Bad credit means that the loan applicant (or prospect) has a record of not clearing loan EMIs or credit card bills by the due dates. It may indicate that such applicants might also default or delay future payments.
Low credit scores show bad credit for individuals. Businesses can also be tagged as bad credit if they have failed repayments. So, bad credit refers to poor repayment behaviour in the past that translates to banks and NBFCs refraining from giving you loan approvals easily. In such a scenario, acquiring a business loan becomes extremely tough. Read on as we explore how to get a business loan with bad credit.
What Can Lead You into Bad Credit?
The following factors can lead you to bad credit:
1. Late Bill Payments
Your history of making timely repayments forms a major portion of your credit score. Consistent delays in clearing dues are recorded in credit reports and lower your score drastically. This poor record reduces your chances of loan approval unless you rebuild your creditworthiness.
2. Loan Defaults
Financial institutions charge off accounts when borrowers default on loans by missing successive monthly payments. In addition to charging penalties, this negative data is also reported to credit bureaus. Prospective loaning institutions see the borrower as a high-risk category for future defaults, damaging loan approval chances.
3. Filing for Bankruptcy
Filing for bankruptcy due to an inability to clear debts critically damages your creditworthiness. It denotes that you are seeking legal protection from creditors. Bankruptcy information in credit data can deter your chances of securing loans for years.
7 Ways to Get a Business Loan with Bad Credit
Can you get a small business loan with bad credit? The answer is yes. But let’s find out how:
1. Loan Against Property
A reliable method to secure a business loan despite a poor credit record is to place an asset as collateral. This can be a real estate property like an office building or factory premises owned by your company. Pledging such business space as security for the loan amount can lead to a quick approval grant.
2. Updating Your Business Plan
A business plan outlines your long-term growth strategy for your company. Many financial institutions require this document to evaluate if your business is viable for repaying loans. This is especially true for new ventures.
If you already have a business plan that was made earlier, you can refresh its contents. Key areas to cover in the updates are:
| Parameters | Suggested Updates |
| Executive Summary | Highlight the specifics of your business approach, what makes your product useful and what level of sales increase you anticipate over time. |
| Key Business Objectives | Revisit and list down the top priorities your business is currently targeting. Highlight the metrics you are tracking to achieve them. |
| Budget & Revenue Stream | With actual time spent in operations, you can update revenue expectations according to your company's growth figures. |
3. Displaying Strong Financial Position
Financial institutions usually evaluate income stability, cash flow health and debt ratios over time. They also assess the number of years in business to confirm stability - usually 2 years for banks and 6 months to 2 years for non-banking finance companies. Keep your business bank statements from the last 3 months handy.
Consistent cash inflows and surplus revenue over the payables depict a good liquidity position for your business. Financial institutions usually demand a debt-to-income ratio of 1.25 to 2 times to ensure that your profit is significantly more than your debt servicing outflows. Sufficient buffers help them in getting assurance about repayment capacity.
4. Equipment Financing
Some financial institutions offer loans specifically for upgrading old machines/equipment. They fund some costs, and you only need to self-arrange the balance amount. The newly purchased/refurbished equipment serves as loan security in these cases.
Thus, by keeping the upgraded machinery as collateral and contributing partial capital, you can secure funds for operational enhancements, irrespective of your business's credit history.
5. Getting a Co-Applicant
A co-applicant is someone who co-applies for the loan with you by signing the contract. He/she takes responsibility for repaying the loan fully or partially if you cannot repay the loan.
Getting a financially stable co-applicant can boost your loan approval chances if you need a loan with bad credit. It may also help you secure better interest rates. Notably, the lender considers the credit records of both the applicants, the primary borrower and the co-applicant.
6. Sustained Existence
You must have been in business for at least 2 years to qualify for a loan from traditional banks and for 6 months to 2 years to qualify for a loan from non-banking financial companies. This is taken as proof of your business's stability.
7. Improvement in Credit Score
If you plan to apply for a business loan but can wait for some time, you should use this time to boost your credit score and fetch better loan interest rates and conditions.
Preferably, do not completely exhaust the available credit limits on your credit card(s). This can help you appear more creditworthy. Most importantly, set reminders for bill payments so that payments do not get missed accidentally.
Key Tips to Remember
Depending on their policies, different lenders have varying eligibility norms for bad credit business loans. Here's what you should remember when choosing the best loan companies for bad credit:
- Compare various financial institutions regarding loan types, repayment structures, and early closure rebates to pick features that suit your needs.
- Please check the minimum criteria regarding annual revenue, years in business, and personal credit score to confirm that you meet the thresholds.
- If you need a loan with bad credit, review interest rates and fee components to calculate the most affordable pricing. Bad credit usually means higher interest rates in most cases.
- Target pre-qualifying for loans with soft credit checks to discover your potential loan amount and terms across financial institutions for getting the best deal.
In summary, you should explore multiple financial institutions on loan specifics, eligibility norms, affordability and pre-qualification feasibility to identify the most suitable bad credit financing option that aligns with your company's profile and capabilities.
Conclusion
Your personal credit history can impact the approval of business loans. But even with a low CIBIL score, there are still viable options to secure financing. Exploring alternative loan providers, bringing in co-borrowers, consistently generating surplus income, and crafting a compelling loan application are all strategies that can help your business.
