Search
Home Blog
Table of Contents

    4 Loan Options For Bad Credit

    Lyn Ridley
    Lyn Ridley - 2019-11-17T22:00:00.000Z

    Do you want to start a business, but you are worried about your chances of attracting enough funding? If you have bad credit, you can still find a decent loan, but it will take a lot more research.

    You're not completely out of luck; there are some options that can make short term financing more accessible.

    If you want to cover a significant expense, you may have to deal with higher rates.

    Big banks are reluctant to lend to people with a less than optimal credit score. A score that is considered "bad" is anything under 620.

    These low scores are caused by previous late payments, debt collections, and even public records. If there is a lot of negative information on a credit report, the score is lower. While your loan choices will be more limited, they aren't all terrible.

    When you are in the market for a lender that will accept your poor credit score, it is essential to know what you are getting into and who is involved. The smarter you borrow, the more money you will save in the long run.

    In this article, we will cover some options for you and go over the pros and cons of each. Hopefully, these four tips will provide you with some helpful orientation for your research.

    Some of these may surprise you, but they are worth checking out. We're going to cover some crucial elements of borrowing so you can consider all of the factors before you make a decision.

    Peer to Peer Lending

    We recommend that someone who is seeking funding but cannot meet the requirements of a traditional business lender, tries peer to peer options.

    Peer-to-peer lending is similar to crowdfunding for investors.

    There are many peer-to-peer lending platforms that you can consider for a debt consolidation loan.

    Like most loan comparison sites, peer-to-peer lending networks present multiple options and let you choose one without having to deal with a hard pull on your credit record.

    Multiple Lenders, One Loan

    With this financing option, multiple lenders will use an online marketplace to contribute to one loan.

    While you will be borrowing from many different sources, you will only have to deal with one monthly payment.

    Investors may review your application and credit profile in deciding whether or not to contribute to your loan.

    Faster Process

    The process of applying for this loan is faster than a traditional bank loan. If all goes smoothly, you will have access to capital faster.

    This is a secured loan, which means that you will have to provide collateral.

    The Catch

    Higher interest rates may still apply with these loans; this is to be expected for people with bad credit.

    Borrowing from peer to peer lenders can be risky if it is not done cautiously, and it may not cover the full investment costs you need for your business.

    Ask Friends and Family

    The best thing about most of our loved ones? They don't charge interest. When you need cash, consider asking friends and family.

    This is a very personal decision and depends on the amount you need and people's financial situations.

    Borrowing from those we are close to can be a tricky process.

    It may be hard to ask for money from those we love, especially if they know about our subpar financial history.

    Have a plan

    It may take some time to convince them to lend money, especially if they are aware of your bad credit. There are ways to appear more convincing and trustworthy.

    Make sure that you have put together a solid business plan. It helps to have a budget so you can show exactly where the money is going to be coming in, and why it will be going out.

    Know the Risks

    One risk that is essential to keep in mind is that your relationship may be affected if the business fails.

    While you won't have a bank chasing you down and ruining your financial reputation, you may lose friends or be alienated from family.

    Draft a Contract

    If you do borrow from someone you know and care about, get the agreement in writing.

    They may also consider investing in your business rather than giving a loan, as this may provide a tax write off if the company does go under.

    Invoice Financing

    Also known as "accounts receivable financing," Invoice financing is a way for businesses to borrow money against the amount that will eventually be received from customers.

    So, how does it work?

    When a business sells products or services to wholesalers or retailers, they typically do it on credit, meaning that the customer does not have to pay right away.

    The company is given an invoice with the total amount due and date by which it must be paid. Invoice financing is a method of short term borrowing extended to a lender based against these unpaid invoices.

    The advance provides immediate working capital, and you can obtain the funding you need if you have bad credit or even if your company has filed for bankruptcy.

    Invoice financing helps you to pay suppliers, increase your cash flow, pay your employees, and reinvest in operations.

    If you have to wait until customers pay off their balance in full, it may be more challenging to get access to capital when you need it.

    Installment Loans

    Installment loans come with repayment terms that are anywhere from nine to eighteen months. This form of financing can offer you a little more breathing room when it comes to opening a business with a bad credit history.

    In a sense, these loans are similar to personal loans, but they come with higher interest rates.

    With an installment loan, you will pay off the debt amount in regularly scheduled payments, as opposed to one colossal sum. Interest is charged at an ongoing rate.

    Each payment you make will go towards both the principal loan and the interest amount. This is what is called a loan amortization schedule.

    If you can pay off the loan early, you will save money.

    One crucial aspect to consider is the fact that some companies have prepayment penalties, which will penalize you monetarily for doing just that.

    Other Options and Considerations

    There are many different options available for you if you have bad credit. Whether you own a business or you need a personal loan, you must conduct thorough research and consider all of the factors.

    Chances are on any amount of money that you may borrow; the interest rates will be much higher than if you had a good credit score.

    Unfortunately, there are a lot of lenders out there who prey on people with bad credit. They could end up trapping you in a vicious cycle of unfavorable terms and endless debt.

    The key is to read the fine print and make sure you are not getting involved with a predatory lender. Try to look for one that is affordable, and that helps you build your credit score.

    If you pay attention to this advice, you will avoid more predatory interest rates and conditions; you can also consider payday loans, car title loans, pawnshops, and payday alternative loans.

    These options provide fast, short term borrowing for when you are really in a bind and don't otherwise have access to credit.

    Conclusion

    If you have bad credit, finding the right way to get funding for your business or personal expenses can be difficult.

    While it takes a lot of research to find them, and some options may be less than optimal, you do have some.

    If you do qualify for any of these loans, you must start paying them back on schedule.

    Borrowing is an excellent opportunity for you to start developing a positive payment history, which will help you to boost your credit score. Make sure your lender reports your on-time payments to the three major consumer credit bureaus.

    Options like payday lenders will not help you improve your credit score.

    Look closely at the terms of each loan and try to understand the conditions in detail.

    If you find the right one, create a plan for paying it back and start aiming for a higher score. After all, you want to start your business on the right foot.