We are excited to bring you a guest post from Marc Prosser at Fit Small Business.
For many lenders, seeing a high credit score is a crucial factor in giving the thumbs up for a loan. So does this mean that a poor credit score completely bars you from getting financing for your business?
The short answer is, not necessarily. There are still business loan options available to those with bad credit, but you need to go beyond the traditional lending options. This article will cover a few of the non-traditional methods and give you some insight on how to get your business rolling, even with less-than-perfect credit.
The Traditional Route
First let’s take a look at what you need for a traditional loan. An SBA loan is the go-to loan for most small businesses, but it does require a significant down payment, over two years of business history, and some collateral in order to qualify. Additionally, your lender will want to see a personal credit score of 680 or higher for all owners. If this last requirement automatically rules you out, you can turn to one of these more unconventional methods.
Today there are far more funding options for small businesses than ever before. Alternative lenders provide short-term loans to give your business a boost as quickly as possible. With the loans being shorter, you won’t have to worry about paying a loan for years to come. You’ll pay about half as much as you would pay for a cash advance, and you don’t need the sky-high credit score to be approved.
The biggest stipulation for approval with an alternative lender is how much income your company is pulling in. While alternative lenders are one of many options, business owners should tread carefully. Alternative loans, while easy to get, typically carry high interest rates. Which means that while you have a shorter loan, you could end up paying more than you would for a long term loan. While it is a viable option, make sure to do your research before selecting a funding option.
While it may sound like approaching your buddy for some extra cash, peer-to-peer lending is far from just a personal loan from a friend. This method involves many investors lending money via an online platform to people who need a personal or business loan. The great part about this option is that it doesn’t involve banks at all – you’re essentially borrowing from a group of individuals, which makes the terms and requirements much more flexible. Your credit score, while still a factor, does not have to be nearly as high as you would need to have in order to qualify for an SBA loan.
One important note with peer-to-peer borrowing is that fees can accumulate quickly if you default or make late payments. Avoid steep fines by only using a peer-to-peer loan if you’re positive that you can pay it back on time.
Hard Money Lenders
This lending option, like peer-to-peer lending, cuts out banks entirely and allows you to borrow from individuals or organizations. Your credit score doesn’t affect your ability to qualify, but you do need to be able to show the lender some asset such as property as collateral. Some hard money lenders will also loan funds in exchange for a percentage of your business profits.
One drawback to a hard money loan is that the interest rates can be incredibly high. So while this may be a decent option if your business is growing quickly and you can repay in a short amount of time, it may not be the way to go if you’re a struggling business that needs several years to pay back your loan.
You may need to do some digging to find a micro lender near you, as they typically only lend to businesses in their local community. Micro loans are a viable business loan option for startups, as they allow you to borrow smaller amounts (up to $50k at most) for short time periods, and your business doesn’t have to be at a certain level of maturity.
You will have to show your credit score to get a micro loan, but this isn’t the only determining factor in whether you qualify. You also need to submit a business plan, financial data, and any investments you’ve personally made to show your commitment. Additionally, micro lenders want to know exactly what you will be using your loan for and they may even have restrictions on how you can spend it.
Don’t be discouraged if your credit score is keeping you from acquiring an SBA loan. With the wide variety of other loan types out there, you can certainly find one that’s right for your business and that will give you the leg up you need.
Marc Prosser is the co-founder and managing partner of Fit Small Business, a site that provides reviews and articles for small business owners. Prior to starting Fit Small Business, Marc was the CMO of FXCM for ten years. He joined as FXCM's first employee and grew the company to more than 700 employees.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more atwww.excelsiorgrowthfund.org.