Running any business—small, medium, or big—is never easy. Besides all the dedication, passion, and hard work you’ll need to put in every moment, you should have constant access to capital or funds to grow your business successfully.
Bank loans are one of the most common financing sources for businesses around the world. In fact, banks in Europe have provided loans to the tune of about 1.4 trillion euros to small and medium enterprises. But, this doesn’t mean that every business loan application from a bank gets approved.
In the United Kingdom alone, the rejection rate for business loan applications varied between 33% and 19% from 2013 to 2016. According to the Federal Reserve’s 2016 Small Business Credit Survey, less than half the number of loan applicants received the financing amount they sought. The rest got lesser than what they wanted or nothing at all.
Getting a Small Business Loan
Most of these loan applications were rejected because of the borrower’s poor credit. In truth, bad credit can be your downfall if you’re looking for a traditional bank loan. But, it doesn’t necessarily mean it’s the end of the road for you as a borrower.
From finding alternate lending sources to boosting your creditworthiness, a little groundwork can go a long way in increasing your chances of approval. Read on to see how you can go about applying for a business loan if you have bad credit:
Building Personal Credit
A good place to start when you’re looking for a business loan is building your personal credit score. Ensure you’re making all payments on time and keep a tab of how much you owe.
If you’re in debt, tackle the bigger payments first. You could try the snowballing method, a balance transfer card, or even a loan to consolidate your debt into more manageable payments.
Making a Business Credit Profile
A separate business credit profile is advantageous to have, especially when your personal credit is bad. It gives credibility to your business and improves your chances when you need financing.
It also works much the same way as your personal credit score if there’s ever a need to rebuild it. Just make sure all your payments are made on time.
Creating a Business Strategy
For a business to be successful, creating an effective business strategy is highly important. From developing a vision statement to identifying strategic objectives, you’ll need to know where you’re headed and what you need to do to make it big.
You could also try your chances at enhancing your creditworthiness. All you need is a letter of reference from your personal or business contacts.
Preparing the Required Documentation
Getting the right documents in order is another important step to applying for a business loan. Along with the letter of reference, it’s important that you keep your personal information, resume, bank statements, and business plan handy.
You should also have your income tax returns, debt schedule, loan application history, and other legal documents in place.
Finding the Right Lender
Traditional bank loans aren’t the be all and end all of business financing. You could try direct lenders like equity firms and investment banks or peer-to-peer lenders. You could also try term loans, equipment loans, invoice financing, microloans, merchant cash advances and get access to a business credit card.
The advantage of seeking alternate financing is that you get comparatively lesser approval criteria and quicker funds disbursement. On the flip side, you may have to deal with higher interest rates and personal guarantees.
To stand the best chance of finding a business loan that works perfectly for you, you’ll need to compare multiple offers. In addition, remember to factor in loan costs, repayment period, eligibility criteria, and the lender’s reputation before you take the next step of application.
So, don’t lose heart if your bad credit score is stopping you from getting your business off the ground or taking it to the next stage. Following the steps above will help you work around your credit situation and get the required financial assistance.