Starting a small business can be incredibly difficult without the right financing in place. Unfortunately, many prospective small business owners have poor or bad credit, making it even harder to get the funding they need.
Financing options are often key to fulfilling the dream of business ownership, a reality made clear by the fact that 43% of small businesses applied for a loan just last year. While having issues with your credit can make it more challenging to qualify for a small business loan, the good news is there are more options available.
While it may take some effort, following a few key strategies can increase your chances of getting a small business loan with poor credit.
1. Improve Your Credit Score
You may already know that your credit score is a key factor in determining whether you’ll be approved for a loan. If you have bad credit, it may seem like there isn't much you can do, but if you've got a little time to spare, improving your credit score can greatly increase your odds of getting approved for a loan, not to mention result in a lower interest rate.
For these reasons, it may be worth holding off on that loan application until you try these three strategies first:
Paying Bills and Balances on Time
Your payment history is one of the most crucial factors impacting your credit score, making up 35% of the total. Just one overdue payment can reduce your credit score by as much as 180 points, and overdue payments stay on your credit report for up to 7 years. Paying your bills on time is one of the best ways to raise your score. Not only that, but your lender will use your payment history to determine how likely you are to pay back your loan.
If you are struggling to make your payments on time, you may want to consider setting up automatic payments, creating reminders for due dates, or even consolidating your debt. This can help simplify bill payment and ensure that your balances are paid on time.
Disputing Any Credit Errors
Another way to improve your credit score is to examine your own credit report for mistakes and errors. You may be surprised to learn that your bad credit isn't your fault - credit report errors are more common than you think. Roughly 34% of credit
reports contain errors, creating poor credit for one in three people.
For this reason, disputing credit report errors can help you improve your credit. The best place to start is to use AnnualCreditReport.com to request a free credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion). Check each report carefully for mistakes - they contain different information. Examples of common mistakes include incorrect account information or balances, duplicate accounts, and someone else's credit activity showing up on your report.
Once you’ve found an error, dispute any errors to the credit bureaus by explaining in writing why it is wrong. Under the Fair Credit Reporting Act, they must investigate and either correct or delete the mistake within 30 days. It may take time, but disputing credit report errors can help you build the credit you need to qualify for a small business loan.
Reducing Your Debt
A third way to improve your credit score is to reduce the amount of debt you are carrying. Paying off debt improves your credit by lowering your debt-to-credit ratio. Lenders use this ratio to evaluate how well you manage your finances. Your credit utilization ratio is measured by comparing your credit card balances to your overall credit card limit. A ratio of less than 30% and greater than 0% is considered good.
One way to reduce your debt is to increase the amount of money you are paying each month - even if it's just a little bit. For example, if you have $500 in credit card debt, try adding an extra $50 or $100 each month to the minimum payment. Over time, this slight increase can lead to substantial savings and can help you get your debt paid off faster.
2. Enlist a Guarantor for Your Small Business Loans
In addition to improving your credit score, another way to secure a small business loan with poor credit is to enlist a guarantor. Enlisting a guarantor with a high credit score can improve your chances of receiving a small business loan. A guarantor is someone who agrees to back the loan and will be responsible for repaying the loan if you are unable to do so.
If you have a bad credit score and have been rejected by other lenders, guarantor loans can allow you to borrow with the help of a family member or friend who "guarantees" to cover your payments. It's important to remember that enlisting a guarantor is a serious responsibility, so consider the financial implications before entering this relationship with anyone.
3. Apply for Loans for Small Businesses with Bad Credit
A third way to get a small business loan with less-than-perfect credit is to seek out and apply for loans specifically designed for businesses with bad credit. One of the best programs currently available is one offered by the Small Business Administration. The SBA offers loans specifically for small business owners with bad credit, and these loans are designed to help businesses overcome financial hardships and get back on track.
For example, SBA microloans are a suitable alternative for small businesses with poor credit. This is because the SBA requires lenders to provide more lenient terms. Unlike many traditional loans, you can typically qualify for a microloan with a minimum credit score between 620 and 640 and can get up to $50,000 in business financing. Plus, these loans are often given with lower interest rates and longer repayment periods, making them a great option for a business loan if you have bad credit.
Consider Financing a Franchise
If you are a prospective owner with less than perfect credit but have the skills and desire to run a business, financing a franchise may be a route you can explore to achieve your ownership dreams Lenders are often more likely to approve loans for franchises because they are pre-established businesses with an established business model and a track record of successful owners. Unlike startups, a franchise business comes with franchisor support, including help through the funding process for your business. Even with a lower personal credit score, you may be able to get the business loan you need if you invest with a quality franchise organization.
Learn More
If you’re ready to dive into business ownership but funding questions are holding you back, check out Neighborly®'s on-demand webinar to hear from franchising finance experts from three top firms discuss what options may be available to fund your franchise ownership dreams.
This is not intended as a substitute for financial advice from a professional aware of your facts and circumstances.
