No matter the scale of your business, you will need some funding to keep its operations up and running.
When cash flow is tight, most business owners resort to loans to cover the expenditures of their business. However, some lenders have strict qualifications, especially when it comes to credit scores. On the bright side, there are some lenders that cater to borrowers with low credit status.
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Factors that Can Affect Your Loan Application
Lenders will usually look for the following when considering your loan application:
Credit Score
There are two types of credit scores that lenders will usually consider for small business funding: your FICO credit score and your business credit report.
Your personal credit score is also your FICO (Fair Isaac Corporation) credit score. It is connected to your Social Security number. Moreover, a credit score is calculated using different factors. These factors include debt repayment history, length of credit history, outstanding debt, and the like.
Your FICO credit score ranges from 300-850. Lenders tend to look for a good credit score to get convenient loan deals. That is why it is recommended to increase your score if it is somehow low.
On the other hand, a business credit report is different from your personal one. It is connected to your employer identification number. Furthermore, its calculation varies from whatever organization you register it to.
Debt-to-income Ratio
The debt-to-income ratio is a percentage that compares your total income and the total amount you owe. Suppose you owe $25, and your current income is $100. This means your debt-to-income ratio is 25%. Most of the time, lenders would like you to have a mid to low 30s debt-to-income ratio. However, some lenders will approve loans for businesses with a debt-to-income ratio of up to 43%.
Cash Reserves
Some lenders may require you to maintain cash reserves. Most of them may expect three months’ worth of cash reserves, while others require six months or more. Cash reserves will act as security for lenders. This will assure them that your business will cover the loan repayments, even if something terrible happens to your business.
Collateral
There is a possibility that lenders will ask for collateral to back up your loan. If you fail to make repayments, lenders will repossess the collateral. Furthermore, common assets pledged as collateral include land, equipment, or real estate.
Options to Try in Financing your Small Business with Low Credit
Below are some funding options available to small businesses with low credit scores:
Short-term Loans
Short-term Loans include term loans and lines of credit. Usually, you get to repay a term loan within three years or less. On the other hand, lines of credit usually last for a year.
Short-term loans are excellent for small business owners who have low credit. This is because lenders tend to look at cash flow rather than credit score. As long as you have enough reserves and revenue to back up a short-term loan, a lender will most-likely approve your loan application.
Hard Money Loans
Hard Money Loans are loans that require you to put up collateral. This is also known as secured loans. Most of the time, if you pledge collateral, lenders will not be strict about your credit score and will approve your loan application.
Microloans
Microloans can help you get $50,000, according to the Small Business Administration (SBA). The SBA will provide this type of loan with the use of nonprofit lending organizations. Furthermore, you can take advantage of this loan for working capital, inventory, building fixtures, new furniture, equipment purchasing, and the like.
Business Credit Cards
Business Credit Cards are options for businesses that prefer to improve cash flow. These cards are usually offered to businesses that have low credit. However, they tend to have high rates. On the bright side, credit card repayments can help boost your credit score.
Equipment Financing
Equipment Financing loans help you purchase the equipment that you need to run your business. This type of loan comes with a repayment schedule over a set period. Moreover, lenders usually offer a fixed interest rate when it comes to equipment financing.
Invoice Financing
Invoice Financing is also known as factoring, but this is not a loan. When it comes to this financing option, a small business owner will sell their accounts receivable to a factor at a lesser rate (70% to 90% of total value).
Once the invoices have already been sold, a factor will begin collecting payments owed from your customers directly. Invoice factoring is excellent for seasonal businesses, and if you need growth capital.
Merchant Cash Advance
A Merchant Cash Advance is also not a loan. This is a type of financing that is secured by credit card sales. This option will depend entirely on your sales volume. The lender will present you with a lump sum payment to trade a portion of every credit card sale that you’ve had until you repay the loan entirely.
Takeaway
When choosing the right funding option for your small business, it is vital to decide on what you can afford. Since you have low credit, you wouldn’t want to hurt your credit score even more. Hence, you should always consider your current financial situation.
