Published By Janet Gershen-Siegel at November 5, 2017
Bad credit does not have to be an albatross around your business’s proverbial neck. Having said that, bad creditdoes make it more difficult to acquire a small business loan. For a new company particularly, your small business credit will be substandard as a matter of course. This is because you just will not have the type of history and seasoning which can make your commercial credit score increase (and, therefore, make lenders want to lend your business funds).
Hence, lenders are not going to be too passionate about granting your company a company loan. This is because they genuinely have no clue if your business will be able to repay the loan. But you are still, justifiably considering how to finance a company with poor credit.
As a result of this, banks will frequently secure a UCC blanket lienin the event that they do give your business a loan. A UCC blanket lien is a notification which is included with your credit report. It says that the lending institution has an interest in all of your business’s assets until you repay the loan in full. For that reason, there can be unfortunate consequences if you need to default.
Plus, many of these loans will also necessitate personal guarantees.
However, if a loan does not require a personal guarantee, then your small business is generally going to be considering unsecured business loans, and those are coupled with exorbitant rates of interest. These types of small business loans are either short term (so you must pay them back fast), receivables financing (where you are able to get a loan based upon business you anticipate to be coming in because you have ongoing statements which your own customers have not paid to you yet), or merchant cash advances. These all come with rates of interest which are often 40% or higher.
The primary advantage is that you do not have to put up a personal guarantee or accept a UCC blanket lien. If you wind up defaulting on the loan, then your home and other individual possessions will not be seized, and neither will your inventory. Nevertheless, this also means that you regularly need to have strong revenue or a significant amount of time in business. Generally speaking, your personal credit must be fair or better (and that’s even with no a personal guarantee requirement).
It’s all about the interest. As reported by Nerd Wallet, Kabbage can provide an unsecured business loan – yet the APR can possibly be up to 99%! If you think that’s usury, think again. In Ohio, the usury laws don’t apply to unsecured loans.
Another downside (although not everybody will view it in that manner) is that unsecured business loans often require that your small business has operated for a minimum of six months, or that you have no personal bankruptcies, or your business needs to show a minimum annual profit amount– which means opening your books to your creditor. If any one of these conditions has already been met by you, then you probably won’t see this as a genuine disadvantage. However, if your company is brand new, and you do not as of yet have a regular clientele and income, and you have had personal bankruptcy problems, then you may be locked out of your few remaining options.
For all of these alternatives, you will typically have a better interest rate (and you will more than likely have more options, so you can shop around and compare plans) if your credit score is better than poor. If your small business can hold on until your credit– either company or personal or both– grows, then your alternatives will dramatically improve, too.