For many lenders, your credit score is a big deal. After all, it shows just how creditworthy you are. But while there are lenders who automatically reject loan applicants with low credit scores, there are still many that are willing to fund your small businesseven if you have bad credit, especially if the loan is guaranteed.
Guaranteed Business Loans
Let me clarify one thing first. A “guaranteed small business loan” does not mean that you are guaranteed to qualify for a loan. Instead, when it comes to business loans, the word “guaranteed” means that the loan is backed by a collateral or agreement, such that the loan will be repaid even if the business owner fails to make the payment.
There are essentially two broad types of guaranteed business loans: loans guaranteed by the Small Business Administration (SBA) and personally-guaranteed loans.
With SBA loans, the lenders are financial institutions (such as banks and credit unions) that work with the SBA. The SBA promises the institution that they’ll get most of their money back even if the borrower is not able to pay. Because of this guarantee, the lender is more likely to approve borrowers they normally do not work with, such as smaller or newer businesses.
With personally-guaranteed loans, meanwhile, the borrower gives the lender a legal right to take away his personal assets (such as cash, real estate or equipment) if he defaults on the loan.
Signing personal guarantees when getting a business loan is common. Nevertheless, make sure you are comfortable with the risk before you sign any such agreement.
You as a consumer have a personal credit score, ranging from 300-850, with a score below 620 generally considered bad credit. A business, on the other hand, also has its own credit score, ranging from 0-300.
ManySBA lenders require a minimum business credit score of 160 when approving loans. If your business meets that requirement, then it is possible for you to qualify for a loan even though your personal score is less than ideal.
When it comes to SBA loans, however, different lenders have different guidelines even though they all work with the SBA, so even if one SBA lender rejects you, it does not mean that all other SBA lenders will reject you as well.
Big banks tend to be strict in their standards, but credit unions and smaller banks tend to be more flexible and willing to work with smaller businesses.
If you have poor credit, another thing you can do to meet the minimum requirements is to bring in a business partner with a strong credit score. You can also put up a collateral.
Getting in touch with an SBA counselor is also a good idea. The counselor can go over your application to help you find the SBA lender that will most likely approve your loan. He can also help you polish your business plan to present your business — and your ability to repay the loan — in the best light possible, as well as prepare for the questions you will be asked during the loan application meeting.
If SBA loans are not appropriate for your business, you can also check out non-traditional lenders.
Guaranteed business loans from these lenders have higher interest rates and shorter payment periods compared to SBA loans; however, many alternative lenders have relaxed requirements, especially when it comes to credit scores. Their application processes are also quick, easy, and convenient.
Having bad credit does not have to stop you from seeking additional financing for your business. A guaranteed small business loan might be what you need.