Can I Get an SBA Loan If I Have Maxed Out Credit Cards?
So you need some cash to grow your small business but your credit cards are tapped out. Can you still get a loan from the Small Business Administration (SBA)? Well, maybe. The SBA doesn’t actually give out loans themselves – they guarantee loans given out by banks and other lenders. So while the SBA sets guidelines for approving loans, each lender also applies their own lending criteria on top of that.This means that having maxed out credit cards won’t automatically disqualify you from an SBA loan. But it does make approval trickier. Keep reading to better understand how credit card utilization affects SBA loan eligibility and what you can do to boost your chances.
How Credit Card Utilization Impacts SBA Loan Chances
The SBA wants to see that you can handle debt responsibly before backing a loan for your business. Part of showing that responsibility is keeping your personal credit card balances low compared to their limits, also known as your credit utilization ratio.As a general rule, the SBA likes to see a credit card utilization ratio under 50% across all your cards. So if you have a total credit limit of $20,000 across all cards, they want your total balances to stay under $10,000.The higher your utilization climbs above 50%, the riskier you look. Once you max out cards completely with 100% utilization, you can almost forget qualifying for SBA-backed financing. Or if lenders do approve, they’ll likely charge really high interest rates and fees to offset the risk.
Tips to Get Approved for an SBA Loan with Maxed Out Credit
Now just because you’ve maxed out cards doesn’t necessarily make an SBA loan impossible. It just makes getting approved a lot harder. Here are some tips that can help boost your chances:
Pay down balances before applying – Even paying off a portion of your credit card balances can help lower your utilization ratio and improve your credit profile. Shoot to get every card below 90% utilization if possible.
Ask issuers for higher limits – Another way to combat high utilization is increasing your total credit limits. Issuers don’t always report new higher limits right away either. So you could get approved for more credit but your utilization ratio on reports the SBA sees won’t reflect it yet.
Lean on equity – The more “skin in the game” you put down for collateral, the more comfortable lenders feel about riskier credit. For example, putting up $100K worth of business equipment or real estate equity to secure a $75K loan.
Bring on a cosigner – Adding a cosigner with better credit scores and income offsets the risk tied to your credit history. Just be sure they understand the liability they take on.
Improve other credit factors – Having strong payment history in other areas can help outweigh high credit card balances. So avoid late payments on existing business or personal loans or other accounts.
Shop lenders – Each SBA lender sets their own credit standards around things like utilization ratios and credit history. Shopping around increases your chances of finding one more open to looking past your maxed out cards.
SBA Loan Requirements to Understand
Outside of your personal credit, the SBA has other requirements business owners need to meet to receive a loan guarantee. Being aware of these can help you assess if an SBA loan makes sense for your situation:
Eligible Use of Funds – SBA-backed loans must be used to finance an eligible business purpose like working capital, equipment, renovations or business acquisition. Using funds for prohibited purposes like paying off credit card debt can trigger immediate default.
Collateral – For loans over $25K, the SBA requires lenders to secure some form of collateral as a secondary form of repayment. Real estate, equipment, inventory and business assets are commonly used.
Owner Equity Investment – The SBA expects owners to contribute a certain amount of their own “skin in the game” equity investment towards the business venture being financed. That amount varies based on factors like desired loan size and owner’s credit strength.
Guarantees – All owners with 20% or greater ownership stake must provide a personal guarantee on the loan. That way if the business defaults, owners’ personal assets can be pursued for repayment. Spouses may also be required to guarantee.
Insurance Requirements – The SBA requires borrowers carry certain insurance types and coverage levels during the life of the loan. This includes general liability, workers’ comp for employees and special property insurance with lender’s interest noted.
Ongoing Reporting – To keep tabs on business health, lenders usually impose periodic reporting requirements on borrowers. This can include things like submitting updated financial statements, accounts receivable aging reports, inventory valuations, etc.The SBA provides over $30 billion in small business financing support each year. But as you can see they don’t hand out guarantees lightly without confidence in the business, owner(s) and their ability to repay.So maxing out credit cards definitely decreases your chances with most lenders. But understanding where you stand across all SBA loan requirements can help you assess if an SBA loan fits your situation. And guide any extra steps to shore up your weak spots to boost approval odds.With a mix of credit repair efforts, finding the right lender and checking other boxes, you can still potentially get approved. It just requires extra work. But the access to affordable, long-term financing is worth it for many business owners.
Options Beyond SBA Loans to Explore
Even if the SBA route isn’t feasible, keep in mind there are alternative small business financing options to explore if you need capital now with bad credit:
Online Business Loans – Online lenders offer fast approvals and funding around 1-7 days in many cases. They rely less on FICO credit scores and look more at business revenue and other factors. Just beware their high interest rates and aggressive repayment structures.
Business Cash Advances – Providers like Kabbage offer lump sum cash in exchange for a share of future card sales. Approval is easier with no fixed repayment schedule but watch out for high equivalent APR.
401(k) Business Financing – Some services let entrepreneurs borrow against or rollover a portion of their 401(k) retirement savings into business ventures. This avoids credit checks but risks your nest egg.**Peer-to-Peer Loans **- Websites like LendingClub connect business borrowers with individual and institutional investors willing to crowdfund loans. Interest rates are friendlier than alternatives but amounts tend to be smaller.
Invoice Factoring – Funders like BlueVine purchase outstanding customer invoices upfront at a discount. This brings working capital relief without borrowing. But higher fees eat into margins.Having bad credit and tapped out cards limits options but doesn’t necessarily need to stop you from securing financing. Get creative with alternative lenders or take steps to rehabilitate your credit standing with card issuers. This can open up more doors to aid your business’ growth.