The question in the header is there for a reason, because for those business owners with bad credit, securing a loan often proves so difficult as to be almost impossible. And there’s a reason for that too, obviously. Getting a business loan at any time can be a problem considering the large amount of paperwork that you have to wade through and all the evidence that you have to provide to support your creditworthiness, but if your business is already burdened with large debts, and therefore has little value as collateral, you may run into several walls that stand in the way of your business loan.
It is almost a given that all new businesses will struggle for survival in their first year or two, but that does not mean that established businesses can lie back and relax. Philip Nixon, a 33-year-old engineer by training who watched his thriving 60-year-old family business in automobile spare parts decline rapidly before he began the fight to bring it back on track, says it is almost as easy for established businesses to hit rock bottom as it is for new ventures. “Unless you move with the times and adapt to the changing world, a competitor can very easily put you out of business,” he says. “Then there are the upswings and downswings in the economy, not just of your country but the world, which will inevitably impact your business.”
So whether an entrepreneur has started out or been in business for some time, s/he is liable to default on loan repayments. In such cases, how does one go about securing a further business loan? Martin Keane, who heads a bad credit consultancy in Denver, Colorado, says that to begin with, those looking for a bad credit business loan must accept that they are unlikely to find much support from banks. “Their best bet is to look for loans from less traditional, though reputable sources,” he says.
According to Martin, most bad credit business loans will place a ceiling on the amount that you can borrow. “Usually, the minimum that you will be allowed to borrow is $5,000 while the maximum depends on the lender that you are dealing with,” he explains. “But anyone who gives you a bad credit business loan will usually insist upon you using your credit card to make the monthly repayments.” In addition, there is a ceiling imposed on the loan term as well. “Usually, the term for a bad credit business loan is 12 months. And you will be charged a significantly higher rate of interest than is imposed on normal loans,” says Martin.
Despite all of that, a bad credit business loan is the only way out of a hopeless situation. For Philip Nixon, the loan came as a lifesaver. “Had I not borrowed then, my family business would have closed down. There was nothing I could do to retrieve it,” he says. “Re-establishing our credibility seemed like an impossible dream.” For Philip and his 30-odd employees, the battle to re-establish the company’s creditworthiness has only just begun, but he admits he secured a loan beyond his expectations on the basis of his loan application. “Writing a good loan application is crucial,” he says. “It should highlight your plans for the business and clearly explain the revenue model that you hope to follow.”
With a FICO score of 540 (anything lower than 600 is bad news for business loan applicants), Juanita Peres was in dire straits as her home-based fancy stationery business (staff strength of seven) seemed close to bankruptcy three years after it was born. “I knew I would have to take some tough decisions because I was going to have to pay a really high rate of interest on the bad credit loan that I had applied for, and firing anyone was not an option,” she says. “So I reduced a few overheads and appealed to my staff to take a temporary pay cut. I also temporarily stopped production of a few items.”
Gradually, as her business claws its way back to respectability, Juanita warns all prospective borrowers to review all their options before applying for a bad credit business loan. “Life can be miserable at times when the prospect of repaying your debt seems crushing. I would say a bad credit business loan is an entrepreneur’s last resort, so get a lawyer to review your loan application. And when you have the loan documents in hand, read the fine print for hidden costs like annual fees, bank charges, closing costs, and balloon payments.”