How To Get Small Business Loans With Bad Credit

You've started your business and things are going well except... you need a little more cash to make your business even better. Unfortunately, you have less-than-stellar credit. Which is why you've been hearing a lot of "no's" from banks whenever you approach them for a loan. They're judging you for your mistakes in the past while you are looking towards the future. Thankfully, they're not the only option for small businesses with bad credit. There are 5 alternatives you can choose from:

#1: Family and Friends

Yes, this is an option if you have bad credit. It’s an option even if you don’t. Obviously, your pride may take a hit, asking them for a loan to fund your business. You may ask them to invest in your business, giving them a piece of your hopefully-soon-to-be-yours pie in exchange for the money. If you’re lucky, they’ll have the cash to spare to help you out. If you’re not, don’t fret because we’ve got 4 more options to give you.

#2: Merchant Cash Advance

This is a type of online cash advance that involves businesses who have a predictable credit card sales volume. What does this mean? A business that deals in credit card payments will be "selling" part of its future credit card sales to an MCA provider to gain access to capital. The turnaround time for approval for this type of loan is usually 3-14 days. Payment of the loan is done by "holding back" a fixed percentage of your business' credit card sales until the cash advance is fully paid with interest. The interest is usually 20% to 40% and the holdback percentage is typically 10% to 20%.

#3: Personal cash advance

Another online cash advance option for business owners with bad credit is payday loans. A payday loan (also called a paycheck advance loan) is a personal loan ranging from $100 to $1500 that you can quickly get approved for. The interest is typically higher, around $15 to $30 for each $100 borrowed. And the term is usually set for two to four weeks, when your next payday rolls in (hence, the name). You can extend the payment date if you still need more time gathering up the money to pay back the loan but you'll need to pay an additional fee.

#4: Peer-to-Peer Financing

Peer-to-peer financing (more known as peer-to-peer lending) is another option if your bad credit is preventing you from getting a business loan. What is it? The idea is that the borrower and lender enter into a transaction without the help of the middleman - the banks. The lenders are typically people with money who want to invest in a person or business and receive higher rates of interest than you would in a traditional savings account. The borrowers are typically those who want to get a loan without the high interest rate they get from bank loans. Borrowers will undergo a credit check and pass credit-worthiness tests set by the peer-to-peer lending site before they can qualify for a loan. Some of the best known P2P companies in the US are Lending Club, Prosper, SoFi, Funding Circle, and PeerForm.

#5: Equipment Sale-Leaseback

This is one of the least popular methods of securing a loan for small businesses simply because it's not as well known as all our other options. How does it work? Much like an equity loan on your house, you will convey the title of your asset (equipment) to the lender in exchange for an agreed upon value. While they now "own" the equipment, you are leasing it back for continued use in your business. The amount of your loan is usually equal to the equipment's "liquidation value" or the amount the lender would get should he/she sell the item in an auction. This type of loan is appropriate only for those businesses that own eligible equipment such as construction equipment, logging equipment, medical equipment, machine tools, processing equipment, and oil & gas equipment. As an added bonus, you may be able to classify your loan payments as a tax writeoff.

Lidia Staron has been working as a writer, editor and literary coach for 5 years. She contributes articles about the role of finance in the strategic-planning and decision-making process. You can find really professional insights in her writings. She is sure that her writings can be a useful source of information for her readers.