Published By Janet Gershen-Siegel at February 10, 2018
Unsecured business loans can save you. Here’s how.
Bad credit does not have to be a dead weight around your company’s proverbial neck. However, it does make it more challenging to obtain a small business loan. For a brand-new small business in particular, your company credit will be poor as a matter of course. This is because you just will not have the sort of history and seasoning which can make your commercial credit score rise (and, subsequently, make lending institutions want to lend your business funds).
Hence, lenders are not going to be too thrilled about offering your business a business loan. This is because they genuinely have no clue if your small business will be able to repay the loan. But you are still, with good reason wondering how to fund a small business with poor credit.
As a result of this, they will typically obtain a UCC blanket lien in case they do give your company a loan. A UCC blanket lien is a notification which goes on your credit report. It says that the lender has an interest in all of your company’s assets until you repay the loan completely. Thus, there could be unfortunate consequences if you need to default.
Plus, most of these loans will also entail personal guarantees.
Having said that, if a loan does not require a personal guarantee, then your small business is generally going to be looking at unsecured business loans, and those are coupled with excessive interest rates. These sorts of small business loans are either short-term (so you must pay them back promptly), receivables financing (where you are able to get a loan based on business you anticipate to be coming in because you have due billings which your customers have not paid out 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 need to put up a personal guarantee or accept a UCC blanket lien. If you end up defaulting on the loan, then your residential property and any other personal possessions will not be seized, and neither will your inventory. Nevertheless, this also indicates that you often have to have strong revenue or a significant amount of time in business. In general, your personal credit must be fair or better (that’s even without having a personal guarantee requirement).
It’s all about the interest. According to Nerd Wallet, Kabbage can offer an unsecured business loan – yet the APR can possibly 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 (though not everyone will view it in this manner) is that unsecured business loans often demand that your company has been in operation for at least six months, or that you have no personal bankruptcies, or your business has to demonstrate a minimum annual earning amount – which means opening up your records to your lending institution. If any of these requirements have already been met by you, then you possibly won’t see this as a real disadvantage. However, if your small business is brand-new, and you do not yet have a regular clientele and profit, and you have had personal bankruptcy problems, then you could be shut out of your few remaining alternatives.
For each of these alternatives, you will definitely have a preferable rate of interest (and you will most likely have more options, so you can shop around and compare plans) if your credit score is better than poor. If your business can stand by until your credit– either company or personal or both– improves, then your alternatives will significantly improve, too. In the meantime, unsecured business lending can help.