Published By Janet Gershen-Siegel at August 9, 2018
Written by Janet Gershen-Siegel
Business loans for bad credit are possible.
Bad credit does not have to be an albatross around your business’s metaphorical neck. But having said that, it does make it tougher to get a small business loan.
For a new business in particular, your corporate credit will be poor as a matter of course. This is because you just will not have the type of background and seasoning which can make your commercial credit score rise. And, as a result, make lending institutions would wish to loan your business funds.
As a result, lending institutions are not going to be too excited about offering your business a company loan. This is because they genuinely have no clue if your company will be able to repay the loan. But you are nonetheless, naturally pondering the best ways to capitalize a small business with substandard credit.
As a result of this, lenders will commonly secure a UCC blanket lien in the event that they do give your company a loan. A UCC blanket lien is a notification which goes on your credit report. It says that the lending institution has an interest in all your company’s assets until you settle the loan in full. As a result, there can be unfortunate consequences if you must default.
Additionally, many of these loans will also entail personal guarantees.
However, if a loan does not require a personal guarantee, then your business is often going to be looking at unsecured business loans. Note: those will have steep rates of interest.
These kinds of small business loans can be short term. So you have to pay them back promptly.
Or they can be receivables financing. This is where you are able to get a loan based on business you expect to be coming in because you have pending statements which your own clients have not paid to you yet.
Or these can be vendor cash advances. These all come with lending rates which are often 40% or greater.
The biggest advantage is that you do not need to put up a personal guarantee or accept a UCC blanket lien. If you wind up defaulting on the loan, then you won’t lose your house and other individual possessions. And you won’t lose your inventory. However, this also means that you typically have to have strong revenue or a substantial amount of time in business.
Generally speaking, your individual credit must be fair or better. And that’s even without having a personal guarantee requirement.
Interest, interest, interest! According to Nerd Wallet, Kabbage can deliver 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 everyone will see it this way) is that unsecured business loans often mandate that your business has operated for a minimum of six months. It’s also necessary that you have no personal bankruptcies. And often your small business needs to show a minimum yearly profit amount. So that means opening up your records to your loan provider.
If all of these demands have already been met by you, then you probably will not see this as a genuine disadvantage.
However, if your company is brand new, and you do not yet have regular customers and revenue, and you have had personal bankruptcy troubles, then you might be shut out of your few remaining alternatives.
So what’s a good alternative? Building business credit!
Business credit is credit in a business’s name. It isn’t attached to a business owner’s personal credit, not even if the owner is a sole proprietor and the solitary employee of the small business. Hence, an entrepreneur’s business and personal credit scores can be very different.
Because corporate credit is separate from consumer, it helps to protect an entrepreneur’s personal assets, in the event of court action or business insolvency. Also, with two distinct credit scores, a small business owner can get two separate cards from the same merchant. This effectively doubles purchasing power.
Another advantage is that even startup ventures can do this. Visiting a bank for a business loan can be a recipe for disappointment. But building business credit, when done correctly, is a plan for success.
Personal credit scores depend upon payments but also various other elements like credit utilization percentages. But for business credit, the scores actually just depend on if a business pays its debts on a timely basis.
Establishing business credit is a process, and it does not occur automatically. A small business has to actively work to establish small business credit. Nevertheless, it can be done easily and quickly, and it is much swifter than building consumer credit scores. Merchants are a big component of this process.
Performing the steps out of order will cause repeated rejections. Nobody can start at the top with business credit. For instance, you can’t start with store or cash credit from your bank. If you do you’ll be rejected 100% of the time.
A company has to be authentic to lenders and vendors. Therefore, a business will need a professional-looking website and email address, with website hosting bought from a merchant like GoDaddy. Additionally company phone and fax numbers must be listed on 411.com.
In addition the business phone number should be toll-free (800 exchange or the like).
A small business will also need a bank account devoted strictly to it, and it needs to have all of the licenses essential for running. These licenses all must be in the specific, correct name of the small business, with the same small business address and telephone numbers. Keep in mind that this means not just state licenses, but potentially also city licenses.
Visit the IRS website and get an EIN for the company — they’re free of charge. Choose a business entity like corporation, LLC, etc. A business can begin as a sole proprietor but will probably want to switch to a sort of corporation or partnership to minimize risk and optimize tax benefits.
A business entity will matter when it involves taxes and liability in the event of a lawsuit. A sole proprietorship means the owner is it when it comes to liability and tax obligations. No one else is responsible.
If you operate a corporation as a sole proprietor at the very least file for a DBA. If you do not, then your personal name is the same as the company name. Therefore, you can wind up being personally responsible for all business debts.
In addition, according to the IRS, using this structure there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 chance for incorporated businesses! Steer clear of confusion and drastically decrease the odds of an IRS audit as well.
Start at the D&B web site and get a totally free DUNS number. A DUNS number is how D&B gets a small business into their system, to produce 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 sites for the business. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for correctness and completeness. If there are no records with them, go to the next step in the process. By doing this, Experian and Equifax will have activity to report on.
First you ought to establish trade lines that report. This is also referred to as vendor credit. 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 acquiring revolving store and cash credit.
These kinds of accounts have the tendency to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But to start with, what is trade credit? These trade lines are credit issuers who will give you starter credit when you have none now. Terms are frequently Net 30, instead of revolving. Therefore, if you get an approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, like within 30 days on a Net 30 account.
Net 30 accounts must be paid in full within 30 days. 60 accounts need to be paid completely within 60 days. In contrast to with revolving accounts, you have a set time when you have to pay back a loan or credit in use.
To start your business credit profile the proper way, you need to get approval for vendor accounts that report to the business credit reporting agencies. Once that’s done, you can then make use of the credit, repay it, and then there’s an account report at Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help in the same way true starter credit can. These are vendors that will grant an approval with marginal effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
You want 5 — 8 of these to move onto the next step, which is revolving store credit. Also, you may need to apply more than one time to these vendors, and you may need to buy some items you don’t need, to confirm you are trustworthy and will pay in a timely manner. Consider donating unwanted items to charitable organizations.
Once there are 5 — 8 or more vendor trade accounts reporting to at least one of the CRAs, move onto revolving store credit. These are businesses like Office Depot and Staples. These companies are more likely to have products you need. Use the company’s EIN on these credit applications.
Are there 8 – 10 accounts reporting? Then move to fleet credit. These are businesses such as BP and Conoco. Use this credit to buy, fix, and take care of vehicles. Make sure to apply using the small business’s EIN.
Have you been responsibly managing the credit you’ve gotten up to this point? Then move onto cash credit. These are service providers such as Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
Know what is happening with your credit. Make sure it is reporting and deal with any errors as soon as possible. Get in the habit of checking credit reports and digging into the details, and not just the scores.
We can help you monitor business credit at Experian and D&B for only $24/month. See: https://www.creditsuite.com/business-credit-monitoring.
Update the data if there are inaccuracies or the relevant information is incomplete.
What’s all this monitoring for? It’s to contest any mistakes in your records. Errors in your credit report(s) can be taken care of. But the CRAs generally want you to dispute in a particular way.
Disputing credit report errors generally means you mail a paper letter with duplicates of any proof of payment with it. These are documents like receipts and cancelled checks. Never send the original copies. Always mail copies and retain the original copies.
Disputing credit report mistakes also means you specifically detail any charges you contest. Make your dispute letter as crystal clear as possible. Be specific about the issues with your report. Use certified mail so that you will have proof that you mailed in your dispute.
Always use credit responsibly! Don’t borrow beyond what you can pay back. Track balances and deadlines for payments. Paying off promptly and completely will do more to elevate business credit scores than pretty much anything else.
Building small business credit pays off. Great business credit scores help a business get loans. And you’ll stop needing business loans for bad credit, since your personal credit won’t matter. The business’s EIN attaches to high scores, and loan providers won’t feel the need to demand a personal guarantee.
For all of these options, you will generally have a preferable rate of interest if your credit score is better than band. And you will probably have more alternatives, so you can shop around and compare plans. If your business can wait until your credit – either business or personal or both – develops, then your options will dramatically improve, too. Learn more here and get started toward building business credit and getting company funding.