If you are a small business owner looking to raise capital for your business, your creditworthiness will be an important factor.
Unlike big businesses where the company takes on a separate financial entity, small businesses are a reflection of the business owner. In such cases, the financial aspects of the small business get tied up with the status of the business owner.
Good credit scores of the business owner make it possible for the business to raise funds from banks and other lending institutions at competitive rates. Bad credit scores on the other hand reduce the number of offers, increase interest rates, and add a ton of paperwork and other collaterals.
In this article, we will look at a very important phenomenon of the trading and commercial world, bad credit loans. In addition, we are going to educate and guide business owners with poor credit scores on how they can get loans for their businesses.
What should Small Business Owners know about their Credit Scores?
Almost all financial institutions use a ranking score to assess the creditworthiness of any individual. This score varies from country to country.
However, it is usually calculated between 1 and 1000. If you are above the 700 marks, you have the perfect credit score. This will make it easy for you to secure the loans.
Anything between 600 to 500 is fair and subjective to the policies of the lending institutions. However, if your credit score dips below 500, then you are termed as a bad credit score. This will reduce and virtually eliminate your chances of seeking a business loan.
The credit score is assessed based on your payment history. For example, if you have been paying your credit card bills on time, your personal loan EMIs without defaults, your current assets, and all your outstanding liabilities.
Why Bad Credit Scores close doors for securing Business Loans?
Anyone who wants to lend money to you wants to be convinced that you are going to repay it back. This belief can only come when lenders see the kind of credit score you have. If you have a poor credit score, they feel that the money, which is going to be lent to you is never going to be returned.
For a bank or a lending institution, unreturned loans can lead to a lot of pressures and stresses. This is why banks and other lending institutions want responsible borrowers for business loans.
Small business owners who want to take out a larger loan for scaling up their operations need to ensure that they have perfect credit scores. The larger the amount of the loan, the more will be the scrutiny from the lending institutions.
Do Small Business Owners with Bad Credit Scores have any other options for getting Loans?
There are a number of credible financial bodies and companies that work with small business owners with bad credit scores. Yes, as a business owner, you might have to incur some extra interest rates to get bad credit loans. However, the benefits of availing of instant business loans to ensure survival, scale up operations or fulfill an immediate requirement are many.
Many lenders forward business loans with a bad credit score by also attaching certain collaterals. They also create a mathematical formulation based on your revenue-cash flows- and debt ratios and arrive at payment terms and interest rates.
Business owners who have a detailed plan of action ready and can show accurate projections following the investment of the loan into the business can impress lenders. This is why you should always have a detailed business plan ready when applying for business loans.
The Final Word
Having a bad credit score should not be the end of the world for business owners. There might be certain factors, which necessitated the bad credit from happening in the first place. However, with bad credit loans, business owners can once again start afresh and give a new lease of life to their businesses.