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Can I Get Business Financing with Bad Credit?

Written by: Donovan Wadholm

Article Overview: Had a tough time making payments on time, been through a divorce or had medical problem that affected your credit score? You may still qualify for a small business loan. This articles explains the ins and out of applying for a business loan with a poor credit score.

Can I Get Business Financing with Bad Credit?

Bad Credit is not always a death knell when it comes to business banking. If there is a legitimate reason why you have poor credit some lenders can look past it. Typically, health problems, divorce, or a layoff (known as “life events”) can ruin a persons credit report through no fault of their own.

Banks look at six main criteria when judging a business loan:

o Credit – Know your credit score. Generally scores over 700 are considered low risk, 650-699 moderate risk, and less than 650 high credit risk (although this varies with each lender and the reasons for a lower score).



o Capital – Also called equity will be required by your lender. Equity is the cash or assets that you contribute to the start-up costs of going into business. Generally 10% of the total project is considered a minimum. Projects that score low on other factors, particularly collateral, will have higher equity requirements.



o Collateral – Assets used to secure a loan. Common items include Building, Equipment, and Furniture & Fixtures. Inventory and Accounts Receivable may be used on a more limited basis in some projects. Intangibles such as Patents, Trademarks, Franchise Agreement and Goodwill provide little value for resale and are generally considered to have no collateral value.



o Capacity – The project's ability to repay a loan from the cash flow it produces. Lenders look for a debt coverage ratio of 1.25 or greater - which means your cash flow has to be 125% of your debt service after all your bills are paid and you have paid your self a salary or minimum draw.



o Character – Character is the experience, education and background of the owners and key management. For the most part the management section of your business plan should give the lender a good idea whether or not you and your team are qualified to successfully start and grow your business opportunity.



o Conditions – Refers to the terms of the loan. Most business loans have an interest rate of 1%-3% over the current prime rate or the rate that the best businesses can borrow at. Terms depend on the collateral used to secure the loan and are usually matched to the life of the underlying assets.




The point is that there are various criteria a lender will look at when underwriting the loan. The above criteria is NOT a checklist. Most projects are week in one area or another. Lenders reduce exposure by weighting the above criteria and making adjustments. So for example…if your project is light on collateral they will require more cash down payment. Bad credit, usually means a higher interest rate and additional collateral to secure the loan.

Most importantly…be upfront about your credit issues. If you try to hide it they will find out anyway and it will make you look dishonest. Just tell them upfront…you have a great opportunity, lots of character but you have a few spots on your credit.

Finally, the best day to start repairing your credit is TODAY! Don’t wait because your most recent credit history is the most important. If you show that the last X months were current (paid on time) then it becomes easier to overlook the old blemishes on your report.

Your Credit is Important…too important to be an unknown or ignored. Find out what your score is today by using the government operated website (website links not permitted) annual credit report dot com and start repairing bad credit or any blemishes TODAY. This is not a monthly service that charges you if you cancel however while the reports are free, you may have to pay a nominal fee to view your actual credit score.

Good Luck
Mr BizPlan

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Article Tags: accounts receivable, business banking, collateral value, coverage ratio, credit risk, credit score, death knell, debt coverage, debt service, equity requirements, experience education, franchise agreement, intangibles, key management, layoff, legitimate reason, management section, moderate risk, o capital, patents trademarks



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