Good Business, Bad Credit? Wait to Ask for a Loan

Question: I have owned a small business for three years now and I’d like to grow the company. But I have bad personal credit. Is there any financial help for me out there and if so how do I go about getting it? I am a woman-owned business.

Answer: There are options available, including nonbank lending, microfinance, and soliciting investment capital from friends or loyal customers. But the best answer may be one you don’t want to hear: Keep working on your business, improve your personal credit score, and think about expanding in a year or two, when you’ll be in a much stronger position.

Granted, lending terms right now are attractive: Small Business Administration-backed loans are available at interest rates below 6 percent, and last year the SBA waived its fees on loans under $150,000. But with poor personal credit, you’re unlikely to qualify for one of these traditional bank loans, even if your business is chugging along profitably. That’s because banks typically want a personal guarantee and substantial collateral from small business borrowers.

“Many small business owners struggle to get loans when their personal credit dips. Most banks simply won’t spend time unless someone has a very high credit score, as well as checking many other boxes,” says Sam Hodges, managing director of Funding Circle, one of the peer-to-peer lenders that cropped up as bank lending to small business tightened.

His company and other online lending platforms do work with borrowers that are considered high-risk, so it’s not impossible for you to get a loan through one of them. But your lending options are likely to be limited to alternative loans such as merchant cash advances, which tend to carry high interest rates and sometimes engage in questionable practices.

They can also be complex, says David Nayor, co-president of BoeFly, a small business loan marketplace. “The borrower has to be very careful and ask the loan issuer to calculate the annual percentage rate for them. I would say you should only [consider alternative lending] if you’ve exhausted all your other options to get lower payments that won’t leave your business tapped out,” he says.

If you can put off growth for a while, spend the time researching the market and positioning your company for expansion, so you can have a plan ready to execute when you get the capital to do it. During the waiting period, look into improving your credit score. If you seek outside help, be smart about choosing a credit counseling agency that can help you and not hurt you.

Start talking to some local bankers now. Introduce them to your business and form ongoing relationships. They will be good sources for advice on how your company can become a great loan candidate in the future.

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