Published By Janet Gershen-Siegel at August 26, 2017
Bad credit does not have to be a dead weight around your small business’s metaphorical neck. However, it does make it harder to get a business loan. For a brand-new business in particular, your corporate credit will be poor by definition. This is because you just will not have the kind of history and seasoning which can make your commercial credit score go up (and, therefore, make lenders want to loan your company money).
Therefore, lenders are not going to be too enthusiastic about offering your company a business loan. This is because they truly have no idea if your company will be able to pay back the loan. But you are still, understandably wondering how to finance a business with bad credit.
Because of this, they will often take out a UCC blanket lien in the event that they do give your small business a loan. A UCC blanket lien is a notice which goes on your credit report. It says that the lender has an interest in all of your business’s assets until you pay off the loan in full. Therefore, there can be dire consequences if you have to default.
In addition, many of these loans will also require personal guarantees.
However, if a loan does not require a personal guarantee, then your small business is usually going to be looking at unsecured business loans, and those come with steep interest rates. These sorts of business loans are either short term (so you need to pay them back fast), receivables financing (where you can get a loan based upon business you expect to be coming in because you have outstanding invoices which your own clients have not paid to you yet), or merchant cash advances. These all come with interest rates which are often 40% or higher.
The biggest advantage is that you do not have to put up a personal guarantee or accept a UCC blanket lien. If you end up defaulting on the loan, then your home and other personal assets will not be seized, and neither will your inventory. However, this also means that you often need to have strong revenue or a significant amount of time in business. In general, your personal credit must be fair or better (and that’s even without a personal guarantee requirement).
Interest, interest, interest. According to Nerd Wallet, Kabbage can provide an unsecured business loan – yet the annual percentage rate can be up to 99%! If you think that’s usury, think again. In Ohio, the usury laws don’t apply to unsecured loans.
Another disadvantage (although not everyone will see it that way) is that unsecured business loans often require that your company has been in business for at least six months, or that you have no personal bankruptcies, or your business has to show a minimum annual revenue amount – and that means opening up your books to your lender. If any of these requirements have already been met by you, then you probably won’t see this as a true disadvantage. However, if your company is brand new, and you do not yet have regular customers and income, and you have had personal bankruptcy issues, then you might be shut out of your few remaining options.
For all of these options, you will always have a better interest rate (and you will most likely have more options, so you can shop around and compare plans) if your credit score is better than bad. If your small business can wait until your credit – either business or personal or both – improves, then your options will dramatically improve, too.