Owning a business is the dream of a lifetime for many people. However, starting a new business is risky not only for the owner, but also for the business loan lenders you seek out to help cover expenses and support operations. Getting an SBA loan for a new business with no credit history or for a business with poor credit can be challenging. Loans may be denied or, if they are approved, can come with very high interest rates.
Here are 7 tips to getting small business loan approval with little or poor credit history:
Check your business credit scores and your personal credit scores.
Obtain a copy of your business credit reports, as well as your personal credit reports. Getting your credit reports helps to identify what you need to do to improve your scores. Detailed business credit reports are expensive, but at North Shore Advisory we are able to purchase tri-merged reports on your behalf at a reasonable price. For personal credit, banks use FICO mortgage scores and credit reports, these can be purchased from MyFICO by getting the3B full report.
Write a business plan.
Writing a business plan is an important first step for all companies, but especially young ones. Lenders want to see what their investment will do and whether you care enough about the future to develop a plan for the business. To apply for a business loan, you will need to provide several documents including tax returns, credit reports, as well as a written business plan. Prepare a detailed vision and strategy for the investment by describing what you intend to use the business loan for along with how you plan to make profit from it. In your business plan, make sure you mention how you plan to manage cash flow and how that cash flow will cover expenses, including loan payments.
Research all your options.
There are many types of small business loans. Always remember, getting a loan with no credit or poor credit is not impossible. Each lender has their own requirements for credit scores, credit history, and financial statements. For instance, most SBA loans require 3 years of financial statements and a FICO SBSS credit score of at least 160-165 (for most lenders). If you are a start-up you will by default be less likely to fit those requirements and should look elsewhere.
As you review your options, think over things like rates and fees as well as repayment terms. You might not get the most favorable terms, but there is a business loan option out there for you.
Find a cosigner for your business loan.
There is always the option of finding someone to back your loan or cosign the business loan application. Essentially, a co-signer goes in on a loan with someone else and agrees to pay off the debt if the borrower cannot. A cosigner should have strong credit and a reliable source of income. A family member or trusted friend are good options. A cosigner is a good option when you have a lack of cash flow, have a high debt-to-income ratio or if you do not have a solid credit history yourself.
Most importantly, make sure you are going to have the money to repay the loan when getting approved with a cosigner. If you do not repay the loan, you hurt the co-signer as well.
You can also provide a significant amount of collateral which may offer more security to the business loan lender. Some lenders require collateral to back the loan, like a lien on your assets or for a personal guarantee. Collateral acts as financial protection for business loan lenders, meaning if your business fails and you fail to pay the loan according to the agreed terms, you will lose the asset to the lender.
Consider high interest loans.
If you are desperate for immediate business funding, there are ‘hard money business credit’ loan lenders out there who will extend capital. Be advised though that the interest rate could be very high. We have seen these high priced credit loans at rates of 25-30% or higher!
- Speak with a business credit expert.
If there is damage to your business credit score, the North Shore Advisory team can review each report and advise whether business credit repair is possible. We can also help if you are a new business owner who needs to build credit, which is a longer process but will better position you for future financial relationships.
There are always going to be bumps in the road as a business owner, funding is a major one that all entrepreneurs face. Make sure to do your homework and know that options are available to help you get approved for a small business loan.