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Insights for Entrepreneurs

The Business of Bad Credit: 14 Dos and Don’ts for Small Business Owners

If you own a small business, you’re eager to bring in more cash flow. But business requires working capital– hiring new employees, buying new inventory, equipment and supplies, and paying for a new marketing campaign to get more customers.

If you’re struggling with funds, a small business loan might be a good option. But how to get a loan if you have bad credit – or no credit at all?

Even if your personal or business credit is bad or nonexistent, you can still get a loan. In fact, if you apply these dos and don’ts from our business loan experts, you’ll take the steps to improve your credit, and find alternative ways to obtain a business loan with a less-than-favorable credit score.

Do start paying on bad debt you have

Last year’s changes to the FICO credit score calculations rewards those who make good on delinquent debts. In even a few months, the upgrade to your credit score can qualify you for a bigger loan on better terms.

Don’t forget you have other financial history

Utilities, mortgage or rent, relationships with vendors, and payroll made are all examples of bills you’ve been paying (mostly) on time and in full. You can use all of these to help negotiate with potential lenders, putting them up against the adverse events. This one is especially helpful if most of your credit mistakes are older than the newer action.

Do take out a credit card

Or get strategic with the one you have. Establishing a history of making purchases and paying off the balance will begin to counteract the bad marks on your record. Like paying off the bad debt, this will incrementally improve your credit score to help you with pretty much every kind of credit you could find. And if you do pay off a card, don’t close the account – leave it open with a zero balance. The more credit you have, and available credit, the better.

Don’t put plans on hold

Bad credit is no reason to miss an opportunity. Instead of saying “I’ll wait until my credit is good enough,” ask “What can I do to get it done anyway?” This is not only good advice for finding business loan resources, but a powerful change of mindset for all business tasks.

Do work hard on your business plan

You should have one anyway – trying to run a business without one is like trying to drive to a new location without a map or GPS. This is doubly important when looking for ways to finance your business growth, since lenders look at both the strength and feasibility of a company’s business plan when deciding whether or not to approve a loan.

Don’t discount family and friends

Most people who have a little extra money like being able to help the people they care about. A cash loan, investment and partnership, or even some free help from an expert you know can help you make forward-looking changes despite any problems from bruised credit.

Do carefully research anybody who calls you with an offer of credit

Not every business that cold calls companies with offers of easy credit is predatory, but enough are that you should never take their offers at face value. Use resources likeRipOffReport and the Better Business Bureau to carefully vet any kind of incoming credit offer.

Don’t overlook grants

Few grants look at your credit rating, and none ask you to pay the money back. Free money is a great deal for any business, especially businesses with rough spots on their credit report. Good sources of grants include local government commerce departments, colleges and universities in your area with local business programs, and empowerment groups for any demographic group you might be a part of. Some industry and trade associations also offer grants, gifts, and contests that can provide growth money for your business.

Do run quickly from tax refund loans and car title loans

All of these are predatory lending scams that hide literally illegal levels of interest behind fees and charges that would add up to over 1000% APR if you worked the math that way. They are not worth it. Ever.

Do look into “alternative lending”

The power of the internet has given rise to online alternative lenders – like Kabbage – that offer business owners online loans on terms that differ from those of traditional lenders. Since the “credit crunch” of the middle 2000s, traditional lending has aimed more and more toward safe loans from large institutions, a trend which leaves small businesses out in the cold. However, alternative lenders make it easier for small businesses to get a loan using business data like your PayPal, Square and checking account vs. just a FICO score. If you have bad credit and can’t receive a loan from a traditional bank, consider taking a look at an alternative lender.

Don’t forget your business has value

A secured loan (one with collateral behind it that the lender can seize if you default on payment) is easier to get, can be larger, and will carry less interest than an unsecured loan. Most businesses have assets you can use as collateral. Some examples include inventory on hand, specialized equipment, buildings or vehicles the company owns, or fixtures and furniture. Depending on your cash flow situation, you could use the business itself.

Do hit up good credit references

Your credit report gives more “time on stage” to the bad parts of your credit record, so it’s up to you to solicit some letters of reference from lenders you did right by over the years. Bring these when meeting to discuss credit. Although more and more traditional lenders are taking human judgment out of their processes, this can make a big difference with any potential lender that hasn’t made the shift.

Don’t even think about payday loan places

Remember what we said about tax refund and car title loans? Payday loans were the original version of this model, and remain the worst. Most actually build trapping the “client” into a cycle of increasing debt where they lend a little more money a little earlier each month. This is not hyperbole, but a documented part of their written business plans. Avoid them at all costs. Seriously.

Don’t get a loan to continue bad habits

If you need a loan to make a significant and positive change to your business, that’s a great reason to get a loan regardless of your credit situation. But if you’re looking for credit to simply maintain an unsustainable business model or bad financial habits…you might want to reconsider. Look first to how you’ve been spending your money and how you’ll use the cash influx, and only after that look into how you’ll get that small business loan.