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Business loans are notoriously hard to get approved. The strict requirements and qualifications can be challenging for small or new businesses to meet. The good news is that the odds of borrowers being approved for a business loan have been increasing lately. The bad news is that these increases have been marginal: approval rates are still only 14.3% for big banks and 20.1% for small banks.
There are several reasons why a financial institution might reject your loan application. Your business might not have been operating long enough, you might not have enough yearly cash flow, or you couldn’t establish a solid enough business plan. While each of these reasons is a common cause for rejection, none of them are as important as your credit score.
Poor credit history is why roughly 20% of small-business loans are denied. Credit is often the first thing a lender will review on a request for any loan option or loan amount. With a personal loan, there is some wiggle room, and it’s possible to overcome a low credit score. The loan application is almost always denied with a business loan if the score doesn’t meet the minimum requirements.
Before we get to our list of the best business loans for bad credit, let’s explore your options for improving your credit.
What are some ways to improve my credit score?
It really can’t be overstated how important it is to have good credit in the business world. Most other criteria and measurements of success can vary. Making $100,000 in annual revenue is phenomenal for a lemonade stand startup but highly disappointing for a car manufacturer.
On the other hand, FICO scores are universal and will provide a lender with the most critical data they need to determine whether or not to give you any type of loan.
There are two different types of credit available: personal and business lines. Individual credit scores range from 300 to 850, and business credit scores range from 0 to 100. It’s easiest to think of them as a number-based system that ranks how likely you are to repay a loan.
The higher each number is, the more likely your loan will be approved. Fortunately, both of them follow the same basic guidelines and principles.
Here are a few things that you can do that can help to improve your credit score:
- Make payments on time. Payment history has the single most significant impact on your credit scores. You must ensure every loan or credit payment is on time. Missing just one payment can hurt your score for years. Traditional lenders need to know that they can trust you to repay your loan on time. Even one instance of late payment can be enough for them to secondhand your dependability.
- Reduce the amount of credit you use. The credit utilization ratio refers to the amount of credit you use compared to the amount you have. If you have a credit limit of $10,000 and only a total balance of $450, you have a credit utilization ratio of 4.5%. If the balance is $4,500, the ratio would be 45%. Try to keep your ratio under 30% as often as possible. Paying off your balances and increasing your credit limit are two ways to achieve this goal.
- Use credit accounts instead of cash. After reading the last point, this might seem counterintuitive, but it’s an essential part of the process. You need to keep your credit accounts active to improve your credit score. If you use cash to pay for something, the credit bureaus will have no knowledge that it ever happened. You should use your credit accounts to cover expenses you can easily afford. Using credit and quickly paying off the balance is much better for your score than never using your credit at all.
- Dispute errors on your report. Credit bureaus aren’t perfect and make mistakes reasonably often. You may have done everything right and still have a low score. In that case, it’s most likely due to an error in your credit report. You should get in the habit of combing over your credit report once or twice a year to scan for errors. It can take a while to dispute a mistake, so you want to catch them as early as possible.
Which loans are best for a business with bad credit?
A bad credit score will severely limit your options for a business loan. However, a few places have a proven track record of extending business loans despite bad credit. While you work to improve your credit, these are the four loans that you should consider applying for:
Build your credit score to receive a better loan
It takes about a million things to go right for you to meet the requirements of a business loan. It only takes one thing going wrong for you to be denied. You can meet every qualification on the board for a business loan. But you’ll still be rejected on the spot if you don’t have a high enough credit score. Credit is one of the few criteria that a loan lender won’t budge on.
The loans listed above can be an excellent way to secure your funding despite having bad credit. However, you should still get serious about improving your credit score. It’s almost guaranteed that you’ll need to borrow more money in the future. There are much better business loans as long as you have the credit requirements. Don’t settle for high-interest rates and fees when you can qualify for way more friendly terms.
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