Obtaining a business loan isn’t terribly easy at the best of times, though, with bad credit, it can become quite difficult. Business owners with bad credit have fewer options to consider, with some of those options being untrustworthy at best. Moreover, these bad credit business loans can come with a hefty price tag, forcing companies to deal with additional financial pressure. However, though it can be challenging to secure a business loan with bad credit, you can take a few steps to improve your chances. Let’s take a look in some detail.
Consider the necessity of a business loan
While this isn’t the most impactful step to obtaining a business loan, it is an important one in its own right. Loans aren’t always required to achieve a particular business goal, and you should strongly consider what you intend to do and how beneficial a business loan could be. In some cases, you’ll find that a loan isn’t the optimal approach, saving you time and money in the long run. Instead of fixating on obtaining a loan, consider alternative methods of raising finance, such as stock offering. Also, consider the impact your idea will have on your company; if it isn’t going to make a notable impact, is it worthwhile to indebt yourself for it?
In addition to this, lenders will look at the reasoning behind the loan application and how impactful it will be on the applicant company’s finances and operations. The impact on revenue is especially considered by lenders, as this can indicate how likely the company is to repay the loan. While lenders will always look at these factors, they will place additional scrutiny on companies with bad credit. As such, it is invaluable to have a clear reason behind your loan application and evidence of how it will help.
Raise your eligibility factors
One of the deciding factors for a successful business loan application is your eligibility. This is another area that lenders pay close attention to generally, but even more so when the prospective borrower has bad credit. When you are applying for a loan, make sure these criteria are the best they can be:
- Business credit rating – The first factor a lender will look at is your business’ credit rating. It indicates risk for the lender, showing how well your business has handled past loans. However, as a good business credit rating must be established over time, it isn’t always possible to have it optimised once you need the loan.
- Personal credit rating – When an applicant’s business credit rating isn’t enough, lenders will usually look to the personal credit rating of its directors. While it can help in a range of loan applications, it is especially important when applying for loans that require a personal guarantee.
- Purpose – As mentioned in the previous step, the reasoning behind the loan application can be quite important. Some lenders will even limit the use of funds, meaning any purpose outside their specifications will likely be rejected by default.
- Revenue – Though the previous two factors are important, the ability to pay is ultimately what determines a successful or unsuccessful loan application. Lenders will look at a business’s annual revenue to have some indication of its ability to repay the full amount at the specified time. Some lenders will also accept detailed and well-evidenced projections for new businesses that don’t have a storied set of accounts.
- Cash flow – This factor follows on from revenue, indicating the profitability of a business. It similarly shows the likelihood of a business being able to repay the loan, indicating the risk assumed by the lender.
- Business assets – For some types of loan, such as a secured loan, the value of your business’ assets is quite important. These types of loans require collateral, which the lender can repossess in the event the borrower cannot repay. This reduces the risk assumed by the lender, while being a fairly convenient method of raising finance for borrowers. Naturally, this method places a heavy emphasis on assets, meaning you’ll need a list of your business’ assets.
- Outstanding debt – The final risk factor is a business’ outstanding debt. This shows how well the business’ directors manage finances, and may indicate frivolous spending or financial overextension. Businesses with large amounts of outstanding debt will find it more difficult to secure additional loans.
While none of these factors are the be-all-and-end-all in most cases, failing to keep several at a high standard will likely result in your business loan applications being rejected, especially with bad credit. For best results, you should carefully manage these factors, improving them where possible regularly.
Plan thoroughly
Generally speaking, lenders like a business with a detailed, decisive plan already drafted. Seeing a clear outline of what your goals are and how you intend to achieve them gives lenders a better picture. Including how finances fit in, along with details about the company, can help lenders see what they are getting into. Not only will this increase your chances of a successful application, but it will also speed up the process, as lenders already have many of their questions answered.
There are a few key factors you should include in your plan. First, you should detail what your business does and how the purpose of the loan will affect operations. Next, you should detail your market research and marketing strategy. This will inform your lender about your target audience. How you draw attention to your products and services, and how effective you are at doing so. Lastly, you should detail the financial state of your company. This should include your cash flow, liabilities, and income statements. Future forecasts are also helpful, and you should also cover how the loan will affect your business’ financial state. If you cover all these points in your plan, being as thorough as possible, your chances of a successful loan application will benefit as a result.
Conclusion
Though securing a business loan with bad credit might seem difficult at first glance, there are many ways to tackle the problem. The above factors can help maximise your chances of obtaining a business loan despite having bad credit, and there are plenty of additional methods to try also. Provided you shop around and do a bit of research, finding a business loan that suits your needs will be simple, despite having bad credit.