Published By Janet Gershen-Siegel at January 8, 2018
Poor credit does not need to be an albatross around your company’s metaphorical neck. However, it does make it a bit tougher to obtain a business loan.
For a brand new small business in particular, your company credit will be poor as a matter of course. This is because you just will not have the sort of record and seasoning which can make your commercial credit score rise (and, for this reason, make lending institutions want to loan your company funds).
Hence, lending institutions are not going to be too eager about offering your small business a business loan. This is because they truly have no idea whether your company will have the ability to pay back the loan. But you are nonetheless, justifiably pondering how you can subsidize a company with substandard credit.
Because of this, lenders will commonly obtain a UCC blanket lien in case they do give your company a loan. A UCC blanket lien is a note which is included in your credit report. It says that the creditor has an interest in all your small business’s assets until you repay the loan fully. Consequently, there can be dire consequences if you need to default.
Additionally, most of these loans will also call for personal guarantees.
However, if a loan does not require a personal guarantee, then your business is normally going to be looking at unsecured business loans, and those are coupled with steep rates of interest. These kind of company loans are either short-term (so you have to pay them back quickly), receivables financing (where you can get a loan based on business you count on to be coming in because you have pending billings which your own customers have not paid to you yet), or vendor cash advances. These all come with rates of interest which are often 40% or higher.
The leading advantage is that you do not need to provide a personal guarantee or allow a UCC blanket lien. If you end up defaulting on the loan, then your residential property and various other individual assets will not be confiscated, and neither will your inventory. Nevertheless, this also means that you regularly must have strong revenue or a significant amount of time in business. In general, your individual credit must be fair or better (that’s even without any a personal guarantee requirement).
Interest, interest, interest! As reported by Nerd Wallet, Kabbage can provide an unsecured business loan – yet the annual percentage rate could be as high as 99%! If you think that’s usury, think again. In Ohio, the usury laws don’t apply to unsecured loans.
Another pitfall (though not everybody will view it in that manner) is that unsecured business loans often require that your company has been in business for at minimum six months, or that you have no personal bankruptcies, or your small business must prove a minimal yearly revenue amount – which means opening your books to your creditor. If any one of these requirements has already been met by you, then you probably will not see this as a real disadvantage. However, if your business is brand new, and you do not yet have a regular clientele and revenue, and you have had personal bankruptcy issues, then you might be shut out of your few remaining alternatives.
For all of these alternatives, you will usually have a more ideal rate of interest (and you will most likely have more options, so you can shop around and compare plans) if your business credit score is better than poor. If your company can sit tight until your credit – either business or individual or both – grows, then your choices will dramatically improve, too.