Can I get a Business Loan with a 500 Credit Score?

A business owner may need a business loan for many reasons. He would need it to buy raw material or inventory, make payments for new equipment or furniture, or simply strengthen cash flows.

However, obtaining a business loan may become a problem when your credit score is 500.

Securing bad credit loans from scheduled banks and financial institutions is extremely difficult, if not impossible.

But, there are alternate lenders who would provide loans even if your credit score is around 500. In fact, a few of these lenders do not have a credit requirement at all. They would rather hinge their decision on other factors like the perpetuity of your business, its cash flows, and revenue generation history. 

In this article, we will discuss some of the options available to you in case you have a bad credit rating.

The Mechanics of Alternate Lending

An alternate loan is any kind of loan (other than a traditional loan) extended either to an individual or a business.

Clients of alternate lenders are usually those people who are turned away by scheduled banks and lending institutions due to bad credit.

Alternate lenders usually operate online rather than their traditional counterparts. 

Loan Option for Business Owners with Bad Credit

Even if you are securing a business loan from an alternate lender rather than a traditional one, the fundamental of the loan itself will not change.

Business loans are generally disbursed with the condition that they will be used for business-related spending. 

These could be used to fulfil working capital requirements, procurement of equipment, furniture or raw material. 

It could also be used as a commercial mortgage. 

If you are opting for a business loan despite a credit score of 500, you may secure:

Term Loan

This is a loan that is disbursed as a lump sum. Business owners generally use term loans for using as working capital.

A term loan can be repaid over a fixed tenure in equal installments agreed between the lender and the borrower.

Every installment paid by the borrower includes a fixed amount of principally repayment, and the accrued interest amount.

Business Credit Line

In many aspects, a business credit line resembles a credit card. A credit line is actually your access to a fund with a certain limit. The good things about a credit line is that you may only take from the pool what you actually require. You will be charged interest for only the amount that you have used from the approved pool.

A business credit line may be used for fulfilling any of your business requirements. You can also pay back the borrowed amount when your cash flow allows you to. Of course, if your credit score is 500, you can expect to be charged an increased rate of interest as compared to what a traditional lender will charge you.

Loan for Furniture, Business Equipment and Raw Martials.

With this type of loan, a business can cover almost the entire cost of the furniture / equipment. The furniture / equipment serves as the collateral or security for the loan. 

Banks and financial institutions are usually hesitant to provide these loans, however, alternate lenders will not be reluctant to provide you with this opportunity despite your bad credit score. 

This is because their investment is secure in the form of the collateral.  

Financing Your Invoices

There are times in a business cycle when it experiences severe cash flows. One of the reasons for this situation is that there are lot of invoices that haven’t been cleared yet.

In such a situation, invoice financing is a better option. The phenomenon is also known as factoring. The idea behind invoice financing is to sell your unpaid invoices to a lender – of course with a discount. 

The lender will immediately pay back the amount while cutting back an agreed percentage of the total. This amount is repaid when the invoice is cleared. 

This kind of loan is a little bit risky since there are two fees involved in this method: the factoring fee, and the interest charged on the cash or loan extended by the lender.

Advance Against Sales

The phenomenon is also known as Merchant Cash Advance. This involves receiving cash from the lender agent your future sales.

The amount is repaid (with agreed fee) to the lender when the sales actually occur. The fee is determined by the lender keeping in view the risk factor involved in working with your company.  

Borrowers with credit score of 500 are considered high risk so they are charged a higher fee while low risk borrowers are charged a lower fee.

Most experts believe that this kind of financing is not very feasible for businesses because the actual sales can never be anticipated. Moreover, a business may become a habitual borrower. 

The Final Word

If your credit score is 500, it doesn’t mean that the doors have been closed for you towards obtaining a loan.

But, of course, it becomes a little bit difficult because a bad credit score means more chances of the investor losing their money on you.

You may explore the options given above, and also explore some further option in the market in order to secure the required loan.

It goes without saying that anyone opting for a loan from traditional lenders or alternate ones should be ready to pay more money in terms of fee and interest. 

So it is highly recommended that you work towards improving your credit score so that you are not required to face the same situation again.

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