A business loan can make all the difference. An injection of funds can help your business grow rapidly, entering new markets faster and acquiring new customers quicker. But when we’re thinking of start up business loans, bad credit & no collateral can be a huge stumbling block. In this article, we will discuss how your business can apply for a loan even if it has bad credit or no collateral to offer.
We know it can sometimes be difficult for businesses to obtain a loan, but loans are often worth the effort. Even if your small business needs to jump through a lot of hoops the growth implications of a loan can be tremendous. Let’s look at some of the reasons why your start up business should consider getting a loan:
- Your business can expand using loan funds. Expansion could include opening a new branch or acquiring a competitor.
- Loan funds can boost your sales and marketing budget, allowing your business to acquire customers faster.
- R&D is key for many businesses, loans can accelerate the ability of your business to perform R&D and release new products to the market.
Loans can also be essential when your business is going through a rough patch. Often businesses experience difficulties due to temporary cash flow problems, and loans can provide a stepping stone. Loans can also help your business to weather difficult market circumstances.
Collateral can help you get a loan on good terms, but it is not an absolute requirement for getting a start up business loan. Start-up businesses can qualify for loans without collateral, but it takes a little bit of extra effort:
Manage your credit. With no collateral on the table, lenders will take a more critical view of your business credit profile. You will stand a better chance of getting a loan without posting collateral if your business credit history is flawless, or close to flawless. Make sure you don’t make unnecessary mistakes such as missed payments or exceeding credit limits.
Offer a personal guarantee. Your business may not be able to post collateral, but perhaps the owners of the business can. By posting a personal guarantee you are putting your personal assets on the line, but this may be worth doing if you are certain your business will repay the loan.
Try a credit card. Formal loans are not the only way to borrow, your business could also consider making use of a credit card. You can pay suppliers with a credit card and repay the card balance over a period of several months, but note that you are likely to be charged a high interest rate. That said, banks typically do not require that you post collateral to open a credit card account, so a credit card account is an option.
SBA loans. Collateral acts as a guarantee to a lender: if you don’t repay your loan the lender can sell the asset that you put up as collateral. Small Business Administration (SBA) loans are an alternative to collateral because the SBA gives the lender a guarantee. However, you can only apply for an SBA loan if you meet strict criteria, including a very good credit score.
Bad credit can make it difficult for your business to obtain funding. Banks will look at your repayment history and conclude that lending to your business poses a high risk. That does not mean that you cannot get a loan, but it does mean your terms will be worse and that you may need to look at alternative lenders:
Improve your credit score. First and foremost, focus on improving your business credit score. Ensure that any outstanding loans are repaid on time, and don’t exceed credit limits on facilities such as credit cards. Over time your score will improve, and your business will get access to traditional loans on excellent terms.
Consider alternative lenders. Traditional, large banks are not the only options for business loans. Smaller, online lenders will often waive strict criteria around credit scores in exchange for a very high interest rate. With Kabbage you can borrow $2,000 to $250,000 online. Another top online lender is OnDeck that offers even larger loans, up to $500,000. However both these lenders will refer to your personal credit history before granting a business loan.
Consider invoice factoring. Several companies will lend to you based on your pool of oustanding business invoices. Bluevine is one lender that can provide loans of up to $250,000 at rates as low as 4.8% APR, assuming you can prove that your customers owe you money. Also consider Fundbox: the lender connects directly to your accounting software and can provide a line of credit based on your outstanding invoices.
Offer collateral. Your business may own substantial assets including property. Lenders will consider lending to you, and at more favorable terms, if you can post your business assets as security for the loan. Even if your business has no assets to post as collateral, one of the business owners may be able to post personal assets as collateral for a loan.
We’ve outlined how your start up business can obtain a business loan even if it has no collateral to offer. The lack of a credit history or bad credit history should not pose a problem either. Just be creative with your choice of loans, and if possible plan ahead as this can improve your chances of obtaining finance.