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Loans for Business Owners with Poor Credit Scores
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Loans for Business Owners with Poor Credit Scores
Last month the President announced a plan to unfreeze credit markets for small business borrowers. This plan and the economic stimulus are intended to ease up the credit crunch in way that encourages banks to increase the number of loans made to small businesses.
Many businesses have suffered under this credit crunch. Lines of credit have been significantly scaled back or eliminated altogether. Some business owners have seen their credit scores decline due to poor business conditions, and have had trouble paying their bills.
So, the government’s effort to rescue small business lending is great, but what about the business owner who, because of these poor economic conditions, may no longer be in position to qualify for a loan?
Here are a few options. If you know of others, please comment on this post.
Government Guaranteed Loans
Federal and state loan guarantee programs are designed for borrowers who are unable to obtain financing on the same terms through normal lending channels. In many of these programs, the loan proceeds can be used for most business purposes including working capital, machinery and equipment, land and buildings, leasehold improvements, and debt refinancing.
Technically, there is no government-backed financing program that is specifically designed for small business owners with weak credit scores. The economic stimulus does not specifically have provisions for small businesses whose credit scores have declined as a result of the downturn in the economy.
Loan Alternatives to Using Credit Cards
Many small business owners have been using credit cards to pay off their bills, and complaining of predatory practices and interest rate increases that get them further and further in debt. A number of different loan programs provide a good alternative to credit cards. In some cases, government guaranteed loans can be obtained at significantly lower interest rates than credit cards.
The Small Business Administration’s 7(a) guaranty loan program is one of the most basic and popular options available. This program is administered through commercial lenders that have been approved by SBA to participate in the loan program. These lenders make and manage the loans but work together with SBA to guaranty any default of payment by the borrower. Potential borrowers with time sensitive needs should look into an SBA express loan. Express loans are designed to provide financing for small businesses more quickly than traditional 7(a) loans; generally within several days. With a 50% guaranty from SBA and less strict collateral requirements, it’s more likely that your application will be approved.
As with all financing, it’s easier to get approved for loans like these with a creditworthy application. As such it is better to use these as an alternative to credit cards rather than a resource for damage control.
Community Banks and Credit Unions
As the economic recession deepens and large banks have scaled back lending, local and regional banks are increasing the number of loans made to small businesses.
This is good news if you have poor credit. Community banks tend to look at other factors in addition to personal credit history and risk. For example, your business credit score, registered through your business tax ID, tends to hold slightly more weight than your personal credit score. This is very beneficial for people who have gotten into some trouble with their personal finances.
Many of these local banks want to invest in the local economy, and may be willing to lend money if you can show a solid business plan with a high likelihood of success.
Some lenders specialize in making loans to individuals who other lenders would consider high-risk. While these loans tend to have high rates and strict requirements, they are a practical option for borrowers with poor credit scores, debt, or those who have yet to established a business reputation. In addition to the funding provided by specialty lenders, they generally provide an opportunity for businesses to prove they are reliable. In many cases, once a borrower has demonstrated positive cash flow and the ability to cover their debt, lender provisions lower their original interest rate.
In our difficult economy, specialty lenders are continuing to play a more significant role. If used efficiently, these loans can be your stepping stone to meeting the eligibility requirements for loan programs from other avenues.
What About Grants?
Federal and state government agencies do not provide small business grants. The President’s economic stimulus plan also does not provide grants to individuals.
The economic stimulus has created a new class of government grant scam sites. The previous blog post discussed government grant scams and how to avoid them. Visit the Government Grants Guide for more information about grants.