Many small business owners accustomed to using personal credit cards to finance purchases, equipment, and even payments to suppliers have seen their personal credit cave in during these tough economic times.
Can you still get a business loan with a personal credit score below 650? Sure — but it’s a lot more difficult.
It’s important to note that a lender will first review your banking history, bank ratings, and business credit history, and (if available) business financials to make its decisions. The stronger your bank rating and business credit profiles, the less your personal credit will figure in the approval process.
The following list of options can help you get a business loan if you have bad personal credit. But be prepared to pay higher fees and higher interest rates with some of them.
While there are subprime lending programs designed for business owners with bad personal credit, these programs charge anywhere from 12 percent to 18 percent interest, or even higher. This isn’t a great option because you end up weakening your finances in the long term. If you do decide to use subprime lending, only select a lender that’s licensed and state regulated. Review its track record and application thoroughly before you apply. And ask lots of questions.
Transfer of Ownership
One of the ways you can solve a bad credit problem is through a transfer of ownership. In many cases, two partners in a corporation own 50 percent each and one partner may have excellent credit while the other may have bad credit. In such cases, both will have to be included in the credit check for a business loan with the bank, and the partner with bad credit will ruin the chance of obtaining a loan for the business.
If this is true for you, then one option is to transfer 100 percent of the business to the partner with the strong personal credit profile. The transfer of ownership is done privately and is simple to complete and can easily be filed in your corporate record-keeping book. Make sure you consult with your certified public accountant and attorney if this is something you would like to do. Remember, the ownership can be transferred right back once you’ve finished applying for a business loan with your bank.
Secured Business Loan
A good way to obtain a loan with bad credit is to post sufficient collateral. This type of loan is known as a secured business loan and is typically asset-based, which means hard assets are used, such as equipment, commercial real estate, receivables, and in some cases inventory. This can be a viable alternative, since banks are more willing to lend when there’s collateral like property on the table.
This is a very common solution for bad-credit business loans. A creditworthy cosigner will act as a guarantor for the business loan. This can be a business or trading partner, investor, or subsidiary company with a strong credit score.
Local banks are more flexible and open to taking other factors into consideration for business loans. This includes reviewing your business credit profile and the scores that reflect your company’s ability to repay a business loan. If you have a strong business credit profile, local banks and credit unions can be an excellent choice for obtaining a business loan.
Strong Bank Rating
A strong bank rating can help you get a business loan with community banks, regional banks, and local banks, even if you have bad personal credit. In order to accomplish this, your business will need to have a “low five” balance rating ($10,000 average balance) for at least three months prior to applying, plus a record of no bounced (NSF) checks.