As a small business owner, your credit score affects your eligibility for financing. If you have a poor credit score, you may find it difficult to get a traditional business loan from a bank or credit union. In such cases, bad credit business loans can be a viable option to get the necessary funding to keep your business afloat. In this article, we will provide a guide to bad credit business loans, including what they are, how they work, and the types of loans available.
What are Bad Credit Business Loans?
Bad credit business loans are meant for small business owners with poor credit scores, limited credit histories, or previous financial challenges. These loans offer a lifeline to businesses that would otherwise struggle to secure financing due to their credit profile. Bad credit business loans come with higher interest rates and terms that are not very favorable compared to traditional loans. However, they can be a viable way to access quick cash when needed.
How Do Bad Credit Business Loans Work?
Like traditional loans, bad credit business loans require repayment of the borrowed funds, plus interest and fees, over a specified period. However, the eligibility criteria and approval process for bad credit business loans differ from those of traditional loans. Lenders offering bad credit loans typically evaluate other factors such as the business’s cash flow, collateral, or revenue potential, in addition to the credit score.
Types of Bad Credit Business Loans
Bad credit business loans come in various forms. Here are some common types of bad credit business loans:
– Merchant Cash Advances: This provides a lump sum payment to the borrower in return for a percentage of debit card sales and future credit.
– Invoice Financing: Invoice financing, also known as accounts receivable financing, allows businesses to sell their outstanding invoices to a financing company. This is done at a discount in exchange for immediate cash.
– Equipment Financing: Equipment financing helps small businesses purchase necessary equipment by offering a loan for the equipment’s cost.
– Line of Credit: A line of credit gives borrowers access to a set amount of funds that they can draw from as needed. Interest is only charged on the amount borrowed, rather than the full credit line.
– Short-term Loans: These typically have a repayment term of six to eighteen months and often have higher interest rates than long-term loans. They can be a quick way to access cash for immediate needs.