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Fund Your Business With Bad Credit During National Recessions

Published By Janet Gershen-Siegel at April 2nd, 2020

The world has changed. Right now, business owners are 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.

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Conditions Are Changing on the Fly

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

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

national recessions Credit Suite2 - Fund Your Business With Bad Credit During National RecessionsNonprofit 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, Kabbage can provide an unsecured business loan. 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.

The Advantages

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.

The Process

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. For instance, you can’t start with retail or cash credit from your bank. If you do, you’ll get a denial 100% of the time.

Company Fundability

A small business must be fundable to loan providers and vendors. 

A small business needs a professional web site and email address. And must have website hosting bought from a merchant like GoDaddy. 

Also, business phone numbers must have a listing on 411. Do so here: http://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. 

Licenses

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.

national recessions Credit Suite3 - Fund Your Business With Bad Credit During National Recessions

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN. Get money even in a recession!

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 will more than likely want to 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.

Sole Proprietors Take Note

If you run a company as a sole proprietor, then at least file for a DBA. 

If you do not, then your personal name is the same as the business name. As a result, you can wind up directly accountable for all company debts.

Also, per the IRS, with this structure there is a 1 in 7 probability of an IRS audit. There is a 1 in 50 probability for corporations! Avoid confusion and noticeably reduce the odds of an audit simultaneously.

But don’t look at any DBA filing as more than a steppingstone to incorporating.

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 revolving credit and the more universal credit you see with MasterCard and Visa.

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.

Details

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, revolving store credit. Here are some stellar choices from us: https://www.creditsuite.com/blog/5-vendor-accounts-that-build-your-business-credit/ 

Revolving Store Credit

Once there are 3 or more vendor trade accounts reporting to at least one CRA, then progress to revolving store credit. These are businesses like Office Depot and Staples. 

Just use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, use the small business’s EIN on these credit applications.

For credit cards which are ultimately issued by a bank, you will need to supply your Social Security Number. This is a federal law to prevent money laundering. There is no way around it.

Fleet Credit

Are there more accounts reporting? Then progress to fleet credit. These are service providers like BP and Conoco. Use this credit to buy fuel, and to fix and maintain vehicles. Only use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, apply using the small business’s EIN.

For credit cards ultimately issued by a bank, you will need to supply your Social Security Number. This is a federal law to prevent money laundering. There is no way around it.

national recessions Credit Suite3 - Fund Your Business With Bad Credit During National Recessions

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN. Get money even in a recession!

More Universal Credit

Have you been sensibly managing the credit you’ve up to this point? Then move onto more universal credit. These are companies like Visa and MasterCard. Just use your SSN and date of birth on these applications for verification purposes. For credit checks and guarantees, use your EIN.

For credit cards which are ultimately issued by a bank, you must supply your Social Security Number. This is a federal law to prevent money laundering. There is no way around it.

These are often MasterCard credit cards. With several trade accounts reporting, then these are doable.

national recessions Credit Suite3 - Fund Your Business With Bad Credit During National Recessions

Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN. Get money even in a recession!

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.

We can help you monitor business credit at Experian and D&B for 90% less than it would cost you at the CRAs.

At Equifax, monitor your account at: www.equifax.com/business/business-credit-monitor-small-business.

Update Your Information

Update the data if there are errors or the relevant information is incomplete. At D&B, go here: https://iupdate.dnb.com/iUpdate/viewiUpdateHome.htm. For Experian, go here: www.experian.com/small-business/business-credit-information.jsp. So for Equifax, go here: www.equifax.com/business/small-business.

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. But the CRAs normally want you to dispute in a particular way.

Disputes

Disputing credit report inaccuracies often means you mail a paper letter with copies of any proof of payment with it. These are documents like receipts and cancelled checks. Never send the originals. Always mail copies and retain the originals.

Fixing credit report mistakes also means you specifically detail any charges you dispute. Make your dispute letter as clear as possible. Be specific about problems with your report. Use certified mail so you have proof you mailed in your dispute.

A Word about Business Credit Building

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.

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