How to get business loan with bad credit?

A business loan is a loan taken by an individual or an enterprise to start a company, expanding operations or emergency funds for daily business operations. Though the business loans for any existing company will not depend on the owner/proprietor or the board members, a business loan to start a new business will depend on the owner or group starting the business. This is because the company being new will not have any credit history. If the person/s borrowing have bad credit score, then the loan application might be rejected. On the other hand, the business loans for companies that have been around for some time the business loan will depend on the company itself as it will have a credit score and not depend in anyway on the owner/proprietor or board members.

Purpose of Business Loans

1. Starting a new business

A person/s can borrow money to start a new business of their own. The money borrowed can vary based on what they want it for like buying a piece of land or leasing an office space or for initial working capital etc. The loan will be provided based on the credit score and assets available with the owner/s.

2. Expanding Operations

Buying land or leasing a property to expand business operations when you feel that your business has grown large enough and scaling up at this moment is an opportunity that you do not wish to forgo, a business based on its growth projections can go for expanding operations more than once.

3. Purchase Equipment

Technology has become a key driver in the information age of business, and since technology comes with a pre-set expiry date, there is always a demand to purchase or upgrade existing equipment and technology. Buying/leasing/replacing a new equipment that will help improve the production or operations of the organization, alternatively the equipment can also be leased, it is best to conduct a cost-profit analysis to determine whether to buy or lease. The advantage with buying equipment is that depreciation can be claimed each year apart from the first-year tax exemptions.

4. Purchase of inventory

Most often small business would require immediate capital for the purchase of inventory stock or raw material. There may arise the situation where the demand for your product may be very high in the market. Businesses may not have the funds to get the raw materials to meet the rise in demand. This problem can be solved when individuals and entrepreneurs take loans to buy the inventory needed for production.

5. To increase working capital

Many times, small businesses may not have enough working capitals to run their day to day activities. They will take short term loans till their own assets earn enough revenues to meet their operational needs.

6. Improve credit history

If a business is looking to get a larger loan it is necessary for the company to have a good credit history. To make sure of this the individual or proprietors get short term loans and pay them on time to improve their credit history. Consistent repayment of borrowings will lead to a positive credit history.

What are the business loan eligibility?

The business loan can be offered to any person who is running a legitimate business and has good turnover. Different banks have different criteria and terms to validate and authenticate a person’s business. After all the evaluation the loan amount, tenure and rate of interest or even whether to provide loan falls under the purview and authority of the bank. Some of the parameters taken under consideration are

• Type of business: Proprietorship, Partnership, Private Limited or Public Limited
• Turnover of the business
• Profit made by the business
• Cash flow of the business
• Track record of business

Starting a new business

Based on the person/s PAN or Aadhar card number and your credit history, the 4 credit reporting bureaus determine your credit worthiness and provide you with a score using various algorithm.

Ranging from 300 to 900 credit bureaus have five major components or categories.

1. Payment history – The most important factor. How regular you are on your loan payments

2. Amounts owed – Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score

3. Length of credit history – The longer the credit history, the higher the credit score.

4. Credit mix – With different types of loans available (credit cards, car loan, personal loans etc.)

5. New credit – Taking out credits within short time increases your credit risk

Business Credit Score (or) Company Credit Report

Company credit report is which determines the financial status of a company or organization. It has details like

• The business registration number or tax registration details
• The complete company profile including name, contact details, DIN number etc.
• It will have a detailed credit history entailing current loans, past applications, defaults, total credit etc.
• The entire loan history including details of whether the company has acted as a guarantor for a loan

How to compare the loans

The best loan for any business depends on

• The requirement of the business
• Strategic or Tactical business needs and decisions
• The loan amounts
• The interest rates
• Processing fee
• Prepayment charges

If you are looking pay the loan using the full tenure, then choose the loan with lowest processing fee and interest.

If you are planning to repay the loan before the end of the tenure, then compare based on prepayment charges.

Business loans with bad credit

Secured loans

Secured loans are where the person/s when starting a new business can pledge any asset like gold or property that they have as collateral to get a loan. In the case of an existing company taking loan for any purpose can pledge any of it’s assets to acquire the loan. This is the best way for people or company with bad credit to definitely get a loan and at good terms.

Unsecured Business loans with Bad Credit

NBFCs

An unsecured loan is offered to individuals by the banks and NBFCs without any collateral. While it may be difficult to get an unsecured business loan for people with bad credit, it is possible with higher interest rate. Most banks reject your bad credit business loan application as they do not see your creditworthiness beyond credit score and credit report.

There are Non-Banking Financial Companies (NBFCs) that look at your creditworthiness by combining data and technology to approve the loan. They are more flexible with credit score and credit rating. Though the interest rate may be high, you may obtain an unsecured business loan based on your business plan proposal.

Web-Based Lenders

In the past, you may have failed to pay your credit card bills or loans which might have affected your credit score. This does not mean you become totally ineligible to get a loan. There are web-based lenders targeting individuals who need urgent funds with bad credit rating. The analysis of creditworthiness differ from the traditional banking system and the process is quicker and loans are approved and disbursed without any delay.

Request Your Current Lender

Another way of getting an unsecured business loan is to approach your local bank where you have the existing loan or credit card. Explain to the bank manager your situation, past mistakes and current business operations and request for an unsecured business loan with low interest. It can get you a business loan without much effort provided you display a promising repaying ability during the negotiation.