Getting a Loan with a History of Bad Credit

Times are tough for small business owners who have seen their good credit fall to the wayside from using their personal credit cards to finance purchases, equipment, and even payments to suppliers or vendors to keep their businesses going during these tough economic times.

And while bad-credit business loans are a viable option for such credit challenges, they do come with a price that most are not willing to pay. Pursuing loans by other means can also be a difficult task -- but it is definitely possible despite the current economic times.

Before you decide that bad-credit business loans are an option you’re willing to pursue, I encourage you to do your homework. It's worth taking the time to carefully weigh all your options -- and to learn which alternatives are safer in the long run.

Below I have listed several ways to obtain a business loan if you have bad credit -- but note that with some of these, you must be prepared to pay higher fees and higher interest rates on your loan.

Sub-Prime Lenders

While there are sub-prime lending programs designed for business owners with bad credit, these specific programs charge anywhere from 12 percent to 18 percent interest, and even higher. This is not an option I would recommend because you end up weakening your finances in the long term.

Transfer of Ownership

One of the ways you can solve a bad credit problem is through a transfer of company ownership. In many cases two partners in a corporation own 50 percent each and one partner may have excellent credit while the other may have bad credit. In such cases, both owners will have to be included in the credit check for a business loan with the bank -- and the one partner with bad credit will ruin the chances of obtaining a loan for the business.

If this is the case, then an option would be to transfer 100 percent of the business to the partner with the strong personal credit profile. The transfer of ownership is done privately and is simple to complete and can easily be filed in your corporate record-keeping book. Make sure you consult with your CPA and attorney if this is something you would like to do. Remember, the ownership can be transferred right back once you have finished applying for a business loan with your bank.

Secured Business Loan

A sure way to obtain a loan with bad credit is to post sufficient collateral. This type of loan is known as a secured business loan and is typically asset-based, which means hard assets are used like equipment, commercial real estate, receivables and in some cases inventory.

Co-Signer

This happens to be a very common solution for bad credit business loans. A creditworthy co-signer will act as a guarantor for the business loan and they can be a business or trading partner, or investor, or subsidiary company with a strong credit score.

As you can see a business loan with bad personal credit is possible even during these challenging times. As you work on repairing your personal credit these options can be a temporary solution for your business to obtain the funding it needs. While bad credit business loans are costly you have to ultimately decide if it’s a price your willing to pay.

Marco Carbajo is founder of Start Business Credit.com

You may contact Marco directly at: ceo@startbusinesscredit.com

Follow Marco on Twitter @MarcoCarbajo and read more of his insights on BusinessCreditBlogger.com