then, you can work on getting accounts that will report to your business credit profile and help you build your score. 

Once you have a strong business credit score, it will be much easier to get a business loan with bad credit, because your personal credit will not be the only thing lenders consider.  Don’t ignore it, because it can still affect things.  However, it will no longer be the sole ruler of your financial future. Find out more today at CreditSuite.com.

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