Bad Credit Small Business Loans
If you are a brand new small business owner or have been managing your business for some time, you may be considering applying for a small business loan. There are many reasons business owners turn to a loan- new supplies, remodeling, or for daily operations. Whatever the reason behind the need, a business loan can help out immensely. However, first-time borrowers may be unsure of exactly how business loans operate, which is where this article can come in handy.
Before You Begin the Process
You will need to know the type of financing that is best for you before you commit to a loan. For example, if you only need a small amount at the moment, a business credit card may do the trick. However, a loan from an actual lender is often the only way to secure the cash needed to get the job done. Just be as prepared as possible before you make your final decision.
Your Credit Score
Your credit score is going to factor in big when it comes to business loans. There is a good reason for it, too. You wouldn’t want to lend someone a few hundred dollars when you know they don’t normally pay back their obligations, right? The same goes for small business loan lenders. Any lender is going to take your past and present credit history into consideration before approving you for a loan, so you want to be sure it is as good as it can be before you even apply.
Your actual score will also affect the type of interest rate you receive once you are approved. Again, the better your score, the better your rate.
Personal Score vs. Business Score
Many first-time business owners use their own personal credit to get their business off the ground. Unfortunately, this can cause issues when it comes to taxes or when applying for a loan. It’s best to keep your personal credit separate from your business credit if possible. Not only that, establishing business credit early allows you to build up a good history.
No matter what; however, your credit history will play a huge part in not only what type of loan you can get, but the interest rate that comes with it. If your credit history is poor, you may not be approved for either a new business credit card or a loan, so take the necessary steps to improve your score before you even apply. When the lender checks into your credit history and finds a great score, they will more than likely approve you for the loan you want.
Tips for Improving Your Score
To begin, you first need to access your credit report. This can be done for free nowadays, due to the Fair Credit Reporting Act. Don’t assume that your credit history is good just because you have some credit cards or you pay your bills. You may have surprise charges or issues on your report that you aren’t even aware of, so be sure to check before you apply for any type of loan. Two good places that are legit and reliable are Credit Karma and freecreditreport.com. Once you have accessed your free credit report, take the time to scrutinize the individual reports and fix any problems you may find. For example:
•Are there errors? Look for debts you paid off in the past but haven’t come off of your report yet. Contact these creditors until they are removed.
•Pay the debts off now. You may think paying on old debts isn’t going to help, but it will. Once they are completely paid off, your score will go up.
•Do you have any tax liens? If so, reach out to the government entity responsible, whether it is state or federal, and ask how to pay it off as quickly as possible. They may offer a payment plan that you can utilize, but the quicker you pay it off, the better.
•Hire a company that monitors your credit report. Many credit monitoring companies charge just $20 per month or less to monitor your credit and make sure there are no surprises or fraud.
You will want to fix any and all credit problems as soon as possible to improve your score. Just remember, you should always pay your bills on time and pay more than the minimum balance as often as you can.
How to Approach Your Request for a Loan
Now that your credit is fixed, it is time to gather all the necessary documents you will need to present to a lender. The first step is preparing your own personal business budget. Consider everything that the loan money will be used for once you are approved. Draft up a business proposal that details your plans to present to the lender. Include new equipment, labor, operating costs, and anything else you will be using the loan for. Your figures do not need to be exact, but they should give the lender an idea of where your money is going.
Gather the Appropriate Financial Statements
You’ll want to meet the lender with the right financial statements, along with your budget. Make sure to bring copies of the following:
•Cash Flow Statement
Having these documents at your disposal will allow you to answer important questions from the lender. They are going to ask questions about your day-to-day operating costs, losses and profits, and how well you expect your business to do in the future. If you need the loan to keep your business afloat, don’t be scared to tell the lender. Just have a solid plan that you can share with them detailing how you plan to get back on track.
The lender will also want to see any financial statements you have had over the past two years, your tax returns for the last two years, and your accounts payable and receivable statements.
Don’t Forget the Fees
Remember, you are responsible for the interest rate on your loan. This is how much you are charged on top of the principal amount. Be sure you include this extra amount in your future budget.