Entrepreneurs with bad credit history can take comfort in the fact that there are commercial loans designed specifically for businesses with bad credit history. Though high street lenders and banks may not accept your application, there are specialised lending institutions offering business loans at an affordable rate. Learn some of the interesting facts about commercial loans and tips on how you can get one with the most favorable terms.
Types of commercial loans
If you cannot access traditional loans because of your poor credit history, you can choose between two types of bad credit commercial loans:
Secured commercial loan: You can access higher amount of loan at a lower rate if you secure the loan with an asset or collateral. The risk is lower on the part of the lender, so the cost of the loan is usually lower than its unsecured counterpart.
The collateral secures the loan and in the event the borrower defaults on the payment, the lender can go after its collateral to recover the remaining balance.
Unsecured commercial loan: Unlike secured loans, you don’t need collateral to access this loan product. The lender would take a higher risk in lending money to you because you did not secure it with an asset. The interest is usually higher than a secured loan because the lender has to compensate for the risk of lending money to a high-risk borrower.
Let’s say, you applied for a $2000 commercial loan and you secured it with your car. In case of nonpayment, the lending company can go after your car and recover the unpaid balance of your loan from the proceeds of sale. The risk is lower compared to unsecured loan wherein the only practical option is to collect money from you, either by sending it to a collection agency or by filing a case in court.
Apply for a commercial loan when you have poor credit rating
Lenders frown upon borrowers with less than stellar credit ratings. But there are many other ways to convince lenders that you can repay your loan on time.
Here are important tips to consider when applying for commercial loans
- Prepare your personal credit report. Lenders typically look into the borrowers’ personal credit report whenever they receive loan applications.
They need to find out first if you have existing debts, and if you have been paying on time. they may look into your credit card records, rental history or mortgage payment history. If you have a good history with loans for the past two years—they may overlook a low credit score due to several unpaid defaults.
Your credit report will show them if you are qualified to take the loan you are applying for—not just because of your score but your repayment habits. Remember that your credit score reflects not only your unpaid dues, but your overall debts and utilization rate-or the portion of the credit limit that you used up.
- Calculate your debt to income ratio. If it exceeds 30%-40%, you may not get favorable loan terms, or your application may be rejected by the banks. In such a case, you may start looking for reputable financing companies that will consider your application and overlook your high debt to income ratio. Some companies inquire about existing assets, part time jobs and potential source of income when evaluating your application for commercial loan.
- Prepare your business records. The lender may look into your income tax, book keeper’s records and other relevant financial documents to determine your credit worthiness and capacity to repay the line of credit. If you have a sound business plan that reflects not only the visions of your company, but the details on how you intend to achieve your business goals, the lender may accept your application. As previously mentioned lenders need to know where you will put the money to good use, and if you can generate income to repay them.
Despite not having a good credit report, borrowers with complete records of financial transactions, decent business plan and good borrowing habits may be considered by lenders as credit worthy, despite its low credit rating. Keeping those records can make a lot of things much simpler and less complicated.
On a final note, make sure that your business will benefit from additional cash flow when you take on a loan. Remember that a commercial loan, no matter how accessible they are would need to be paid on time, within a specified period.so, it is important to have a debt management plan in place, along with your business plan, to maximize its use and reduce expenses. Commercial loans are financial tools to grow your business and lead it to the right direction, use your money wisely and you will have no issues with repayment.