How Small Business Loans Can Improve Your Credit

Entrepreneurs of small businesses sometimes struggle with procuring the needed capital to grow their businesses. A lack of a strong sales history in financial statements, combined with poor credit tends to be what causes them to be declined for small business loans when they reach out to lenders. Some small business lenders are amenable to the ailments of small businesses and will approve them for small business loans -even with bad credit- but that doesn’t mean that the benefits stop there. These approvals have an adverse effect for entrepreneurs that apply for small business loans with bad credit.

For starters, entrepreneurs who receive small business loans, even with bad credit, are able to begin establishing a positive credit history with their lender. Banks and lending institutions have been around long enough to understand that most, if not all, entrepreneurs are going to walk through their doors with financial baggage. They don’t necessarily care about the past. Lenders are more interested in what business owners are doing now to create a stable and profitable financial future. An entrepreneur making regular, timely payments on a small business loan will find themselves in a favorable position when it’s time to go through another round of financing.

Additionally, the longer the length of small business loans, the better it is for the credit rating of the business/entrepreneur. Companies that haven’t been around as long are at a disadvantage because they don’t have a reputation to present to lenders. This is especially discouraging when there’s no credit history to review either. A business owner paying small business loans over months/years will see their bad credit ratings rise in greater increments than a business owner paying loans with shorter durations. The important thing to remember is that credit is used to determine the risk factor for a lender or account holder issuing out money or any other assets. Entrepreneurs with bad credit are encouraged to seek out small business loans to make them less of a red flag among lenders.

 

Stage of Grief: Applying for a Small Business Loan with Bad Credit

 

It’s not a pleasant experience. You walk into a bank or lending institution with your business plan in place, references and other necessary documents to show that you’re a serious and motivated entrepreneur. Still, the dreaded question needs to be answered. “What’s your credit score?” It’s a burden that brings stress to many aspiring entrepreneurs and unfortunately, one that haunts millions of Americans today. The bottom line is that most individuals have poor credit. Although having a bad credit history turns away most small business lenders, there are those who will approve loan applications, but with severe business loan penalties attached.

One of the downfalls of applying for a small business loan with bad credit is that interest rates are higher than that of applicants with excellent credit histories. This of course is a deterrent for entrepreneurs of small business, but in addition to the high interest rates, small business lenders may also tack on certain business loan penalties for paying off a debt in full early.

A prepayment penalty is a fee charged when a small business loan is paid off before the scheduled date of the last payment. Because the small business lender doesn’t receive the entire interest they would have received if the payment schedule had been kept, a prepayment penalty is put in place to recoup some of the lost profits.

If the interest rates are low, it could be preferable to pay off the loan early. In other cases, where the rates are high, spending capital on business loan penalties may be a waste and would be better served elsewhere. Regardless of the case, anyone applying for a small business loan with bad credit should be aware that options are available to them. They must simply find the right small business lender and shop for the best rates.

 

Why Your Credit Score Matters With Business Loans

Ok, you’ve got your business plan in place, you’ve outlined your financial statements, and you know how much money you need from your small business loan, and exactly how you plan to spend it. The only issue is that you have bad personal credit due to some financial mistakes you’ve made in the past. While this is not necessarily a deal breaker, having a low credit score is a concern for banks and lending institutions. However, if you turn to an online lender like Fast & Easy Funds, your chances of securing a loan are higher than through a bank.

First and foremost, business credit and personal credit are not at all the same thing, and depending on the type of business you’re launching, each can play a different role in securing a small business loan. An individual applying for a loan with a poor personal credit score is going to find themselves challenged with proving that they’re able to repay the loan. Banks are going to take everything into consideration when deciding whether to approve a loan application and regarding sole proprietorships, personal credit can sway their minds towards one direction or another.

Additionally, business Intelliscore Plus from Experian may combine your credit history and utilize it to determine your business score. These blended scores are used to determine the risk of a small business. Banks and lending institutions prefer to invest in businesses that are near certain to be profitable, therefore it’s vital to minimize the risk potential as much as possible when seeking a small business loan from a bank, or try your odds with an online business loan provider with more leniency.