How to Get a Small Business Loan With Bad Credit

Small business loans provide many opportunities.  From acting as startup capital to serving as a source of extra cash during a dry time, small business loans can be a saving grace for many businesses.  However, not all small business owners qualify; small business loans are difficult to obtain for those individuals with bad credit.  But all is not lost, for if you’ve got bad credit, there are a few tricks you can try to obtain a small business loan.  Here are three tricks of the trade.

1. Trade credit

A trade credit can serve as an excellent substitute to a traditional loan in such that both issuances cover similar items.  These include purchasing a product or service for the business, office supplies, or equipment.  Essentially, a trade credit is a loan of merchandise, products or services from one business to another.  The items or services are put up front by the lender and used by the borrower to produce cash.  At this point, the borrower pays the lender for the products or services rendered, plus a small bit of interest.  Because these types of loans are business to business, personal credit score is rarely a factor in the loan decision.

2. Business  Cash Advance

Business cash advances are loans provided by third parties for small businesses.  They are unique in that they are paid back by promising the lender a percentage of every customer credit card transaction.  This feature makes loan payment a relatively easy and rapid process, but is contingent upon generating credit card sales.  Generally speaking, to qualify, your business must accept credit cards as a form of transaction, make at least $2500/month in credit card sales, and your personal and business credit scores are usually not major factors in the loan decision.

3. Establish Business Credit

Perhaps the most effective means of securing a conventional small business loan if you have bad credit is to generate good business credit that is independent of your personal credit. While this is a slow and arduous process, it will ensure that future small business loan awards will not be affected by poor personal credit.  The fastest step we know of is to obtain a federal tax id for your business, open a checking account in your business’ name and find a credit card company that 1) reports to the credit bureaus and 2) will issue a card.  Use the credit card and pay all bills on time.  Eventually, your business (but not you) will have excellent credit.

Of course, the first thing to do is check your credit.  If you’ve got a score below 640, it’s unlikely a bank will go anywhere near you, especially in this market.  But don’t fret, try the tricks we provide above before giving up - you can be certain that people have gotten through worse spots than the one you’re currently facing.

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