If you’re a small business owner in Texas with poor credit, you may have a more difficult time securing funding that you need to grow and expand. Furthermore, it’s harder to get a traditional business loan during COVID. Some Small Business Administration (SBA) loans are experiencing a higher percentage of defaults due to the pandemic, so lenders are more hesitant to hand out SBA loans.
However, there are many bad credit financing options that you may qualify for, even with poor credit. We explore the best loan options for securing funding with a bad credit score in this article.
What is credit?
A credit score is like a grade that you get for how promptly you repay the money you borrow — like loans or credit cards, as well as the age of your credit and the percentage of credit that you use.
Having poor credit or bad credit can mean one of two things: That you have a low credit score, or that you have no (or limited) credit history. FICO credit scores range from 300 to 850. Poor credit is anything below 580, and fair is anything between 580 and 669. Your personal credit score usually counts as much as your business credit score.
The three major credit bureaus that track your credit score are Experian, Equifax, and TransUnion. You can check your credit report at all three of these bureaus or use a free service like Credit Karma to check your personal credit score.
Why does credit matter?
Having a credit score under 670 can make it more challenging to get a small business loan. Also, if you do qualify for a small business loan with a low credit score, you will often be saddled with an unreasonable interest rate (the percentage you pay in fees for borrowing money).
This reality applies to both your personal and business credit scores. In fact, some businesses don’t have separate credit scores and rely on the business or startup owners’ personal scores to qualify for funding. If your credit score is too low to get a small business loan, or to get one with good terms, consider looking outside of traditional lenders.
Alternatives to a small business loan
There are many bad credit business loans that small business owners in the Lone Star State can turn to when they need business financing. Many of these are online lenders, which offer several advantages. Online lenders are quicker than traditional banks — both in the application process because there are fewer documents needed and in the speed at which you receive the money. Plus, they often offer more flexible terms and aren’t location-dependent like some banks. You can live anywhere from Dallas to Galveston and you’ll be able to use an online lender.
You’ll likely have a higher chance of getting approved with an online lender if you have bad credit. Often, instead of credit scores, online lenders look at the health of your business when deciding whether or not to offer business financing. If your business is doing well and you have been operating for more than one year, turning to online small business funding could be a good route.
Here are the best bad credit funding options for small businesses.
Invoice factoring (or accounts receivable financing) offers cash for your outstanding invoices in as little as 48 hours. If you have clients that don’t pay their invoices on time and it’s making your business cash-strapped, invoice factoring can provide a solution. Wondering how it works? After you apply, you’ll be approved based on your clients’ credit standing rather than your own. Then, you send outstanding invoices to the factoring company that gives you between 70% and 90% of the amount due. After the client pays the invoice, you’ll receive the rest of what you’re owed, minus a small 3% to 5% factoring fee.
You can use the cash for things like payroll, expenses, materials, and equipment — everything that keeps your business running.
Equipment leasing offers companies the chance to lease heavy machinery rather than having to buy the equipment outright for their jobsite. Leasing equipment has many benefits. It’s easier to qualify for leasing equipment than equipment financing. You won’t have to rely on your credit score to qualify because the machinery itself is collateral. Plus, you don’t have to come up with a large chunk of money to buy the equipment to take on new jobs — instead, you’ll make a predictable monthly payment on the equipment. On-time payments can help boost your credit score, as well. You may find yourself with good credit at the end of the lease.
Also, leasing is more affordable than renting if you’ll use the machinery for an extended period. If you need a piece of machinery for more than a few months, consider leasing it. At the end of the lease, you’ll have the option to buy the equipment outright or return it, which can help many companies secure the equipment they need long-term.
Asset-based loans offer up to $5 million in funding based on how much your company owns in assets, like property, equipment, inventory, and more. This type of loan offers higher funding limits than traditional lines of credit and has more flexible terms. Whether or not you are approved depends on more than your credit score — things like annual revenue, profitability of your business, and the size of your clients are also taken into consideration.
Asset-based lending will work best for companies that need a lot of funding, have collateral to put on the line, and can’t get any more business financing using a traditional loan. Another benefit is the speed of asset-based lending, which gives you funding much more rapidly than traditional lenders. B2B companies in industries like real estate, oil and gas, manufacturing, and construction can benefit the most from asset-based lending.
Business lines of credit
A business line of credit operates like a business credit card — it sets a credit limit on how much you can spend and only charges interest on what you have borrowed. If your company is in a seasonal line of work or needs access to a short-term loan, a business line of credit could be a good option. Online lenders provide business lines of credit even to companies with poor credit.
There are two kinds of business lines of credit: Secured and unsecured. Unsecured lines of credit can be used for any business expense as needed, and most small businesses choose an unsecured option but they are more difficult to get. If you have a high credit limit, however, you may need to acquire a secured line of credit and put some or all of your assets down as collateral for the funding.
Working capital loan
Working capital loans are meant to help businesses through issues with cash flow, paying everyday expenses, or funding an expansion period. It can pay for things like payroll, rent, or operations. They are also great options for cyclical businesses while they are in the off-season. Traditional business loans target larger and longer-term expenses than a working capital loan — which is designed specifically to pay for cash flow projections.
You may be approved quickly and easily for a working capital loan since they often have a lower minimum credit score.
Merchant cash advance
A merchant cash advance is also called a purchase of future sales agreement, and is basically like a personal loan given to businesses based on a percentage of debit and credit card receivables the business will receive in the future. In other words, the lender takes a percentage of the debit and credit card sales made until the loan is repaid.
A merchant cash advance can be taken out by a small business or startup owner with bad credit. However, this funding tends to come with a high annual percentage rate that may make it out of reach for some small businesses.
Getting Creative With Small Business Funding
It can feel impossible to get the cash you need to keep your Texan business growing. But don’t worry — there are many bad credit small business loans to secure funding for your small business. We highlighted a few of the most common in this article, but be sure to research what other options may be on the table for your company. Look for good repayment terms, a low annual percentage rate, and an easy loan application. When you’re ready to apply, reach out to us here at Cultiva Financial to talk through your small business funding options.