Your credit score is an acknowledgement of your past payment behaviour. It can call your credibility into question when your credit score is not up to snuff. As a result, you will either be turned down straight away or charged a high interest rate. Most lenders restrict the borrowing sum if they decide to lend money despite charging high interest rates.

Although the importance of a good credit report cannot be ignored for both personal and business loans, the approval criteria for the latter are a far cry from that of the former. A lender would be willing to check your business history and the worth of your business assets as well. If your business does not sound to be profitable in years to come, your chances of securing a business loan are pretty bleak. If the scenario is the opposite, your lender would still expect you to have a backup plan.

Unfortunately, some entrepreneurs struggle with a bad credit rating. Most lenders out there also accept applications from bad credit borrowers. When you are self-employed or a freelancer, your personal credit rating will be reviewed to make a lending decision. You will need a business credit score when your business has a separate legal entity.

What can you use bad credit business loans for?

Bear in mind that business loans can be used for business-related expenses. You may think of personal loans as an alternative if you are self-employed, but they are not meant to fund business expenses. Lenders will not sign off on your application. Make sure that you apply for a business loan only when you need money for your business expenses. You can use the following:

• To expand your company
• Pay employees’ salaries
• Buy machinery or equipment
• To fund cash flow problems

Once your business loan is approved, there is no restriction on how you can use the loan as long as it is for a business purpose.

The upsides and downsides of business loans

 

Advantages	Disadvantages
Your poor credit history will not get in your way of getting the nod for a business loan.	The size of the loan will not be so big. Many lenders will restrict you from borrowing a larger sum of money.
You can spend the money however you want as long as it is exclusively for business purposes.	High interest rates will be charged. Chances are you struggle to stick to payments.
If you keep up with payments, you will see a significant improvement in your credit score.	Not all lenders lend bad credit business loans. You will have to make do with fewer options.

Ways to get a bad credit business loan

A bad credit rating can make it quite complex for you to get approval for a business loan, but there are chances to secure an affordable deal:

• Borrow a small amount of money

Your chances of securing a business loan with a bad credit rating are quite high when you try to borrow a smaller sum of money. It is vital to understand that interest rates charged are very high, and they quickly add up the total cost of the debt.

Therefore, you should try to borrow as little money as possible. Your lender will be able to have confidence in your repaying capacity when you do not have a huge debt to be paid off.

Use online calculators to understand the estimated cost of the debt. On no account will the actual cost be equivalent to it by virtue of fees and associated charges.

• Shop around

No matter how good a lender’s deal sounds on the landing page, you are always suggested that you carefully explore all your options. Every lender charges different interest rates and fees, so make sure that you apply to a lender that provides you with the best deal.

You can be informed about fees and associated charges by going through lenders’ websites. If not, call the customer line to get details. Business loans are not like small emergency loans so that you can get pre-qualifying letters from multiple lenders. Though the actual rates will be higher than those mentioned in pre-approval letters, you will at least have an idea of which lender is offering cheaper deals.

• Take the help of a broker

Finding a specialist lender is not so easy. Although a few lenders are out there to entertain bad credit applications, not all of them entertain the whole bad credit score range. Chances are your credit rating is lower than the bare minimum the lender you are applying to has set. In such circumstances, your application will be turned down immediately.

A broker can help you find a lender that matches your credit file. They will assess your credit rating without damaging your credit points, business needs, and future profitability and then introduce you to a lender who may offer you the best deal.

• Put down collateral

Small business loans do not require collateral, but when your credit rating is not stellar, you can think of securing your loan against your business asset. However, it may not be possible when you are running a store, or you are a freelancer. Your house may be secured against the loan. Remember that you will lose your house if you fall behind on payments.

What kinds of business loans can you secure with a bad credit rating?

Here are the types of business loans you can think of applying from a direct lender:

Unsecured business loans Unsecured business loans are small loans that are to be paid back within a period of five years. No collateral is required, and hence, interest rates will be quite high.	Secured business loans Secured business loans are quite cheaper than unsecured business loans as your lender can liquidate your assets to take their money back.
Business credit cards Business credit cards come in handy when you do not have to borrow a larger sum of money. You can access funds at once based on the card’s limit. They are ideal for funding working capital.	Merchant cash advance It allows you to borrow money against future credit card sales. You will have access to cash this instant, which is ideal for funding immediate cash flow needs.

Is there a way to offset the impact of a bad credit rating?

Bad credit business loans from a direct lender lay emphasis on a good credit rating because it increases your chances of applying for a loan at a low interest rate.In addition, you will need a good revenue stream and a long business history.

You might think that you can offset the damaging impact of a poor credit rating by having a strong business profitability, but that is a myth. Nothing can disregard the fact that you failed to manage your payments in the past.

The bottom line

Getting the nod for a business loan can be quite complicated when your credit history is not so perfect. A few lenders are out there who can approve your application, but they will charge very high interest rates.