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Ways to Finance Your Business at Any Credit Score

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With the economy slowing in response to COVID-19, millions of business owners have seen their incomes drop and are increasingly relying on financing to help fund their businesses. In most cases, the financing options available are based on the business owner’s personal credit score, so it’s important to know what may work for you before deciding which to use.

How credit scores affect loan options

Before diving into the types of loans that work for good, average, and poor credit, let’s discuss how a business owner’s credit score affects their financing options.

While businesses can establish their business credit scores separately from the personal scores of their owners, this process takes years and lots of revenue. For the vast majority of small businesses, lenders assessing the loan application will look to the owners as the principal source of repayment. This means that the lender will want to consider the business owners’ personal incomes, assets, and liabilities as well as credit.

Lenders consider the credit scores of potential borrowers as an indication of the risk they pose – i.e., how responsible they are with credit. This, in turn, indicates how likely the borrower is to repay the loan, and whether the lender should consider them creditworthy.

Depending on credit score, some business owners only qualify for certain types of financing. If a business owner’s credit is too low (below 550 to 600), they may not be able to get a loan at all.

Business financing and changing credit

Even after you’ve secured a small business loan, your credit score is still important. Some loans include provisions that allow lenders to call the loan if your credit score or the value of collateral drops too much, though these loans are fairly rare.

More often, refinancing becomes far more difficult if your credit score drops after you secure financing, which may leave you stuck paying interest on a high-interest loan – or, if you have balloon financing, you could end up unable to refinance your balloon payment and have to pay it all at once.

If your credit score improves, you may qualify for a better loan or have the option to refinance your debt at a lower rate or for a longer term, drastically lowering your monthly payments.

Types of small business loans for each credit score

Type of financingType of credit
Bank term loanExcellent
SBA loanGood
Business line of creditFair
Merchant cash advancePoor

 

While you assess each of these options, it’s worth remembering that a borrower’s credit score isn’t the only determining factor in whether a certain type of financing is right for them or even if they’ll qualify. For each of these loans, there are other types of requirements as well, including time in business, revenue and debt-to-income (debt-service coverage) ratio.

In some cases, other nuanced requirements may also exist. Merchant cash advances, for instance, are only available for businesses that process credit card transactions, and SBA loans are only available for businesses that have been denied financing from other sources.

Bank term loans

When it comes to small business financing, bank term loans are the gold standard – as good as it gets. This type of financing is typically reserved for the most creditworthy borrowers – business owners with strong, reliable business revenue, excellent credit, and usually an established relationship with a bank.

With a term loan, a bank extends a direct loan to a business – the loan is not federally insured – and the business repays the loan through regular payments over a period ranging from five to 30 years.

While bank loans are ideal for small business financing, they’re extremely hard to qualify for, and because these loans aren’t federally insured, the interest rates aren’t always great for non-prime borrowers (if they even qualify). If you don’t have an established relationship with a bank, they often aren’t even an option.

Bank term loans are best for small business owners who want to do one of these things (or the like) with the funding:

  • Buy or expand their business facilities
  • Purchase new equipment, supplies or inventory
  • Buy another business or open a new location

SBA loans

For business owners who have good credit and want a term loan but don’t have the stellar credit or established relationships necessary to get a bank loan, the SBA is often a great choice. Borrowers still need to have good credit to qualify, though (600 to 640 is the minimum for most programs).

When it comes to SBA loans, there are many different options available. Most loans issued by the SBA are conventional term loans, but there are also lines of credit, microloans, grants and other options to fit a business owner’s particular circumstances. These options are usually offered at more attractive rates than business owners would get from other non-bank lenders.

One of the great advantages of SBA loans, in addition to the lower credit score requirements, is that these are still structured loans that can be repaid on set schedules. Plus, interest rates are still pretty good, since the loans are federally insured. Some extra costs are also associated with these loans, though, including an SBA guarantee fee, and underwriting can be a pain for borrowers who need cash quickly.

SBA loans are best for business owners with good (but not excellent) credit who want to do one or more of these things:

  • Buy new facilities or renovate facilities they occupy
  • Buy equipment
  • Create new jobs
  • Develop a new product line

Business lines of credit

If your credit isn’t quite good enough or you don’t have the revenue necessary to get an SBA loan, you may be able to find the financing you need with a line of credit. This type of loan is called a revolving credit facility, because it allows business owners to potentially borrow the same money multiple times, if they pay back part of what they owe after taking their original loan.

With a line of credit, business owners have a certain amount that they can borrow. They can borrow money against their line as they need it, then repay and actually borrow the same money again, so long as they’re still in the draw period (usually the first one or two years of their loan).

After the draw period for a line of credit ends, the business owner repays any amount outstanding on their line, often with fixed payments over five years or more.

While business lines of credit offer a lot of flexibility, they can still be tough to qualify for, because lenders know that the borrower’s financials may change and a loan could become riskier over time. Some lenders even include provisions allowing them to call the loan if the borrower’s credit score drops or collateral decreases in value – which can cause a business owner a lot of problems if they aren’t careful.

Business lines of credit are often used for these purposes:

  • Financing midsize purchases
  • Renovating facilities
  • Smoothing seasonal expenses
  • Accommodating recurring financing needs

Merchant cash advances

If your credit is poor and you need business financing, your best bet may not be a loan at all, but a merchant cash advance. This type of financing is available for businesses that process credit card transactions and is extended against future credit card sales. The lender then keeps a portion of future credit card sales until the advance is repaid with interest.

Merchant cash advances are pretty unique in the world of business financing. They’re easy to get and extremely easy to administer, but they’re also expensive, and they’re only available to businesses that process credit card transactions. What’s more, these advances can take a long time to pay back if you experience a period of slow or low-dollar sales.

These are some cases where merchant cash advances may make sense:

  • Buying inventory
  • Making payroll
  • Meeting personal expenses

Bad credit business financing options

If you have bad credit and need business financing, there are other loan options that may work for you. Business lines of credit and merchant cash advances can be quick and easy to get for some, but they aren’t an option for all business owners, and they aren’t always the best choice even if you can get them.

In addition to the financing options outlined above, here are some that might work if you don’t have strong credit:

  • Business credit cards: Small business credit cards work just like personal cards and are great short-term financing options for business owners who want to finance everyday purchases.
  • Bridge loans: These loans only last for a short term but can be great for businesses who are just waiting to resolve other debt or get paid by customers before refinancing into a long-term loan.
  • Personal loans for business: These loans offer a lot of flexibility in use of funds and are one of the best options for startups that haven’t been around long enough to meet most lenders’ requirements for minimum time in business.

There’s also invoice financing or factoring (which allow businesses to borrow against receivables), leasing, equipment loans, crowdfunding, and microloans for very small businesses with very small needs.

Improving your credit to increase your options

If your credit isn’t great and you don’t have financing options or don’t like the options available to you, you can take certain steps to improve your credit. The first thought most people have is to raise revenue, but that’s often outside your control. There are much simpler things that are more within your control and will help you expand your financing options.

Here are four things you can do to improve your credit and expand your business financing options:

  1. Consolidate outstanding loans. If you have multiple outstanding debts, consider consolidating them into a single, structured consolidation loan.
  2. Pay down revolving lines. Reducing your balances on debts like credit cards can help to lower your credit utilization rate and improve your credit score.
  3. Keep accounts current. Making sure that you don’t fall behind on any of your outstanding debt will also make sure you don’t get any new derogatory marks on your credit report and demonstrate to lenders that you are responsible with credit.
  4. Dispute negative marks on your credit report. If you have old accounts that are closed and have derogatory marks, they may be holding down your credit score. You can work with credit bureaus to eliminate these marks from your credit report and potentially raise your score quickly.

If none are these are options for you, you can always get a co-signer to guarantee your small business loan, or take on an equity partner to get the money you need. No matter your credit, there’s always a financing option available to you. Some are better than others, but there are always options.

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Is There a Difference Between No Credit and Bad Credit?

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The short answer is yes, and understanding the difference could be instrumental in getting better credit.

No credit and bad credit often get grouped together. It’s understandable why, as they both sound similar enough. And if you have either, the next step forward is to focus on improving your credit.

The two situations aren’t the same, though. It’s important to know the difference, because the right way to build your credit often depends on whether you have no credit history or bad credit.

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The difference between no credit and bad credit

Having no credit means that there’s not enough information on your credit file to calculate a credit score for you. It’s also known as being credit invisible. Sadly, this is an issue that affects millions of Americans.

There aren’t any problems on your credit file; the credit bureaus just don’t have enough data on you. That means when a lender or any other third party checks your credit, there’s nothing to go on.

Meanwhile, “bad credit” is a common term used to describe a low credit score. That low score is because of negative items on your credit file, such as not paying your credit card bill.

When you have no credit, the solution is to build your credit. When you have a low credit score, the solution is to rebuild your credit. Now, let’s look at how you can do each one.

How to build credit for the first time

Here’s the simplest way to build credit:

  • Open a credit card.
  • Use the credit card for at least one purchase per month.
  • Always pay your credit card bill on time and in full.

It’s that easy; that’s all you need to do to get a good credit score. When you use a credit card and pay the bill on time, you establish a positive payment history. That’s the biggest credit scoring criteria.

The tricky part when you have no credit is finding a credit card you can qualify for. Secured credit cards are one of the most common options for consumers in this situation. You pay a security deposit for this type of card, so it’s possible to open a secured card even if you have no credit.

If you’re in college, credit cards for students are available. These are often an option for applicants without any credit history.

How to rebuild a low credit score

It’s a little more complicated to rebuild your credit. First, you need to find out what negative items are affecting your credit score. Here’s how to start:

  • Use an online credit score tool to check your score and learn about any items damaging your credit. If you have a credit card, there may be a credit score tool in your online account. If not, there are plenty of free ways to get your credit score.
  • Request your credit report from the three consumer credit bureaus (Equifax, Experian, and TransUnion). You can pull a free annual credit report from each bureau, and through April 2022, you can get free weekly credit reports. Your credit report will show you exactly what’s affecting your credit.

Once you know what’s affecting your credit, you can work on correcting it. Below are a few of the most common issues and how to fix them.

Problems with your payment history

This includes anything related to not paying a bill on time, from late payments to having accounts go to collections.

The first step is catching up on your payments. If you can’t pay in full, contact your creditors and see if you can set up a payment plan with them. They may be willing to work with you if that means you’ll be making regular payments.

Next is rebuilding your payment history. The easiest option is to use a credit card at least once per month and pay in full by the due date. Why do you need to use a credit card? Credit card companies report on-time payments to the credit bureaus, which helps your credit score. With other types of bills, your on-time payments typically don’t get reported to the credit bureaus. That means you may not be able to improve your payment history with rent, utilities, or other monthly bills.

If you already have credit cards, you can continue using them to rebuild your payment history. If you don’t, look for secured credit cards and apply for one you like.

Using too much of your credit

A big factor in your credit score is your credit utilization ratio — your credit card balances divided by your credit limits. If this number gets too high, it can lower your credit score. The standard recommendation is a credit utilization ratio of under 30%.

Let’s say you have one credit card with a $4,000 balance and a $5,000 credit limit. That would put your credit utilization at 80% ($4,000 divided by $5,000 is 80%), a very high number that would decrease your credit score.

Fortunately, only your current credit utilization matters. Once you pay down your credit card balance, your credit score will bounce back.

Errors on your credit history

A low credit score may be due to an error and not any action on your part. This is why it’s so important to pull your credit reports from each credit bureau. By reviewing those, you can see if there are any mistakes.

If there are errors on your credit report, you can go to the credit bureau’s website to dispute them online and get them removed.

A low credit score and a nonexistent credit score are both things you can change. After you determine exactly what the issue is, you’ll be able to choose the best solution to fix it.

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‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic

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It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.

Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.

To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.

“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”

Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.

Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.

She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.

Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.

“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”

Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.

“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”

In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.

Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.

Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.

“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”

Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.

As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.

So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.

The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.

“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”

Related Content:

Owner of Worcester’s Nuestra restaurant, closing due to COVID impact, has something she’d like to say to Gov. Baker

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Columbus Mattress Wholesale moves to newer, larger Gahanna store

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More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable  price. 

Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.

They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches. 

But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of  helping low-income consumers secure mattresses and other bedtime products.  

“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.

Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income. 

Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.

Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.

Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.

Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.

Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus. 

Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell. 

She said a big mission for herself and Robbins, beyond doing business, is aiding the community.

“We’ve seen a lot of people struggle,” Clark said.

Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.

She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.

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@SarahEDon

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