How Can I Get a Business Loan With Bad Credit?

If you have bad credit, obtaining a business loan can be difficult. Most banks will not grant loans to individuals with credit scores below 640. However, there are options for people with bad credit.

First, you should separate your personal credit situation from your business credit profile. Obtain a separate tax number and legal identity for your business. This can be accomplished when you start a limited liability company (LLC), for example. Next, become qualified for vendor small credit lines. These will help build your business' credit history, enabling you to eventually obtain larger loans. Keep track of your credit history with all three major business credit bureaus (Experian, Equifax and TransUnion), making sure that you track and correct any report discrepancies.

Once your business credit has been established, you may attempt to obtain a business loan through one or more of the following ways.

Hard money loans

Also known as private loans, these are provided by individuals who wish to invest their own private capital. The interest rates on such loans are not always favorable and typically range from 12 to 20 percent. Depending on the nature of your business, you may also be required to pay points or put up some of your equity as collateral. However, because the application process for such loans is less stringent, a hard money loan may be your best option if you have bad credit and a bank loan cannot be secured.

Peer-to-peer loans

Also called social and person-to-person loans, peer-to-peer (P2P) loans involve the lending of money between one or more individuals without the aid of a third party such as a bank. Interest rates on such loans can be quite favorable, 7 to 20 percent. Many P2P lenders operate online, matching borrowers with lenders for a small, one-time service fee that is typically about 1 percent of the amount borrowed. Due to the increasing difficulty of obtaining loans from traditional sources such as banks, P2P lending has become quite popular. The financial research firm Celent estimates that P2P loans will reach $5.8 billion by the end of this year.

Merchant loans

These are usually provided by private companies. The merchant loan company loans money to your business, and then collects a certain percentage on its loan every time your business posts a sale. Sales are typically tracked through your credit card terminal, which the merchant loan company sets up beforehand. This arrangement is beneficial because you are not pressed to make loan repayments when your business is not yet profitable.

Hally Z.

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