Published By Janet Gershen-Siegel at January 8th, 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 get a business loan with bad credit.
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, that would 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. But those are coupled with steep rates of interest.
These kind of company loans can be short-term. So you have to pay them back quickly. Or they can be receivables financing. That is where you can get a loan based on business you count on to be coming in. It is because you have pending billings which your own customers have not paid to you yet.
Or it can take the form of 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. And 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 they can require that you have no personal bankruptcies.
Or they might require your small business to prove a minimal yearly revenue amount. So this means opening your books to your creditor. If any one of these requirements has already been met by you, hooray! Then you probably will not see this as a real disadvantage.
But if your business is brand new, you could have issues. And you do not yet have a regular clientele and revenue, it could be a problem. 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 if your business credit score is better than poor. And you will most likely have more options. So you can shop around and compare plans.
The Leveraging Information and Networks to Access Capital (LINC), an online matchmaking service, connects business owners to nonprofit lenders. So these lenders supply free financial advice and specialize in microlending and smaller loans. This is the SBA Community Advantage program. See: https://www.sba.gov/sites/default/files/files/CA-Participant-Guide-4-December-28-2015.pdf
Collateral-based financing offers low rate funding. Personal credit quality and revenue don’t determine your approval. Some permitted collateral includes:
The idea behind collateral-based financing is that a lender needs to have a guarantee. For the lender, a great assurance that you will pay back financing is when your property is at stake if you don’t.
You’ll have certain options if you’re the female of the species.
They can help you get access to capital. See: https://www.sba.gov/tools/local-assistance/wbc
For women who are also veterans, the Veterans Women Igniting the Spirit of Entrepreneurship (V-WISE) is an SBA funded program provided by the Institute for Veterans and Military Families which includes online training, a conference that harnesses the unique esprit de corps of women veterans and female military spouses, and follow-on mentoring through a community of partners.
$1,000 to a different women-owned business each month. At the end of the year, one of the monthly grant winners gets $10,000 more. See: https://ambergrantsforwomen.com/get-an-amber-grant/
Up to $100,000 is awarded to ten women-owned businesses per year. NOTE: this program is on pause until the middle of 2019. See: https://www.eileenfisher.com/grant-program-guidelines/
You have some additional options if you have served our country. Thank you!
These are in addition to the Veterans Women Igniting the Spirit of Entrepreneurship (V-WISE). That option is mentioned above.
The Military Reservist Economic Injury Disaster Loan Program (MREIDL) offers loans to $2 million to eligible small businesses. So this is to address operating costs that can’t be met. That is, as a result of the loss of a necessary worker called to active duty in the Reserves or National Guard. This one comes straight from government benefits.
The Office of Veterans Business Development offers a number of programs and services to sustain and empower aspiring and existing veteran business owners and military spouses.
The SBA furnishes training and coaching, access to capital, preparation for opportunities in federal procurement, and cultivation of connections within commercial supply chains and disaster relief assistance.
Learn business loan secrets with our free, sure-fire guide.
Boots to Business is the two step entrepreneurial program offered by the SBA on military installations around the world as a training track of the Department of Defense (DOD) Transition Assistance Program (TAP). Boots to Business | Reboot expands the entrepreneurship training offered in TAP on military installations to veterans of all time frames in their neighborhoods.
The National Center for Veterans Institute for Procurement extends the entrepreneurship training offered in TAP on military installations to veterans of all periods in their communities.
The Veterans Business Outreach Center (VBOC) furnishes entrepreneurial development services such as business training, guidance and mentoring for qualified veterans owning or considering starting a small business.
SBA Veterans Advantage guarantees loans approved to businesses operated by veterans or military spouses.
The Veterans Entrepreneurship Act of 2015 reduces the advance borrower cost to zero dollars for eligible veterans and military spouses for SBA Express loans up to $350,000.
Fundera provides financial resources and advice for small business owners. The Zach Grant awards $2,500 to an entrepreneur who sends in a three minute video explaining why they started their business. So we think this is a terrific idea – and if you enter, please let us know what the experience was like in the comments.
If you have decent personal credit and tax returns for two years that show a profit, try alternative lenders. They may have programs that could work. You could get an approval with rates of 7% or less. Lenders will want to see some kind of profit on your tax returns.
Microlenders do not lend a lot of cash, just as the name implies. These are small loans for generally $500 to $30,000. Here are some sources of microloans:
In addition, the SBA offers Startup Microloans. The program is called 7(m). There are loans for up to $35,000 for working capital and growth. The average loan amounts are about $10,000.
These funds come directly from the SBA. This is unlike the 7(a), where the funds come from a bank.
Small business credit is credit in a corporation’s name. It doesn’t attach to a business owner’s personal credit, not even if the owner is a sole proprietor and the sole employee of the corporation. Hence, a business owner’s business and consumer credit scores can be very different.
Because company credit is distinct from personal, it helps to safeguard a business owner’s personal assets, in the event of a lawsuit or business insolvency. Also, with two distinct credit scores, an entrepreneur can get two separate cards from the same vendor. This effectively doubles purchasing power.
Another advantage is that even startup companies can do this. Heading to a bank for a business loan can be a recipe for disappointment. But building company credit, when done properly, is a plan for success.
Personal credit scores are dependent on payments but also various other factors like credit utilization percentages. But for business credit, the scores truly merely hinge on whether a corporation pays its invoices punctually.
Growing small business credit is a process, and it does not occur automatically. A corporation has to actively work to establish corporate credit. Having said that, it can be done easily and quickly, and it is much quicker than building personal credit scores.
Merchants are a big component of this process.
Performing the steps out of order will lead to repetitive rejections. Nobody can start at the top with company credit. For example, you can’t start with store or cash credit from your bank. If you do, you’ll get a rejection 100% of the time.
A business must be legitimate to credit issuers and vendors. Due to this fact, a corporation will need a professional-looking web site and email address, with site hosting bought from a vendor such as GoDaddy.
In addition company telephone and fax numbers ought to have a listing on ListYourself.net.
Likewise the company telephone number should be toll-free (800 exchange or the equivalent).
A business will also need a bank account devoted only to it, and it has to have all of the licenses essential for operating. These licenses all must be in the particular, accurate name of the business, with the same business address and phone numbers.
So note that this means not just state licenses, but potentially also city licenses.
Visit the IRS website and get an EIN for the business. They’re free. Select a business entity like corporation, LLC, etc.
A company can start off as a sole proprietor. But they will more than likely wish to change to a sort of corporation to lessen risk and make the most of tax benefits.
A business entity will matter when it pertains to taxes and liability in the event of litigation. A sole proprietorship means the owner is it when it comes to liability and taxes. Nobody else is responsible.
If you operate a business as a sole proprietor, then at least be sure to file for a DBA (‘doing business as’) status.
If you do not, then your personal name is the same as the corporate name. As a result, you can end up being personally accountable for all business debts.
Also, per the Internal Revenue Service, with this structure there is a 1 in 7 chance of an IRS audit. There is a 1 in 50 possibility for corporations! Prevent confusion and drastically lower the chances of an IRS audit simultaneously.
Start at the D&B web site and obtain a totally free DUNS number. A DUNS number is how D&B gets a small business into their system, to generate a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s websites for the business. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process.
This way, Experian and Equifax will have something to report on.
Learn business loan secrets with our free, sure-fire guide.
First you need to build tradelines that report. This is also called the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score.
And with an established business credit profile and score you can begin obtaining retail store and cash credit.
These kinds of accounts tend to be for the things bought all the time, like shipping boxes, outdoor work wear, ink and toner, and office furniture.
But first off, what is trade credit? These trade lines are credit issuers who will give you preliminary credit when you have none now. Terms are commonly Net 30, versus revolving.
Therefore, if you get approval for $1,000 in vendor credit and use all of it, you will need to pay that money back in a set term. This is like within 30 days on a Net 30 account.
Net 30 accounts need to be paid in full within 30 days. 60 accounts need to be paid in full within 60 days. In contrast to with revolving accounts, you have a set time when you must pay back what you borrowed or the credit you used.
To start your business credit profile properly, you need to get approval for vendor accounts. You want vendors that report to the business credit reporting agencies. Once that’s done, you can then use the credit.
Then pay back what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help like true starter credit can. These are merchants that will grant an approval with very little effort. You also need them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
But there must be 5 to 8 of these to move onto the next step. So it is the retail credit tier. But you may need to apply more than once to these vendors. This is to demonstrate you are dependable and will pay timely.
Get 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs. Then you can move onto the retail credit tier. These are businesses such as Office Depot and Staples. These companies are likelier to have supplies you need.
Use your SSN and date of birth for identification purposes only and not for guaranteeing the credit.
Are there 8 to 10 accounts reporting? Then move to the fleet credit tier. These are service providers such as BP and Conoco. Use this credit to buy, fix, and maintain vehicles. Use your SSN and date of birth for identification purposes only and not for guaranteeing the credit.
Have you been responsibly managing the credit you’ve up to this point? Then move onto the cash credit tier. These are businesses like Visa and MasterCard. Use your SSN and date of birth for identification purposes only and not for guaranteeing the credit.
These are service providers like Walmart and Dell, and also Home Depot, BP, and Racetrac. These are typically MasterCard credit cards. If you have 14 trade accounts reporting, then these are attainable.
Know what is happening with your credit. Make sure it is being reported and take care of any errors as soon as possible. Get in the practice of checking credit reports and digging into the specifics, and not just the scores.
We can help you monitor business credit at Experian and D&B for 90% less than it would cost you at the CRAs. See: https://www.creditsuite.com/business-credit-monitoring.
Update the relevant information if there are errors or the details is incomplete.
So, what’s all this monitoring for? It’s to dispute any inaccuracies in the records. Errors in credit report(s) can be corrected. But the CRAs normally want you to dispute in a particular way.
Disputing credit report mistakes usually means you mail a paper letter with copies of any proof of payment with it. These are documents like receipts and cancelled checks. Never send the original copies. Always send copies and retain the original copies.
Fixing credit report inaccuracies also means you precisely detail any charges you challenge. Make your dispute letter as clear as possible. Be specific about the concerns with your report. Use certified mail so that you will have proof that you sent in your dispute.
Always use credit sensibly! Never borrow more than what you can pay off. Keep track of balances and deadlines for repayments. Paying in a timely manner and completely will do more to increase business credit scores than just about anything else.
Establishing small business credit pays. Excellent business credit scores help a corporation get loans. Your lending institution knows the small business can pay its financial obligations. They recognize the small business is authentic.
The small business’s EIN attaches to high scores, and loan providers won’t feel the need to require a personal guarantee.
If your company can sit tight until your credit grows, then your choices will dramatically improve, too. And this applies to either business or individual credit or both. Because with good business credit, you won’t need to get a business loan with bad credit.
Learn business loan secrets with our free, sure-fire guide.