Improving your credit score is key to getting financing for your business, but a variety of loan options can help in the meantime.
Cash and access to credit are the lifeblood of a business, especially in its formative years. Those that have access to enough to meet their needs have a leg up on tackling the many challenges that can arise, whether it’s an unforeseen equipment repair, covering extra supply costs or riding out a run of lackluster sales. Take away or severely restrict credit, however, and most businesses will rapidly grind to a halt.
Small businesses with a solid track record of paying their bills on time and strong cash flow have more options for qualifying for financing at more attractive interest rates.
But what if your credit history isn’t in good shape? While a lousy credit score will severely limit your access to credit, there are steps you can take to improve your chances of qualifying for a small business loan. Beyond that, there are alternative lending companies and other sources of business financing that you may be able to tap even without a sterling credit history.
Conventional Small Business Loans
One of the first places many small businesses look for financing is a bank that offers loans backed by the Small Business Administration. The government gives lenders an incentive to loan money to businesses by guaranteeing up to 85% of the loan.
Still, qualifying for an SBA loan isn’t easy. The reasons small businesses are typically denied funding range from poor credit to weak cash flow. Before approving a loan, banks typically want to see proof that your business revenue is growing steadily.
If you’ve been in business for less than a year, lenders will gauge your creditworthiness by looking at your personal credit history. If they see any red flags, say because your credit score is below 650, the odds are against you getting approved.
Improve Your Chances of Qualifying for a Small Business Loan
While lenders review a number of factors when considering your loan application, what they’re really looking at is your ability to repay the loan. To improve your chances of getting approved, start by pulling your credit report. That way you have a good idea of what your credit history looks like before applying. If there are any errors, contact the credit bureaus and ask for them to be corrected.
Ensuring that you don’t miss payments on your current debt and, if possible, reducing what you owe, will help raise your credit score, eventually. While you can’t mend your flawed credit history overnight, there are other things you can do to ease lenders’ concerns. Prepare a detailed business plan that you can provide when you apply for a loan. This can help assuage lenders’ concerns that your business won’t survive long enough to pay them back.
You can also offer up your home or other personal assets as collateral for the loan. Of course, if you can’t repay the debt, you’ll lose those assets. Do you have a mentor or business partner with a more established credit history? You can ask them to be a co-signer on your loan, which can improve your odds of being approved.
Turn to Alternative Lenders
If you’ve been denied for a loan from traditional sources, you may have better luck getting financing from alternative lenders. These companies will accept average credit scores and typically only need to see your financial statements to gauge your creditworthiness.
Contrast that with traditional financial institutions, which in addition to a good credit score will want you to provide collateral, a thorough business plan and all manner of financial records, including tax returns and bank statements.
Online lenders are also more likely to lend smaller amounts. Their application process tends to be faster and less onerous. The FINSYNC Lending Network matches applications from small businesses with the lenders who have the best options for them.
Consider Invoice Financing
Small businesses with poor credit scores may also qualify for certain short-term loans. One example is invoice financing, which involves essentially borrowing against the amount your customers owe you for a product or service that they’ve purchased. By doing this, you ensure you get the money upfront without having to wait for your customer to pay.
With invoice financing, the strength of your customers’ credit is more important than your own, which is helpful if you struggle in that area.
With this type of loan, the lender will charge you a percentage of the invoice. You generally get 85% of the amount right away and then the lender will release the remainder once your customer pays up. Expect to pay a processing fee and perhaps other costs for this type of short-term financing.
Use Credit as Cash
You may have trouble getting more credit right now, but are you using your existing credit fully? FINSYNC Pay enables you to access the available balance on your credit cards to pay your rent or any other kind of bill you ordinarily pay with cash or check.
With this approach, payments are set up via email, without the need for credit card account numbers or other information changing hands, which minimizes identity fraud risk. Moreover, this approach will free up your cash for other needs, buying you more time to line up the best online loan or other more accessible financing options.
All small businesses struggle at times to make timely payments on their loans and credit cards. While this can hurt your ability to access some types of financing, it pays to remember there are other options available.