Can You Get a Business Loan With a Bad Personal Credit Score?

By Angela Monroe - December 3, 2019

It’s not easy to get approved for a business loan if your personal and business credit scores are bad. Nevertheless, taking out this type of financing is now more possible than ever before with the emergence of online lenders that offer bad credit financing.

Aside from your business credit score, lenders also check your personal credit score to assess your attitude towards money and handling financial obligations. 

Even if your business credit score is good, you may still have problems in getting your loan application approved if you have a low personal credit score. You might also get an amount that’s less than what you requested, as well as unfavourable business loan terms.

How to Get a Loan With a Bad Personal Credit Score?

Get a bad credit loan. This is a type of personal loan for borrowers with bad credit. Like other types of personal loan, it can be used for a variety of purposes including business. However, it is more expensive than the standard personal financing for borrowers with good credit. 

Instead of requiring a good credit score for approval, it looks into other factors that prove your capacity for repayment. These include regular income, money in the bank and properties with monetary value. The associated high credit risk of lending money to you despite your terrible credit history is compensated by higher interest rate and loan fees. 

Before taking out a bad credit loan for business use, ensure that its benefits outweigh the cost. 

When Should You Get a Bad Credit Loan for Business?

Despite the higher charges for interest and other associated expenses, taking out a bad credit loan for business may be beneficial if:

1. You need funds to keep the business alive

Some business expenses are very important that failing to pay them typically ends up in the closure of the business. These expenses include unexpected ones, like replacing faulty or damaged equipment that’s expensive but crucial to your day-to-day operation. Taking out a loan to cover late payments and unpaid invoices is also important, especially for a small business where delayed payments can derail cash flow and lose out on revenue-generating activities.

Equipment Loan

Some businesses are heavily dependent on certain equipment and machinery that losing them is tantamount to losing the business. A water delivery business, for instance, needs an efficient water distillation machine to keep its business afloat. If this machine needs to This won’t be a problem if you have plenty of funds in your working capital. However, if you’re just starting up or if your business is only making a small amount of revenue, you may not be able to comfortably afford to pay the unexpected but necessary expenses.

Crimes like robbery and natural disasters, like flooding or fire in business offices, are also other unforeseen expenses that can often cause stress on your business’ financial systems.

Unpaid Invoices

One of the common “diseases” that can kill small companies from the inside out is the plague of late payments and unpaid invoices from customers. This is common in B2B companies that supply goods and services to other businesses. 

Unpaid invoices are money owed to your business. You need profit to support your business working capital. If you don’t have enough working capital because your clients are not paying you, this can become a cash flow issue that worsens over time. 

While you’re chasing clients for unpaid bills, you can take out a loan to support your business and use the unpaid invoices as security for the loan. This is called invoice financing. 

While your credit score is factored into the approval decision, you’re likely to get approved even with bad credit. Lenders are more interested in the strength of your customer’s credit.

2. The business opportunity outweighs the debt

Sometimes, opportunities for business growth come knocking on your door in the form of bigger demands for your products or services. This bigger demand means bigger profits, but you also need more equipment, manpower and inventory to be able to meet the growing demands of your customers. 

Taking out a loan can help you purchase all the necessary equipment and materials. It also helps you get all the skills and labour you need without touching your profit or business safety net.

If you believe that responding to the bigger customer demand can result in bigger earnings and increased business cash flow that enables you to make timely payments and settle the debt on its due date, taking out a bad credit business loan is a smart idea.

3. Your business credit score needs a boost

Taking out a bad credit loan not only helps you get funds for business needs. It can also fix your unsatisfactory business credit score. As you make your repayments on time, you create a new pattern of payment behaviour that reflects responsible credit management and smart attitude towards debt. This new pattern greatly improves your credit score, overshadowing old patterns of late repayments and other negative behaviours, because payment history is the biggest factor that goes into calculating your score.

4. You need to survive the slow months

Many seasonal small businesses die in the slow months when it is hard to attract clients. These include vacation resorts, summer camps, skiing facilities, landscaping firms, snow removal services, and ice cream stands. 

While big companies typically lure customers by offering discounts and special offers, you cannot follow this similar sales strategy for your small business because the normal profit you’re making is usually just enough to keep production and distribution running. To offset the slow season without closing down your business, taking out a loan is usually your best option.

5. You have multiple debts to pay

Taking out a bad credit loan to consolidate debts into one account is a smart strategy. Aside from helping you efficiently manage and keep track of your debts, you can also save money on interest. This is especially true if your old debts have higher interest charges.

While you have a limited option for bad credit debt consolidation loan, there are lenders that specialise in working with borrowers with bad credit. Fintechs and online lenders usually offer this financing at a limited amount and short repayment term. The interest rates and fees are expectedly high as the best terms are only available for borrowers with good credit. However, you can still find lenders that offer reasonable terms if you shop around. 

When Should You Avoid Getting a Bad Credit Business Loan?

Bad credit financing is the go-to solution of business owners with poor credit who need money for various business projects. However, you should always take extra consideration and precaution before taking out one. Predatory lenders often use this type of financing to cash in on desperate borrowers.

It may not be in your best interest to get a bad credit loan for business use if:

1. You simply cannot afford the repayments

Predatory lenders can lure you into taking out a loan by offering “guaranteed approval” and making the process very smooth and easy for you. Sometimes, they would not even bother checking out your credit report before granting you the funds. They do this because they are not really interested in your financial capacity for repayment. They are more interested in earning money from the astronomically high-interest charges and the big possibility of repossessing the assets you pledge as collateral.

If your business is not making enough profits to make loan repayments on time, it may be wise to look for other funding alternatives. These include crowdfunding, seeking grants, bootstrapping and borrowing money from private equity.

2. You can’t efficiently manage your finances

Good financial management is important when running any business. If you don’t have the time or the skills to understand where your money’s going and how to keep track of expenses and profits in your small business, it is simply not a good idea to get one. Without the skills to effectively manage your finances, debt and profits alike, your business is bound to hit the rock. Taking out a loan may only put you deeper into debt.

 

Loans For Loans For People With Bad Credit is a finance broking company in Australia that operates nationwide. We help people across the country get the financing they need despite their less than stellar credit records. Talk to one of our loan experts on 1300 769 384 or request a Bad Credit Loan Pre-Approval.

 

Se also:

How a Personal Loan Affects Your Credit Score

Getting a Debt Consolidation Loan When You Have Bad Credit

Top Myths About Bad Credit Personal Loans That Should Not Discourage You

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

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