Bad Credit Loan
Turning your financial situation around
By J.T. Newon
Let's say you've just written the most thorough, well-researched and articulate business plan on the planet. Everything seems in order. Your business would be ready to take off, except for one thing.
You don't have funding.
Your research has told you that many start-ups are funded when entrepreneurs take out credit card loans or tap into their home's equity with an equity loan. But your cards are maxed out and your home's value has fallen so that it offers little to banks in terms of collateral. You know that there's a variety of predatory loans out there for you, but usury is not an option for the time being. Your SBDC advisors ask you about your credit score.
You haven't looked at it in ages. It's bad. Well, maybe not bad, it's just lower than 660. You technically don't qualify for prime rate loans. Maybe it's those maxed out cards. Maybe an electronic payment did not go through. It could be identity theft or a spouse covertly hiding bad spending habits. For all the things that impact credit, it might even be those library books you forgot to return.
The Bad News – You Have Bad Credit
To make matters worse, you learn that the type of loan you want is technically a "microloan." Banks don't typically like to make microloans because they yield little profit compared to the amount of time spent on underwriting. Many banks also don't like start-ups because, statistically speaking, half of them fail. Plus, in terms of getting funding, you couldn't have picked a worse time to start a business; credit is tightening up all over the country in response to the credit crunch, and bank mergers leave fewer banks interested in local community investment. Of course these things don't impact people with credit scores over 770, but that's not you.
As you try to keep from hyperventilating, you vaguely wonder if you can sort it all out. But what if you can't? Are there any options left to you?
The Good News – You Can Get a Small Business Loan With Bad Credit
Actually, there are. Here are four.
Community Development Financial Institutions specialize in extending credit to markets on the edge of traditional banking. If you are a woman looking for a small business loan, an ethnic minority, a recent immigrant, or if your start-up is in an area with a high poverty concentration, this may be a great option.
If your character and your ability to pay back a loan is not reflected by a three digit number, a community bank or credit union may be for you. Here, you will be less likely to be turned down by a machine processing thousands of applications a year. Additionally, your local institution has a vested interest in seeing small businesses in your area succeed. They'll also be less impacted by the credit crunch since many of them are not major mortgage lenders. To find these, attend your local Chamber of Commerce events and start networking.
SBA Loans are market or below market rate government sponsored loans for start ups and small businesses. They are administrated by large banks all over the country. Your SBDC advisor should be able to help you with this type of financing.
De novo banks and niche lenders sometimes specialize in making a large volume of small business microloans. For these banks to stay in business, they must scramble to gain market share and grow their loan portfolios as fast as they possibly can. To do this, they relax underwriting criteria. As new lenders, some of them have not learned to appropriately price risk. But the only way to find these is to keep your ear to the ground.
