I’m not going to lie to you. Trying to get a small business loan with bad credit can be difficult.
Although it is not the sole determining factor in getting a small business loan, credit history will play a large part in whether or not a lending institution will go forward with a small business loan.
However, it is possible to get a small business loan, even with bad credit.
Speaking from an ex-commercial banking point of view, a credit report is basically an introduction or a first impression of the person in general. If the credit report is clean, it sort of sets the tone with the commercial banker.
Sort of like getting your foot in the door and getting past the first stage. However, if the credit report is bad, than you probably have some explaining to do.
It all depends on how bad your credit report is. If you’re showing a slightly overdue payment on one of your visa’s, it shouldn’t be a big deal but if you have 2 or 3 collections showing, it’s gonna take some time and patience to deal with the banker.
She could say come back when you have your credit cleaned up or she might decide to hear you out. It all depends on your relationship with the bank.
However, I’m not trying to discourage you from trying to get a loan. On the contrary, I want to give you a heads up as to what to expect when you apply for a small business loan with questionable or bad credit.
If you are interested in getting a small business loan, the first thing you must do is get familiar with your credit history. If you don’t know what your credit history looks like, how are you supposed to explain what’s on the report to your lending institution? You need to know exactly what’s on the credit report and account for every detail, well ahead of time .
If there are some details that you don’t recognize or there are some mistakes on the credit report, it’s best to catch them before you apply for a loan. Once you know what’s on the credit report, you’ll have a better idea of your current status.
When you apply for a loan, there are basically 3 credit bureaus who collect your credit information. They are Equifax, TransUnion and Experian. All three of these companies operate basically the same.
They collect credit information from banks and other lending institutions on all of your borrowing habits. From this information, they basically assign you a score. These scores range from good to bad.
Once you get your credit report, it may seem a little confusing, however It’s not as confusing as it looks. There are certain sections you need to pay particular attention to. The main sections you need to look at are:
Public Records/Other Information
The first section you need to look at is the personal information or identification. Make sure they have this right. Some of the information might be incorrect and might affect your small business loan application. The second section you need to look at is the Inquiries.
The inquiries section tells the banker where you’ve previously applied for a loan. If she sees 15 different inquiries in the last 2 months, she’s going to start wondering how come you’ve been to 15 different companies and why you’ve been denied.
The third part of the credit report you need to be concerned about is the public records and other information section. This will outline any secured loans and collection information you have. If you see a collections on your report, make sure it’s accurate.
It’s important to note that if there are any amounts owing in your collection, a lending institution will almost certainly close your file. That is, if the file is 3 years old and you didn’t bother to pay any of the money back from a collection, a lending institution simply won’t take your file seriously.
The only way the banker or lending institution will keep looking at your file is if you have a plausible explanation ready. This is why it’s so important to have a look at your credit report before you apply. Once you know what’s in the public records section, you can get an explanation ready for the lender.
The fourth section you need to look at is the trade information. The trade information will have all of your credit information. That is, everything that you’ve borrowed in the past 7 years will show up here.
These are broken down into R’s and I’s.The credit scores range from R1 to R9’s and I1’s to I9’s. Ones being the best and nines being the worst. Make sure that this information is correct because it is the most important aspect of your credit report.
Lenders will take a close look at your repayment history and look for anything over an R1 or I1. Lenders will also look at any previous highs in terms of your late payments.
If you see an R9, it means you were sent to collections. Is the credit report the sole determining factor in applying for a small business loan? No, it’s not. Like I said before, it’s like a first impression for the lending institution.
Alright, you have your credit report and your getting ready to apply for a loan and everything looks ok but you have an R9 showing up.
This is not the end. Remember, when you go for a small business loan, the lending institution will look at the credit history as well as your collateral and the business plan. In this case, collateral will include all of your equity possessions. That is, the stuff you own including cash and assets.
They will also look in detail at your business plan .
If you have a plausible explanation for the R9 and you own certain assets and are using some cash equity to bargain with, the bank might see the benefit of lending you a certain amount of cash. Also remember that if you are asking for a small amount, you might be better off applying for a personal line of credit.
This way, you don’t have to go through the hassle of the commercial loan process. The commercial loan process is a lengthy one. I’d always recommend you go through a personal line of credit first – It’s more flexible
However, when you are applying for a small business loan and you don’t have a dime to your name, bad credit and no collateral, a bank or lending institution won’t touch you. I know, it’s tough but it’s the truth. There is no incentive for a bank or lending institution to go forward when they have no confidence in your business.
So it’s important that you give them the confidence they’re looking for. Get to know your commercial banker. Get to know the bank manager. Find out what they’re looking for and meet their requirements.
Have the banker or lending institution give you a list of what they need. Once you get the list and provide them what their looking for, they will have no choice but to go forward.
This might mean that you have to go back to the drawing board to save up some cash and to clean up your credit but in the long run, it will be worth it.
Believe me, its possible but you need to have three things in place:
1) Credit Report – Make sure you know what’s in the report and everything’s accurate. If it’s clean and you don’t have any R9’s, you should be ok. If you have an R9, you will have to get your story straight before you visit the banker or lending institution.
Also, lenders are big on seeing you take the initiative. If they see you are paying the collection back in full, they might look favourable on it.
2) Collateral – You need assets to leverage additional debt. In other words, you need to own certain assets that are worth some money. This can be cash or physical assets such as property, vehicles and buildings (home)
3) Comprehensive business plan – A bank will simply not look at you if you don’t have a business plan. Make sure it’s a good plan!
Remember to be consistent and don’t give up so easily. If you hang in there, the lending institution will eventually come around.
Best of luck,