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Loans for Business Owners with Poor Credit Scores

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Loans for Business Owners with Poor Credit Scores

By BobK
Published: April 29, 2009

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.

Specialty Lenders

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.

About the Author:

Bob

Comments:

I can say things have gotten better than they were at the time this article was written. We can just really hope the upward trend continues. For those with lower scores who won't qualify for loans backed by the SBA, their other option is alternative financing.
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Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for used machinery and Construction equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally.Message Edited by NicoleD on 08-18-2009 09:34 PM
Bosstripd.... consider using Invoice Factoring to get working capital for your business. If you provide goods or services to other businesses or to government entities such as local, county, state or federal governments and are waiting to get your invoices paid, Invoice Factoring will get your invoices paid in 24-48 hours. If you are waiting 30, 45,60+ days to get paid, Invoice Factoring will unlock cash that is locked up in receivables.  Use the cash for any business reason.... payroll, taxes, inventory, supplies, equipment, etc.. Invoice Factoring is a little known and little used credit faciltiy available to the small business owner.  It is not a loan, so it does not add debt.  It is off-balance-sheet financing so it does not add additional burden to the financials of the business. If you are in need of working capital and your bank has said no, consider using Invoice Factoring to get the needed working capital.
I can't believe it, I found the information for the ARC funding at www.sba.gov/recovery/agencyplans/index.  Can any of you wait till sept-09?? if you and your business even qualify.  If this was easy everybody would be doing it.
This is the future I have to look forward to, holding on by my finger nails, using credit cards because my bank of 15 years just aint the same.....by the time MICRO gets around-it will be so spent if you can get your hands on it...I am sorry I have such a blick outlook-but I have done all I can, each day I keep getting up and putting one foot in front of the other, cant sleep at night because I cant find payroll for a great crew that is looking forward with me...chapter 7-all this new language that I never thought I would be looking at or using.Business recovery loans 'ARC' get moving and only a 3 page form, just like the Banksters.....man  I never thought I would be so un hopefull
Thanks for the information on microloans. Unfortunately, my business and my credit have taken some serious blows during this economy, to the point where I have to file for Chap. 7 protection. The business is still viable, we have reduced practically all our expenses, but we still have considerable debt. I have two questions; 1) How 'micro' a business do you have to be to qualify for a micro loan? 2) Can I qualify even with a Chap. 7 on my credit record? I own a Satelite communications company, we are retailers and installers for two popular residential and commercial satellite television companies. We would like to expand into wired and wireless small business networks, we have the experience, but need working capital to achieve this. Any advice?
The financial crisis has caused banks and lending institutions to tighten credit. As a result, businesses are finding it more dificult to obtan funding. To enhance their chance of qualifing for a loan, businesses need to have a sound business plan as well as strong financials. Being able to provide assets as collateral improves their chances of obtaining loans. Additionally, businesses should, as a first step, evaluate their likelihood of qualifying for a loan by calculating key business ratios and metrics. Calculatorplus.com offers a comprehensive source of free business and financial calculators that can be used to calculate these metrics.Message Edited by NicoleD on 08-18-2009 09:35 PM
I can say from experience that the 'credit markets' for small businesses are more than just frozen up, they're gone. My small business has ZERO debt, and a VERY large amount of 'cash' in the bank and I can't seem to get a credit card! How absurd is that?! Omer A.MMORPG and Game Music Site OwnerVG Alliance LLC (New Jersey) Message Edited by NicoleD on 09-30-2009 12:46 PM

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