When many people decide to go into business for themselves, they often think it will be impossible if they have bad credit and a low credit score. However, while it may make the ultimate goal a bit more difficult, it is by no means a dream that has to be extinguished. In fact, many entrepreneurs who had bad credit have gone on to get the loan they needed and find success. To find out how they did it, here are some ways a business loan can happen despite bad credit.
Purpose of Business Loans
People seek business loans for many different purposes. The most common, of course, is to start a new business, which may involve purchasing or leasing space, obtaining initial working capital, or other related tasks. Business loans are also sought by entrepreneurs who want to expand their existing business, purchase new equipment or additional inventory, and gain increased working capital. Finally, a business loan is sometimes obtained to help an entrepreneur improve their credit rating. Obtaining a short-term loan and paying it off on time gives them a better chance of obtaining additional loans in the future.
Why Your Credit Score Matters
According to Lantern by SoFi, “many entrepreneurs who wonder how to get a small business loan with bad credit often ask why their credit score matters.”
Lenders use credit scores to measure an individual’s risk. In other words, the lower the credit score, the more a lender will view a person as being at high risk of not paying off their loan. Traditional lenders, such as banks and credit unions, often use a credit score of 650 as a starting point when deciding whether or not to grant a business loan.
For entrepreneurs seeking a startup loan, their personal credit score is the only score used as consideration by lenders. For those with an existing business, both their personal credit score and that of their business are usually taken into consideration.
How to Get a Business Loan with a Low Credit Score
Entrepreneurs can do several things to get a business loan despite having a low credit score. First, they can obtain a credit report so that they know their credit score prior to asking for a loan.
Providing collateral is another great option. This can include personal assets, cash or savings accounts, or even equipment financing or unpaid customer invoices.
Other options can include:
- Applying for a lower amount of funding.
- Reviewing eligibility requirements of various lenders to know which lenders may be more willing to extend a loan.
- Having a co-signor take on the part of the responsibility associated with the loan.
In many cases, taking advantage of these various options results in getting a loan.
Though it may seem as if the deck is stacked against entrepreneurs with low credit scores, that is not the case at all. By being persistent and taking various steps along the way, a business loan can become a reality.