Navigating the many land mines in the SMB world is not for the faint of heart. Running a successful small business is dependent on myriad factors, such as smart decision-making, proper management of finances and oftentimes, just dumb luck.
However, those aforementioned land mines can sometimes cause casualties, in the form of lowering your credit score. There are the obvious factors that damage credit ratings, such as poor payment history and bad credit utilization, but there are also several less-obvious bumps in the road that can wreak credit havoc as well.
Something as minor as a delinquent payment on a parking or speeding ticket, even if the offense happened across the country, can damage your credit score. That unpaid ticket winds up in collections and then ultimately into the realm of delinquent payments. Same goes for unpaid utility bills.
Before you know what hit you, your business credit score has slipped into the red zone, meaning you’re considered a credit risk, and finding a bank that will lend you the capital you need to grow your business can be needle-in-a-hay-stack difficult.
Defining Bad Credit
Business credit scores differ from consumer credit scoring, as the major credit reporting agencies use a ranking system that rates business credit on a scale from 1 to 100. The greater the score, the better your ranking, with 80 or higher meaning the business is considered to be running smoothly, making on-time or early payments, and not considered a credit risk.
However, Equifax uses a rating system ranking business credit scores from 101 to 992, so familiarize yourself with the specific credit agencies your vendors are using.
Improving Your Score
Before we examine your borrowing options, let’s take a look at a few ways to help get that score closer to where it needs to be.
There’s a good chance that some of the vendors and suppliers you work with aren’t consistently reporting your payment history to the credit reporting agencies. In the event that you’re making timely payments, make sure your solid payment history is being recorded.
"Staying on top of credit card debt isn’t always easy, but reducing these balances is a quick and very effective way to increase your score."
Positive reports from vendors to the major business credit agencies like Dun & Bradstreet, Equifax and Experian can immediately help raise your score. You should be ordering credit reports from these agencies anyway, to check for mistakes (yes, they make them) and anything else that looks like it could be fraudulent.
Another way to positively impact your business credit score is to pay down balances on your business credit cards. Ideally, try to limit the use of the cards to no more than 30 percent of the available credit lines. Staying on top of credit card debt isn’t always easy, but reducing these balances is a quick and very effective way to increase your score.
The Alternate Universe
Regarding those options we mentioned earlier, in the event you’re finding raising that credit score is just too steep a hill to climb right now, there is a brave new lending world to explore. A multitude of alternative lenders have surfaced within the fintech space that specialize in loans for borrowers with lower credit scores. The larger percentage of these firms still require a minimum credit score, typically in the 500 to 650 range, but there are some lenders that have no minimum score requirements.
There are several different loan options offered by many of these lenders, and below we’ve outlined a few of the more viable:
- Short-Term Loans: These are unsecured loans that are expected to be repaid within anywhere from two weeks to 18 months. Typically used for emergency situations, and to bridge a cash flow gap, short-term loans are not recommended as a long term solution.
- Invoice Financing/Factoring: With invoice financing, the lender buys the small business’ invoices at a discount, typically 80% of the total. The business gets the remaining 20% back (minus fees) after the invoice is paid. This essentially enables the business to borrow money against outstanding amounts due from their customers. The business can now use this immediate cash influx for myriad short-term issues.
- Equipment Financing: This type of loan lets you finance the full cost of a piece of new or used equipment (any hard assets) you need for your business. There are many variations on the equipment financing theme but this method is a fairly low-risk, cost-effective way to purchase hard assets than other forms of financing.
As is the case with just about everything involved with borrowing money, there are positives and negatives involved with obtaining a bad credit loan. The good news is they are typically approved instantly and the funding is made available quickly, usually within two or three days. However, as you might expect, interest rates can be a bit extreme and the terms can be onerous, so just be sure you read the fine print so there are no unwanted surprises after you sign on the dotted line.
Among the bigger name companies that offer loans to small SMBs with low credit ratings are Kabbage, BlueVine, Fundbox, QuarterSpot, OnDeck, and Credibly.
At Original Funding, we help business owners and entrepreneurs with short-term capital needs find the right small business loan product. When you’re ready to have a more in-depth conversation about your lending options, we are ready to help. Find out more here.