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How to finance a business with bad credit

Published By Janet Gershen-Siegel at October 16th, 2017

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Bad credit is a problem, yes – there’s no denying that. But it is not an unsurmountable one. You can get financing for your small business even if your credit score is a stinker.

Personal Guarantees

One way to get business credit is by offering a personal guarantee. This personal guarantee can come from you, but it can also come from an investor. If a family member (your semi-rich uncle, for instance) wants to have a piece of your new business, why not offer a chunk in exchange for them providing a personal guarantee to a lender or credit issuer?

Personal guarantees do come with a degree of risk. If your business does not take off, then your investor could be left holding the bag if you default on loans and the like. Therefore, asking someone to provide a personal guarantee for you is not something that either of you should take lightly.

UCC Blanket Liens

Without a personal guarantee, some lenders will take out a UCC blanket lien on your business. A UCC blanket lien serves as a notice which will go on your credit report. It says that the lender has a monetary interest in all of your business’s assets until you pay off the loan in full. Hence, there can be dire consequences if you have to default. Also, for really bad credit risks, your lender might insist on both a UCC blanket lien and a personal guarantee.

Unsecured Credit

A better option is unsecured credit. Unsecured just means you are getting credit without putting down any money (with secured credit, you put down a certain sum and can only borrow up to that sum).

So, how do you get unsecured credit? You get it by putting up collateral for your loan. Don’t think you’ve got enough for collateral? Think again. You may have any number of assets which could be used as collateral for a business loan.

Personal Assets

You might have a retirement fund, like a 401 (k). Or your semi-rich uncle might give you (or will to you) stocks or bonds. You might own your own home. All of these assets can be used as collateral for unsecured credit, whether that’s in the form of an unsecured business loan or a credit card.

Current Company Assets

Your company might also have assets which you could tap as collateral. Company assets can include real estate – does your business own land, or a building, or part of a building? You can use this real estate as collateral.

It can also mean equipment, if you own it free and clear, although this has to be major equipment. You won’t be able to combine a bunch of smaller equipment. This is called an equipment sale leaseback – you are essentially selling your equipment to the lender and renting it back from them for the cost of your loan payments.

How about business inventory? You can use inventory valued at $500,000 or more and use it for a line of credit worth 50% of your inventory’s value for what’s called inventory financing.  Or if you have more like $300,000 worth of inventory, you can get an inventory loan for $150,000 (that is, the loan to value, AKA the cost, is 50%).

Anticipated Company Assets

You can also use your expected profits as collateral. Let’s say your business has outstanding invoices out to your customers. You may have granted generous repayment terms in order to sweeten a deal and get the sale. Or maybe your customer is just plain late paying you back. With accounts receivable factoring, you can get up to 80% of your outstanding receivables. However, you must be in business for at least a year and the receivables have to be with another company (e. g. not with an individual).

So think about what you and your company own, or are expecting to own in the near future. You just might have enough collateral for an unsecured business line of credit even if your personal credit is tarnished.

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