Published By Janet Gershen-Siegel at November 25, 2017
Bad credit does not need to be a dead weight around your company’s proverbial neck. However, it does make it more difficult to acquire a business loan. For a new business particularly, your small business credit will be poor as a matter of course. This is because you just will not have the type of record and seasoning which can make your commercial credit score rise (and, for this reason, make lenders want to loan your company money).
As a result, loan providers are not going to be too passionate about granting your company a small business loan. This is because they genuinely have no clue if your small business will be able to pay back the loan. But you are nonetheless, obviously wondering how to fund a company with poor credit.
Because of this, lending institutions will typically obtain a UCC blanket lien in case 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 lender has an interest in all of your small business’s assets until you repay the loan completely. Therefore, there might be dire consequences if you need to default.
Plus, many of these loans will also require personal guarantees.
Having said that, if a loan does not require a personal guarantee, then your business is normally going to be checking out unsecured business loans, and those come with excessive rates of interest. These kind of small business loans are either short term (so you have to pay them back swiftly), receivables financing (where you are able to get a loan based upon business you expect to be coming in because you have unsettled invoices which your clients have not paid to you yet), or vendor cash advances. These all come with lending rates which are often 40% or higher.
The primary advantage to unsecured small business loans is that you do not need to provide a personal guarantee or accept a UCC blanket lien. If you wind up defaulting on the loan, then your home and other individual assets will not be confiscated, and neither will your inventory. However, this also implies that you usually have to have strong revenue or a significant amount of time in business. In general, your individual credit must be fair or better (that’s even without any a personal guarantee requirement).
It’s all about the interest. According to Nerd Wallet, Kabbage can provide an unsecured business loan – yet the annual percentage rate can be as much 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 everybody will view it in this manner) is that unsecured business loans often mandate that your small business has operated for a minimum of six months, or that you have no personal bankruptcies, or your business must show a minimal yearly earning amount– which means opening your records to your lender. If any of these criteria has already been met by you, then you most likely won’t see this as a true disadvantage. Having said that, if your small business is brand new, and you do not as of yet have regular customers and revenue, and you have had personal bankruptcy problems, then you may be locked out of your few remaining options.
For all of these options, you will always have a better interest rate (and you will more than likely have more choices, so you can shop around and compare plans) if your credit score is better than poor. If your small business can hang on till your credit– either business or individual or both– improves, then your options will significantly improve, too.