Published By Janet Gershen-Siegel at January 31st, 2018
Do you know how to get a business loan, even if your credit is less than stellar? We break down what’s out there, even if your personal credit is not so hot.
Poor credit does not need to be a dead weight around your company’s proverbial neck. Nevertheless, it does make it more difficult to get a small business loan. For a brand-new small business particularly, your corporate credit will be poor by definition. This is because you just will not have the kind of background and seasoning which can make your commercial credit score go up (and, for this reason, make lenders wish to loan your small business money).
As a result, lending institutions are not going to be too excited about granting your business a company loan. This is because they genuinely have no idea if your small business will be able to pay back the loan. But you are still, not surprisingly pondering how to subsidize a company with substandard credit.
As a result of this, lenders will oftentimes obtain a UCC blanket lien in the event that they do give your company a loan. A UCC blanket lien is a note which is included with your credit report. It says that the creditor has an interest in all of your company’s assets until you pay off the loan completely. For that reason, there might be dire repercussions if you need to default.
Plus, many of these loans will also involve personal guarantees.
Having said that, if a loan does not require a personal guarantee, then your small business is typically going to be looking at unsecured business loans, and those are coupled with high interest rates. These sorts of business loans are either short term (so you must pay them back fast), receivables financing (where you are able to get a loan based on business you anticipate to be coming in because you have pending bills which your own customers have not paid out to you yet), or vendor cash advances. These all come with lending rates which are often 40% or higher.
The main 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 house and any other private assets will not be seized, and neither will your inventory. However, this also implies that you normally must have strong revenue or a substantial amount of time in business. Generally speaking, your personal credit must be fair or better (that’s even in the absence of a personal guarantee requirement).
It’s all about the interest. As reported by Nerd Wallet, Kabbage can deliver an unsecured business loan – yet the APR can possibly 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 drawback (although not everyone will see it in that way) is that unsecured business loans often demand that your business has been in operation for at least six months, or that you have no personal bankruptcies, or your business needs to show a minimal yearly revenue amount– and that means opening your books to your creditor. If any one of these demands has already been met by you, then you possibly won’t see this as a real disadvantage. Having said that, if your company is brand-new, and you do not as of yet have a regular clientele and profits, and you have had personal bankruptcy problems, then you may be shut out of your few remaining alternatives.
For all these alternatives, you will usually have a preferable rate of interest (and you will probably have more alternatives, so you can shop around and compare plans) if your credit score is better than bad. If your business can sit tight till your credit – either small business or private or both – develops, then your options will significantly improve, too. A little patience is a virtue when you want to get a small business loan.