Bad credit can prevent you from getting a loan when you need it. This can lead to missing important opportunities and stopping your business growth.
For example, if the demand for your products or services is seasonal or seasonal, lack of funds could cause you to be unable to pay salaries or cover administrative expenses. This could be easily solved with a loan, but what if you have bad credit?
Is it impossible to get a loan if you have bad credit?
Fortunately, there are a few options for getting funds when you have a bad credit score.
These are high-interest loans.
Lenders offer them to people who cannot get loans elsewhere because of bad credit. The average term of this type of loan is two weeks.
Is it a good idea to get a payday loan?
It is best to avoid this form of loan as much as possible.
Payday loans have incredibly high interest rates. According to the Consumer Financial Protection Bureau (a United States government agency responsible for consumer protection in the financial sector) typical two-week payday loans have an annual percentage rate (APR) of 400%.
Secured Business Loans
This is another option for bad credit borrowers. A bank offers you a loan in exchange for you providing collateral.
In this type of loan, the important thing for the institution is not your credit score, but the collateral.
What is collateral and why does the lender require it?
When you apply for a secured business loan, you will need to provide your property, your vehicle, or your business inventory as collateral. If you don't pay, the lender can take the collateral and sell it to get back the money you owe.
The lender can even create a "blanket lien" on all of your assets. This implies that, in case you do not pay, any of your assets may be appropriated by the lender.
Are Secured Business Loans A Good Idea?
Although secured business loans generally have an interest rate significantly lower than the rate of payday loans, they are not a very good option.
Why? The problem arises if you cannot pay.
The lender may take your assets and sell them to get back what you owe. Also, the sale is unlikely to generate the true value of your assets. Also, the loss of your property can force you to close your business.
If your business accepts credit card payments, you can get a cash advance. This is, essentially, a short-term loan that is made in exchange for your future credit card sales.
The bank or financial institution advances you a sum of money depending on the estimated value of your credit card sales in the future. Later, when a customer pays by card, the money goes directly to the lender.
Is a cash advance a good option if you have bad credit?
It depends on your financial situation. Cash advances have several disadvantages and can end up being a very expensive loan. Another problem is that the funds are available to your business only for a very short period.