2017 Guide to Finding the Best Small Business Loan with Bad Credit & Getting Great Small Business Loans for Women with Bad Credit
You want to start your own business. You have the skills, business savvy, and expertise needed to keep it running smoothly, but you have to get started first. Unfortunately, according to the Kauffman Foundation, the average cost of starting a new business is a little more than $30,000. How can you obtain small business credit for women up to that amount?
After the Great Recession, many people were left with poor credit, and it’s much harder to make it better than it was to make it worse. Plus, it’s hard to get small business loans with bad credit. But what can you do? You need to get your business up and running, and you can’t fix credit scores with the wave of a wand.
Lenders tend to avoid people with bad credit—no matter your personal situation. They will assume you are a risk, which is why it is so hard to get a small business loan with bad credit hanging over you. Maybe you won’t pay them back. Maybe your payments will be late. Maybe you will even default on a loan. Why should lenders risk small business loans for women with bad credit?
In this article, we will discuss how to get a business loan with bad credit, small business credit for women, and small business loans for women with bad credit.
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What Is Bad Credit?
Bad credit defines a history of untimely payments, defaulted loans, and the total amount of debt (including mortgages, collections bills, credit cards, small business credit for women, etc.) a person may have accumulated in a certain period of time.
It is important to note that there isn’t just one credit score—each person has several. Fair, Isaac and Company, or FICO as it is frequently called, is the most well-known data analytics company specializing in calculating credit scores. They are the ones who decide if you have the kind of bad credit small business loan companies wouldn’t touch.
Image Source: Finding Small Business Loans for Women with Bad Credit
However, there is also VantageScore, jointly developed by TransUnion, Experian, and Equifax. Both VantageScore and FICO have a scale from 300 to 850. Although both companies are reliable, NerdWallet advises that you use FICO for official business, as it is the one most likely to be used by lenders, and VantageScore to check your credit regularly. If you are trying to get a small business loan with bad credit, lenders will look at FICO first.
VantageScore and FICO don’t decide if you have “bad” credit or “good” credit—they just provide a score that assists lenders with their decisions for loaning bad credit small business start-up loans.
Lenders use these scores to determine interest rates, how much credit to offer, and whether or not they want to deal with you in the first place. Nonetheless, you can generally assume that a score below 630 won’t do you much good.
How to Get a Business Loan with Bad Credit: The Hurdles and Differences
Small business start-up loans for bad credit can be a little different from a normal loan. Business owners attempting to get loans often try for brick-and-mortar banks, however, only twenty-seven percent of these potential borrowers are approved. It is especially bad if you’re looking for a small business loan with bad credit.
Regardless, it is often much harder to receive a loan as a small business than it is for a large business, but especially bad for people with bad credit small business start-up loans.
The National Small Business Association recently conducted a survey that found that “twenty-nine percent of small business owners report having their loans or lines of credit reduced in the last four years and nearly 1 in 10 had their loan or line of credit called in early by the bank.” It is even more difficult to get small business loans with bad credit under your belt.
So let’s get a little more specific here: where can you obtain small business credit for women, and what about small business loans for women with bad credit? According to the Senate Committee on Small Business and Entrepreneurship, women own thirty percent of small businesses but only receive one dollar for every twenty-three dollars in small businesses. Women still face financial inequality today, and it is evident in how loans and small businesses are handled.
Small business owners are generally advised to stick to local banks, credit unions, and community banks, as they are much friendlier to smaller business than national banks tend to be. But how to get a business loan with bad credit?
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#1 Microloans: Small Business Loans for Women with Bad Credit
Photo Credit: Kiva
You can apply for a microloan, which differs from a traditional bank loan, as they are normally funded by nonprofit microfinance institutions that focus on your local community. This is the perfect bad credit small business loan, as microloans don’t require a credit check.
Microloans favor people with bad credit or low cash reserves, as well as areas that are disadvantaged. Plus, microfinance institutions often have programs specifically for women-owned businesses. Microloans are the perfect small business loans for women with bad credit.
You can find microloans by searching nonprofit organizations such as Communities at Work Fund, Kiva, and Accion. There are also search portals such as Microfinance Gateway. These small business loans for women with bad credit are need-based and may be hard to apply to.
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#2 Peer-to-Peer Lending: Bad Credit Small Business Start-Up Loans
Photo Credit: LendingClub
Peer-to-peer lending, or P2P for short, describes an online system where individual investors can connect with individual borrowers for small business loans; this is an opportunity to receive small business loans for women with bad credit. The two main websites that mediate P2P today are LendingClub and Prosper.
Peer-to-peer lending, also referred to as “social lending” is celebrated for its low loan rates and high ROI (return on investment) but involves a more tedious process as opposed to traditional banks. P2P is a good place to start for small business loan with bad credit borrowers, as no credit checks are involved, but it can be a little riskier for borrowers and lenders alike.
You can learn more about peer-to-peer lending by visiting news and education sites dedicated to P2P economies such as Lending Memo, Lend Academy, and Crowdfund Insider, where you can learn more about how to get a business loan with bad credit.
#3 Merchant Cash Advance: Small Business Start-Up Loans with No Credit Check
Before looking elsewhere, you can try to get small business start-up loans with no credit check. If you have bad credit, the good news is that there are many alternatives to traditional bank loans that look at other sources.
For instance, your business’s credit card sales can be used for a loan called merchant cash advance, which gives business owners cash up front in exchange for a certain percentage of future credit card sales.
Merchant cash advances work a lot like loans, but without the pesky limitations of collateral, personal guarantees, and credit checks. However, this would not be good for a small business start-up loans for bad credit borrowers as it requires that the business makes a minimum of at least $1,500 in credit card sales per month and to be in business for at least one year. If you make at least that much, merchant cash advances may be a viable option.
Merchant cash advances are good ways to obtain small business start-up loans for bad credit. However, you must choose carefully as the costs may be very high, as much as thirty-eight percent.
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#4 Revenue-Based Loans: Small Business Start-Up Loans with No Credit Check
Bank deposits can be used instead of credit checks for revenue-based loans, which take into account the amount of money that is deposited into a business’s account and requires no tax returns, financials, or collateral. This bad credit small business loan is perfect for businesses that have a good chance of turning a profit.
BJ Lackland, CEO of revenue-based financing company Lighter Capital, explains that a revenue-based financing is “technically a loan, but there are no fixed payments, no set time period for repayment, and no set interest rate.”
They may be more expensive than bank loans but less expensive than equity investments. Most small business loans for women with bad credit will have caveats like these.
On the other hand, revenue-based loans are riskier than bank loans but less risky than equity investments. They lie somewhere in the middle and remain good options for small business loans with bad credit.
Businesses with low gross margins may want to avoid revenue-based loans, but you should demonstrate growth potential. “We don’t require a company to be profitable,” Lackland says, “but we want to see where they have a path to profitability.” Small business loans with bad credit borrowers need to plan ahead and really prove to these lenders that what they have is financially solid.
On Deck, another revenue-based financing company, offers term loans and lines of credit. However, the latter requires one partner to have a credit score of 500 or higher, and the latter requires 600 or higher. If you have a personal credit score lower than 500, you need not worry as Kabbage and Fundbox look at other factors. These small business start-up loans with no credit check can be pricey in the long run though.
#5 Business Credit Cards
You can apply for business credit cards in your company’s name, or partner with someone who has a decent credit score. If not, you can apply for an unsecured card to build small business credit for women run companies.
WalletHub states that “a secured business credit card solves that problem [of finding a big enough credit line you are eligible for], allowing business owners to set their own spending limits by placing a refundable security deposit that doubles as their credit line.” This provides small business credit for women who have limited or damaged credit.
Of course, this new credit card should be used responsibly, with all monthly payments paid on time. Small business credit for women-run companies are a chance to show lenders that you are responsible. Also, although the security deposit may be pricey, it “allows you to qualify for most secured business credit cards regardless of your credit history or how much disposable income you have,” WalletHub writes.
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#6 The 7(a) Loan Program
This U.S. Small Business Administration loan is available to both start-ups and existing companies and is specifically for working capital, real estate, and equipment. Loan amounts can be up to five million dollars, and loans less than $150,000 will have zero fees.
Although this loan needs to be secured by collateral, such as your house, it does not require a healthy credit score, and it provides the best small business loans for women with bad credit. Interest rates are very low as well, with the majority of interest rates being between 2.25 percent and 2.75 percent.
What’s the catch? Around eighty-five percent of applications are denied. It’s one of the hardest loans to get, and the process can take several months. But if you are able and willing, it might just be worth a shot.
#7 Purchase Order Financing
Purchase order financing is a short-term type of loan that helps businesses complete customer orders up front. The lender pays the supplier up front for verified customer orders, so that the borrowing company can complete the orders. Purchase orders are great for small business loans for women with bad credit, as it is not necessary to apply.
This short-term loan is great when you are in a pinch, allowing you to take more orders without turning any away, and provides quick and easy small business loans with bad credit not a thing to worry about. However, it can cost quite a bit, with costs between 5 and 10 percent of the loan amount.
Purchase order financing is also extremely limited—the funds secured can only be used for to fulfill the purchase orders. This means that it would not be ideal to use purchase order financing as small business start-up loans with no credit check. Purchase order financing is for businesses that are already up and running, not waiting to get started.
There is also the matter of the type of business you have. Purchase order financing is meant just for that—purchase orders. Meaning that your business must be dealing with the sale of physical products.
Conclusion
There are approximately 543,000 new businesses that start each month. The Institute for Women’s Research reported that women are steadily taking up more and more of these new small businesses. The amount of women-owned businesses has grown sixty-eight percent since 2007, while about twenty-nine percent of business owners in the United States are women.
However, women-owned businesses make only a percentage of what their male counterparts do, which is even worse than the national average for women in general, who make eighty-three percent to a man’s dollar. When you take into account small business credit for women with bad credit, the situation seems even bleaker. The need for small business loans for women with bad credit seems to be greater than ever before.
However, there are many types of small business credit for women and small business loans for women with bad credit you can take advantage of.
Microloans and the 7(a) loan program do not require super credit but may be hard to obtain, as the competition for them is high. Peer-to-peer lending might be an option if you are just starting up, but you must pay fees to the mediating websites between you and your lenders.
Merchant cash advances, revenue-based loans, and business credit cards rely on your business’s performance, while purchase order financing is a quick-and-dirty loan limited to certain types of businesses.
Small business credit for women and small business loans for women with bad credit can seem intimidating at first. All these loans do come with their own list of risks, but what’s that to you? You are an entrepreneur.
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