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3 Lending Options That Overcome Poor Personal Credit

Can I Take Out a Business Loan with Bad Personal Credit?

Access to capital is vital to your company’s growth and sustainability. You need it for purchasing inventory, buying equipment, hiring employees and boosting marketing efforts.

Unfortunately, many businesses face a shortage of capital. In fact, nearly two-thirds start with less than $70,000 AUD.

If you’ve got good personal credit, that’s great. You’ll likely have several options and shouldn’t encounter much difficulty obtaining a business loan.

But what if you have bad personal credit?

Are there other ways to get the financing you need? If so, what are some specific workarounds?

Let’s find out.

 

What Lenders Look At

First, it’s important to know which specific factors look at when receiving a funding request. This offers insight into their decision-making and helps you better understand their logic.

There’s obviously your credit score, and nearly all lenders will check this. In Australia, you can go through credit bureaus like Experian and Equifax to see what your score is.

But the term “bad credit score” is somewhat subjective. So, what exactly constitutes as a bad credit score?

Here’s how these break down according to Finder:

 

Experian

  • 800 - 1000 - Excellent
  • 700 - 799 - Very good
  • 625 - 699 - Good
  • 550 - 624 - Fair/Average
  • 0 - 549 - Weak/Below average

 

Equifax

  • 833 - 1200 - Excellent
  • 726 - 832 - Very good
  • 622 - 725 - Good
  • 510 - 621 - Fair/Average
  • 0 - 509 - Weak/Below average
 

If your credit score is 549 or under with Experian or 509 or under with Equifax, it would generally be considered poor. Falling into this range means that you’re in the bottom percentage of the credit-active population.

While your credit score is important, it’s certainly not the only thing lenders look at. Here are some other factors they examine.

 

Age of Your Business

The longer your company has been around, the better your chances of obtaining a business loan typically are. Brand new startups tend to have more difficulty than those who have been around for at least 2 years.

In some cases, it can be nearly impossible to get a loan if you’re just starting out, even if you have a good credit score.

 

Debt-to-Income Ratio

There are 2 main elements involved with your debt-to-income ratio. One is your business’s cash flow and income. The higher these are, the less of a risk you are to lenders, and the more appealing you’ll be.

The other is the amount of debt you have. If your company has taken on a lot of debt, the less appealing you’ll be to lenders, and you’ll have more difficulty getting a business loan.

 

Collateral

If you can back your debt with substantial collateral such as your home, commercial property, equipment or outstanding invoices, it reduces your level of risk. In turn, collateral-based loans can be easier to obtain and may involve lower interest.

 

Industry

Finally, there’s industry.

“The type of industry your business falls under can be a deciding factor for many lenders,” explains digital marketing strategist Brooke Hayes. “And in some cases, they may lean away from certain industries that are considered risky. In fact, businesses deemed to be socially undesirable or that have an unsteady cash flow tend to be rejected most.”

A seasonal business, for instance, may have difficulty getting a business loan due to the inherent ups and downs throughout the year. Those selling alcohol or sexual health products often get denied as well because of the social stigma of their products.

 

Many Different Factors

The point here is that lenders look at many different criteria. Having good personal credit is always beneficial and makes it easier to obtain a business loan. But having poor credit won’t necessarily disqualify you from accessing capital.

So the short answer to the question, “Can I take a out a business loan with bad personal credit?” is usually yes. However, it will probably narrow down your options, and you’ll likely need to explore some different avenues.

 

Looking Beyond Conventional Lenders

The approval rate for small business financing requests among conventional lenders is fairly low. In January 2019, it was:

  • 48.9% for small banks
  • 40.3% for credit unions
  • 27% for big banks

If you’ve got bad personal credit, it’s going to be tough to get financing. But there are a few viable options that can work.

 

1. Business Credit Cards

This is one of the more straightforward options and can provide you with some financial breathing room. Fortunately, many business credit cards don’t require you to have superb credit and may be a viable option for your company.

This post from Nav and this one from Fundera feature lists of business credit cards that are specifically geared towards individuals with less than stellar credit.

For instance, the Capital One Spark Classic for Business requires a minimum credit score of 580+. There are even a couple of cards that only require a minimum credit score of 450+ — the Capital One Secured Mastercard and the Bento for Business Visa Debit Card.

The downside is these may come with high interest rates, which can create a financial strain long-term. So, you’ll want to fully familiarise yourself with the terms and read all of the fine print before making any commitments.

 

2. Short-Term Business Loans

This type of loan can provide you with fast cash and help cover cash flow gaps. It’s mainly intended for emergency situations like a critical piece of machinery going out or you encounter unexpected expenses.

Most short-term business loans are 3 - 18 months in length, and you’ll have either weekly or monthly Automated Clearing House (ACH) payments.

When used correctly and paid off promptly, this will supply you with the necessary capital to keep your company on track. And some lenders only require a minimal credit score. For example, OnDeck has a minimum credit score of only 500, while Fundbox doesn’t have one at all.

Again, the drawback here is high interest, and you’ll likely encounter high APRs. This is definitely something to be aware of when checking out different lenders. That being said, this can be a feasible option if you need cash now and feel you can pay it off quickly.

This resource by NerdWallet provides a breakdown of different short-term business loan lenders along with the minimum credit score for each.

 

3. Invoice Finance

This is a catch-all term that refers to a line of credit secured by your outstanding invoices. Quite simply, invoice finance (also known as debtor finance) allows you to access money that’s owed to you by clients ahead of time. Rather than waiting 30, 60 or even 90 days to be paid for an invoice, this solution helps free up cash flow much sooner.

This is huge because the majority of Australian businesses deal with slow or late paying clients. Xero even found, “Over 62% of small businesses have encountered late or unpaid invoices in the past year.”

And this can lead to complications in other areas. For instance, companies may have trouble paying their own suppliers because of sluggish invoice payments.

Invoice finance often works well for individuals with bad personal credit because outstanding invoices serve as collateral, which can offset a low credit score. There’s also a lot of flexibility in terms of how the service is offered.

You can opt for full management of accounts, where the lender assumes responsibility for tracking down payment. This is great when you need to focus on core operations and don’t want to be hassled by collecting invoices.

There’s Selective Invoice Finance, where you only submit invoices you want funding against. This works well if you only need occasionally need capital.  

These cash flow solutions can also fund your turnaround situation or support your business through the early years. With no real estate security required, invoice finance is a flexible approach to business financing.

Here some of the key benefits of invoice finance solutions:

  • Access to quick cash - Approval usually takes a maximum of 24 hours.
  • Receive up to 95% of the value of approved invoices - You receive the rest once the invoice is paid in full by the client.

 

Exploring Your Options

Bad personal credit certainly isn’t ideal when you’re looking to take out a business loan. But it doesn’t automatically disqualify you either.

There are several different factors that lenders look at besides your credit report, so you shouldn’t assume that it’s always a dealbreaker.

As we’ve just learned, there are multiple options for obtaining capital if you’re unable to go through a conventional lender. The encouraging thing is that alternative lenders approve 57.3% of small business financing requests, which is higher than small and large banks as well as credit unions.

It just boils down to exploring your options to find the right lender with terms that work for you.

Which of these alternative business loan options sounds best to you? Get in touch with us on 1300 332 867 to see how we can help, or click here for us to connect.

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