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Is It Possible to Qualify for a Business Loan with Bad Credit?

Funding a business is complicated whether you are a start-up or an established business. A lender will carefully peruse the future likelihood of profitability before lending you money.

Despite collateral, a lender ensures you can pay back the amount as they want their money back without getting involved in cashing out the pledged assets. It costs them some money, too, and time to make arrangements for an auction or find a buyer.

Business loans are not the same as payday loans or any other small cash loans you use to fund emergencies. Unlike these loans, they are not processed on the same day.

A lot of formalities are done, paperwork is required, and some additional details like a business plan of at least two years in case you are a start-up or success report if you need money to expand or invest in a project are needed.

Business loans carry a lot of money, so a lender will examine each aspect of your application, from your credit score to repaying capacity.

Since the lending amount is big, a lender would want you to have a good credit score. However, some entrepreneurs, especially start-ups, have always a concern if it is possible to take out a business loan despite a bad credit rating.

Can you get a loan for your business despite a poor credit rating?

If you are running a business, you will need to ensure that your credit rating is good. A lender may look at your business credit history as well if it is maintained separately.

Most of the lenders are strict about their credit policy, but a few lenders give you an opportunity to borrow money even if your credit rating is not perfect. However, they will likely charge a slightly higher interest rate. Further, when you apply for these loans, you will have to meet other conditions discussed below:

Arrange collateral

Since the loan amount is bigger, you may be asked to put down collateral. In other words, it will be a valuable asset that a lender can liquidate after you make a default.

This security is generally your house or any other piece of property. If you are looking to borrow money to invest in a project, a lender would have the upper hand on it, so they can recover the cost of their debt when you make a default.

Security minimizes the risk of a lender; therefore, getting money to fund your business is easier. You can likely get the loan at better interest rates security is worth more than the amount of money.

Arrange a guarantor

If you are not interested in putting down security for your business, you may be asked to arrange a guarantor. A guarantor must have a good credit score. They will be responsible for making the payment when you make a default.

However, this can be quite trickier than putting down security because people often hesitate to act as a guarantor, as this may affect their credit rating too when you make a default. The guarantor can be your spouse, friends or any other members of your family.

Note that sometimes the borrowing money is too large that a lender may ask you to arrange both collateral and a guarantor. It all depends on the policies of a lender. It is always suggested that you do some research beforehand.

Applying for a loan means hard inquiries will show up on your credit report, and they will pull your credit points. Before applying to a lender, you should know if they want collateral, a guarantor, or both. Contact their customer care team, so you get all the details before you apply for the loans.

What are the alternatives for business loans?

Although a couple of lenders are out there that may give the nod to your loan application despite a bad credit rating, there is no guarantee that you will get the loan.

A lender reserves the right to refuse you even if you put down the collateral or arrange a guarantor because there could be several other reasons why they are sceptical about your repaying capacity. If this is the scenario with you and you need money to contribute to your business, you should seek the following options:

Guaranteed loans

Guaranteed acceptance loans are small loans that you can use to fund your business as well. However, these loans are generally used to fund a small share of working capital or when you want to buy equipment and your cash reservoir is not enough to meet the cost.

These loans are instalment loans, like any other business loan, but the length of these loans is generally up to six months. You will be paying down the debt in six monthly instalments. Because these loans are known as guaranteed acceptance loans, it does not mean that you will get the approval 100%. A lender will ensure your repaying capacity as well before approving the application.

Bad credit loans

Bad credit loans with guaranteed approval are also another alternative for business loans with bad credit. If you need a small amount of money, say, £5,000, you can apply for these loans. However, the interest rate will be slightly higher.

These loans do not require you to arrange collateral and guarantor, so the interest rate will be higher. These loans are also paid in instalments. Since the loan size is generally bigger than guaranteed acceptance loans, the repayment length will be up to one year.

To wrap up

Business loans with bad credit are not so common. However, there are a few lenders that can allow you to apply for the loan. However, they may restrict the borrowing amount and ask you to arrange a guarantor and collateral.

If you are struggling to qualify for a business loan due to a bad credit rating, you should seek alternatives like guaranteed loans and bad credit loans. These loans do not require any conditions like collateral and guarantor.

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