We have had a lot of people asking us how to get a business loan with bad credit as the recession put a hurt on their credit score for a variety of reasons.  To make matters worse, banks have tightened their standards on lending and the primary factors today in getting a small business loan is credit and collateral.  Collateral is a discussion for another article and I want to get real information on how people with bad credit can get their businesses financed.   There is no doubt that bad credit is going to make it difficult to get financing but there are some options.

One point I want to bring up though, as I’m sure you have found on the internet, there are companies that claim to be able to get credit lines for people with bad credit for up to $250,000.  I want to be the first to tell you that this won’t work.  It’s not a real option.  Please stay away!

Now how do you fix bad credit?  Let’s start off by defining what bad credit really is.  Truth is most people don’t really know but they may think their credit is bad and the reality is that you don’t have to have perfect credit (800) to get a loan.  The rule of thumb is a score of 650 and above is great credit for someone looking for a business loan.  Anything below is going to be risky to the bank.  Be sure to pull your credit report from the free legitimate site www.annualcreditreport.com.  You get to request a credit report from each of the three credit agencies once a year for free.  The score itself is extra, but the important thing is to look over your report to see if everything is accurate.

Once you have checked your reports and your credit really is bad, the first thing you should do is to start and get it fixed.   There are companies that can fix it for you, but you will be wasting your money as they can’t back up any promise to fix it quickly.  It will take a lot of time and work and you have to clear out and/or dispute all negative items on your credit report as well as get back on track and stay on track with your current obligations.  While this option doesn’t get you a loan now it will help you down the road.

A few options for getting a small business loan without going to the bank

  • Find Some Hidden Money – There have been many instances with our clients who need a loan to get over the “hump” but really didn’t need money at all. How do you find this hidden money in your business?  The usual suspects are either in being more aggressive in accounts receivable or paying suppliers a little later.  There are a multitude of areas to increase your operating cycle and get more money in the business faster, so you may want to work with your accountant to find them.  A few small changes can have a huge impact on some businesses.
  • Friends & Family – While not for everyone and doing so will likely cause for conflict if things don’t go perfectly, friends and family are a place to turn to.  Make sure you put together a loan agreement so everyone is on the same page on how the loan will be repaid.
  • Investors – if your business is interesting enough, investors may be an option too.   Keep in mind this will be expensive money as you are typically giving up a piece of your company but 10% of $1,000,000 is better than 100% of nothing.   There are a lot of complicating factors so be sure to engage an attorney and accountant so you aren’t putting unnecessary risk on the business or yourself.Vendor Credit – If you have a product based business, obtaining credit from vendors could be an option to free up some additional capital.
  • Credit Unions – Many credit unions offer second chance personal loans or personal lines of credit for those that can show that they are working on improving their credit or who have cleared up their credit and are just waiting for the credit agencies to catch up with it.
  • Merchant Financing – While your credit may play a role in getting funding, merchant financing is a way to get a loan based on the amount of credit cards processed through your business.
  • Peer-To-Peer Loans – Companies such as Prosper.com, LendingClub.com and others is a marketplace that eliminates the bank where individuals lend directly to people who need money for a variety of reasons.  Rates will vary depending on your credit but you can post your story in your profile and if your story is good, many people are willing take a risk.
  • Micro Loans – Micro loans are available to help communities prosper and provide financing for entrepreneurs who are not able to secure sufficient capital. These programs focus more on the job creation than on a credit score, making access to funding a small business possible for entrepreneurs.  Funding comes from the Small Business Administration (SBA), Economic Development Administration (EDA), United States Department of Agriculture (USDA), Housing and Urban Development (HUD), Department of Treasury, and more.   Here is our list of revolving loan programs by county.

While you may have bad credit today, there are easy and identifiable steps to make it better in time and doesn’t have to be a permanent roadblock for your business or dreams.  Start today to begin working on fixing your credit and utilizing the other methods that you can use to get the money you need to start or grow your business.