National Recession 2020: Conditions Are Changing on the Fly
The world has changed. Right now, business owners may be more scared than ever before. Many are unsure of what to do. It’s a time to be wondering about how to get the capital you need to grow, and if it’s possible to grow at all, let alone thrive. But you can! You can even get business loans for bad credit in a recession.
Several states have already closed restaurants. Others are limiting gatherings. Stores are having trouble keeping stock on the shelves. Customers and prospects are jittery.
Interest rates are at an all-time low. There has never been a better time to borrow. Banks are still lending. You can still get money within 24 hours. Such low rates mean business owners can get money at very cheap rates. You really can get business loans for bad credit in a recession.
A National Recession Won’t Stop You from Getting Business Loans for Bad Credit in a Recession
Starting a new business for some entrepreneurs can be hard when times are rough. This is especially for business owners looking to get their business off the ground. But it can be even tougher for business with bad credit. So you need funding! And you need financing for small business with bad credit, even during national recessions.
National Recessions and Business Loans for Bad Credit in a Recession
The number of US financial institutions and thrifts has been decreasing gradually for 25 years. This is coming from consolidation in the marketplace along with deregulation in the 1990s, reducing obstacles to interstate banking. See: https://www.fundera.com/blog/happened-americas-small-businesses-financial-crisis-six-years-start-crisis-look-back-10-charts
Assets concentrated in ever‐larger financial institutions is problematic for local business owners. Big financial institutions are much less likely to make small loans. Economic downturns indicate banks come to be much more mindful with lending. Fortunately, business credit does not depend on banks.
What’s Bad Credit?
Business owners with bad credit have credit scores of 300 – 629. A score in this range can be a huge obstacle for any business owner looking to fund a new business. Still, having bad credit shouldn’t stop new business owners from looking for money.
Business Loans for Bad Credit in a Recession – Nonprofit and Micro Lenders
Nonprofit and Micro Lenders. If you’re a business owner with bad credit, consider a nonprofit or microlender. Nonprofits and microlenders typically establish loans with bad credit borrowers in mind. Most nonprofit and microlenders loans are to help women and minority entrepreneurs. They also help people from lower income and economically disadvantage communities.
A microloan is what it sounds like – not a lot of money.
You can’t get a microloan from a regular bank. Rather, you get a microloan from a microlender. Try the Association for Enterprise Opportunity to find a local microlender. A microloan is just what it sounds like; it’s not a great deal of cash. Still, if your business only needs something like $500 – $35,000, then a microloan could work.
Business Loans for Bad Credit in a Recession – Online and Offline
Need much more than a microloan? Then apply for a loan from a bank or an online lender. Prepare to provide collateral, which might be stock or real estate or the like. Pay back on time or your company’s credit rating will take a hit.
Because of your bad credit, banks often take out a UCC blanket lien if they give your small business a loan. Online lenders may or may not do so as well.
A UCC blanket lien is a note which goes on your credit report. It says the creditor has an interest in all your company assets until you pay off the loan completely. Hence, there may be unfortunate consequences if you have to default.
Also, most of these loans also require personal guarantees.
Business Loans for Bad Credit in a Recession – Unsecured Business Loans
If you can get a loan which does not require a personal guarantee, then it’s often an unsecured business loan. And those come along with excessive interest rates. These kind of company loans are either short term or vendor cash advances.
Or they can be receivables financing. That’s where you can get a loan based on expected business because you have pending unpaid statements. These all come with rates of interest often 40% or higher.
Advantages of Unsecured Business Loans for Bad Credit in a Recession
You do not have to put up a personal guarantee or allow a UCC blanket lien. If you default on the loan, then your home and other individual assets will not be confiscated. Neither will your inventory. Still, this also shows you often need to have strong revenue or a substantial amount of time in business. Generally, your personal credit must be fair or better. This is even without a demand for a personal guarantee.
Disadvantages of Unsecured Business Loans for Bad Credit in a Recession
Interest, interest, interest. Per Nerd Wallet, you can get an unsecured business loan online. Yet the annual percentage rate can run as high as 99%! If you think that’s usury, think again. In Ohio, for example, usury laws don’t apply to unsecured loans.
Unsecured business loans often require at least six months in business. Or they may demand you have no personal bankruptcies. It’s possible your small business would have to demonstrate minimal annual revenues.
If the business is new, with no regular clientele and profits yet, and you have had personal bankruptcy troubles, then this option is off the table.
Funding During National Recessions: Crowdfunding
Get funding from a crowdfunding site like kickstarter.com or indiegogo.com. But read the small print. Many crowdfunding platforms want all the money back if you do not make your goal by the end of your campaign. Note: Indiegogo has a flexible funding option. Also, crowdfunding websites take a percentage of the contributions.
Straightforward companies may not do so well. Crowdfunding tends to work best when donors can directly connect with the service or product. So product lines not quite in stock yet, or artistic undertakings, may do well. But conventional gizmos not about to really change are not going to attract brand ambassadors. And by extension, they probably won’t get contributors too excited.
Business Loans for Bad Credit in a Recession – Factoring
Another option is invoice factoring, where your company gets a percentage of the cash from outstanding invoices fronted by the factoring company. The factoring company then goes directly after any business which owed you cash, and collects on it themselves.
Hence if a merchant owes your business $1,000 on a twelve month payment basis, you might give an invoice to the factoring company. Then you may get something like $950 in a week. The factoring company then collects the total from the retailer. This lets you extend credit or negotiate longer term payment plans in exchange for other, more favorable terms. And you can do so without holding a bunch of what are effectively IOUs for months at a time.
Funding During National Recessions: Angel Investors and Venture Capitalists
These may or may not work for you. They won’t work for most businesses. Both types of investors are often looking for a high growth opportunity.
Angel investors often invest in early stage or startup companies in exchange for a 20 – 25% profit on their investment. Angel investing is more informal. Yes, your mom can be an angel investor.
Venture capitalists are different. In contrast, they give money to help build new startups which the VCs believe have both high growth and high risk potential. These can be fast growth businesses with an exit strategy already in place. They can get up to tens of millions of dollars for investment, networking, and building their business.
Essentially, this is a gamble on prospective profits. Also, venture capitalists often plan to recoup their investment in 3 – 5 years. They also, normally, want a part of your business if not a controlling stake.
Go Beyond Business Loans for Bad Credit in a Recession with Business Credit
Don’t have cash, collateral, time in business, a guarantor, or good personal credit? Then build business credit.
Business credit is credit in a small business’s name. It doesn’t connect to a business owner’s consumer credit, not even if the owner is a sole proprietor and the sole employee of the company.
Because of this, an entrepreneur’s business and consumer credit scores can be very different.
Since business credit is independent from personal, it helps to secure a small business owner’s personal assets, in case of litigation or business bankruptcy. Even new ventures can do this.
Personal credit scores rely on payments but also additional components like credit usage percentages.
But for business credit, the scores just depend on if a business pays its invoices punctually.
Building business credit does not occur automatically. A small business needs to proactively work to develop business credit.
However, it can be done readily and quickly, and it is much more efficient than developing consumer credit scores.
Merchants are a big component.
Doing the steps out of order causes repetitive denials. Nobody can start at the top with business credit.
A small business must be fundable to loan providers and vendors. A small business needs a professional web site and email address. And it must have website hosting.
Also, business phone numbers must have a listing on 411. Do so here: https://www.listyourself.net.
In addition, the business phone number should be toll free (800 exchange or comparable).
A company also needs a bank account dedicated solely to it.
A business must have all the licenses necessary for operation. These licenses all must be in the correct, accurate name of the small business. And they need to have the same business address and telephone numbers.
So keep in mind, this means not just state licenses, but potentially also city licenses.
Dealing with the IRS
Visit the IRS web site and get an EIN for the business. They’re free. Choose a business entity like corporation, LLC, etc.
A company can start as a sole proprietor. But they should switch to a form of corporation or an LLC.
This is to decrease liability in the event of a lawsuit. And it optimizes tax benefits.
Kicking Off the Business Credit Reporting Process
Start at the D&B website and get a free D-U-N-S number. This is how D&B gets a company in their system, to produce a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s web sites for the business. You can do this at www.creditsuite.com/reports. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process.
This way, Experian and Equifax have activity to report on.
Starter Vendor Credit
First you should build trade lines that report. This is also known as starter 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 start to get more credit.
These kinds of accounts often tend to be for the things bought all the time, like marketing materials and office furniture.
But first of all, what is trade credit? These trade lines are credit issuers who give you starter credit when you have none now. Terms are usually Net 30, instead of revolving.
Hence, if you get an approval for $1,000 in vendor credit and use all of it, you need to pay back in a set term, like within 30 days on a Net 30 account.
Unlike with revolving accounts, you have a set time when you must pay back what you borrowed or the credit you used.
To start your business credit profile the proper way, get approval for vendor accounts that report to the business credit reporting agencies. Then use the credit.
Repay what you used, and the account is on report to D&B, Experian, or Equifax.
Starter Vendor Credit – It Helps
Not every vendor can help like true starter credit can. These are merchants that grant an approval with minimal effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
You want 3 of these to move onto the next step. Here are some stellar choices from us: https://www.creditsuite.com/blog/5-vendor-accounts-that-build-your-business-credit/
Monitor Your Business Credit
Know what is happening with your credit. Make certain it is showing up on your reports. Address any mistakes as soon as possible. Get in the habit of taking a look at credit reports and digging into the details, not just the scores.
Fix Your Business Credit
So, what’s all this monitoring for? It’s to contest any mistakes in your records. Mistakes in credit report(s) can be taken care of.
Disputing credit report inaccuracies often means you specifically detail any charges you dispute.
Always use credit smartly! Never borrow more than what you can pay back. Keep an eye on balances and deadlines for repayments. Paying off on time and in full does more to raise business credit scores than almost anything else.
Growing small business credit pays. Good business credit scores help a small business get loans. Your loan provider knows the business can pay its financial obligations. They recognize the company is authentic.
The small business’s EIN connects to high scores and banks won’t feel the need to demand a personal guarantee. And you won’t need business loans for bad credit in a recession.
Business Loans for Bad Credit in a Recession – Takeaways
Looking for money, loans, credit cards, etc., to start a business can be a tricky task, especially if you have bad business credit. It may look impossible to start your business with bad credit, but it’s not anything you can’t work through. There are a number of choices. You’re not out of luck, not even during national recessions.