When it comes to applying for a new credit card or loan to fund business operations, lenders have a difficult time looking beyond financial blunders of the past. Your personal credit score is closely tied to your small business, which can make it tough to secure the funding you need quickly and affordably. Especially with traditional banks and credit unions.
Fortunately, there are newer options for small businesses needing financing. Online marketplaces and direct funding solutions offered through companies like Fundera and Uplyft Capital make it easier for small businesses with less-than-stellar credit histories to receive funds.
Here are three commonly used borrowing options for small businesses and individuals with bad credit seeking business funding.
Top 3 Types of Small Business Loans for Bad Credit
1. Small Business Loans with Collateral
If you are struggling with your credit or have had poor credit before, one of the simplest ways to secure financing for your business is to use collateral to sweeten the deal. Financial institutions view a new loan application for a product with collateral as a lower risk.
Inventory, invoices, or equipment can be used to back a new business loan. If a business doesn’t repay as agreed, the lender can recoup losses from the nonpayment by taking ownership of the business assets.
– Invoice Financing
Through business lending marketplaces online, small businesses with bad credit can apply for invoice financing and qualify for up to 85% or more of the value of the outstanding invoices as a cash advance. A fee is then charged for that cash advance.
– Equipment / Inventory Financing
Lenders who offer equipment financing often do not look as closely at personal credit as a qualifying factor for a loan. Alternatively, this type of small business financing uses business equipment or inventory as collateral in exchange for a term loan. Personal credit is less of a concern for lenders since they will have a lien on the business asset.
2. Short-Term Business Loans
Traditional business financing through a bank or credit union is often structured as a long-term loan. This means the business owner receives a lump sum and repays the amount in full, plus interest charges, over two or more years. However, when personal credit is tarnished, conventional bank loans with extended repayment terms are hard to come by.
Some business loan brokers, online marketplaces, and alternative lenders offer short-term small business loans directly or through their lending partners.
These loans are designed to help small business owners with less-than-perfect credit. Short-term business loans typically have a higher interest rate than long-term loans, and repayment is over a shorter time frame – usually 3 to 18 months.
Because of these factors, lenders are exposed to less risk should payment not be made on time or fully. Shorter-term small business loans may still require a check of personal credit, but the qualification criteria are less stringent than traditional business loans.
3. Merchant Cash Advances
Many small businesses use significant amounts of capital to fund day-to-day operations. When cash flow is tight because an unexpected expense or something else throws a wrench in the mix, financing business operations can be challenging. Luckily, Merchant cash advances are available through online lenders and other business loan marketplaces to meet this need.
With a merchant cash advance (MCA), the lender offers to supply a certain amount of capital based on sales. Instead of structuring a fixed repayment out of cash flow, borrowers typically pay back the advanced amount as a percentage of their daily credit card transactions.
When sales are slow, the repayment of the cash advance is small. When purchases are booming, companies pay more to the lender on those days.
Although a merchant cash advance is helpful when credit isn’t at its best, the total cost of this type of business financing can be high.
Final Thoughts on Funding for Small Businesses with Bad Credit
Small business owners with bad credit still have opportunities to obtain the funding necessary to keep the company’s doors open and business thriving. However, it takes understanding personal and business credit scores and knowing which borrowing options are available to make smarter choices.
Before selecting a random type of financing to meet a business’s goals, companies such as Fundera by NerdWallet can connect prospective borrowers with a free funding advisor.
Using a loan consultant who understands the available terms, costs, and qualification requirements for each financing solution can help small businesses with bad credit make the best decision for their needs.
