Loans for Business Owners with Poor Credit

Gone are the days when you can walk into a bank and get a loan based on good rapport with a loan officer. But today the banking industry isn't willing to spend the time — or to undertake the risk — in issuing loans this way.

Today banks focus primarily on personal credit scores. If you have a checkered credit history, big banks won't be your best bet for funding your business. Not only will you almost certainly be denied, but each inquiry into your credit may actually lower your credit score. Here are some alternatives to big banks to fund your business:

Local lenders
Community lenders and regional or local banks are more likely to consider other factors in addition to your personal credit score, such as your business credit score. Your business credit score is determined by similar factors as your personal credit — outstanding debt balance on credit accounts, bill payment history — but is associated with your business's tax ID number, not your Social Security number.

Establishing a separate business credit history is a key to a successful business. If your credit is damaged and you have not already secured a separate tax ID number from the IRS, get one as soon as possible. You can apply for a tax ID number without incorporating if your business is a sole proprietorship, an LLC, or a partnership.

Specialty lenders
Some lenders actually specialize in loans for high-risk entrepreneurs. These loans generally have high interest rates with a provision for lowering the rate when the business shows positive cash flow and the borrower demonstrates ability to cover the debt.

Home equity loans
Another option is a home equity loan. Home equity loans can provide you with large amounts of cash at a relatively low interest rate, as well as certain tax advantages unavailable with other types of loans. But using a home equity loan to fund your business carries considerable risk: if your business fails, you will have lost both your business and your home.

Friends and family
Family and friends may be able to offer financial assistance. Many business owners dislike asking family and friends for money, and some experts advise against involving relatives and friends in your business dealings, but if your options are limited, you may have no other choice.

If you pursue this route, treat your friend or family investor as you would any other investor. Present your business plan and draft legal documents that protect all parties. Things can go wrong in the closest of relationships, and a handshake just isn't enough.

The SBA
The Small Business Administration has a wide variety of programs to help you fund your business. While the SBA does not lend money, they do guarantee loans; this reduces the risks inherent in loaning money to small businesses and makes lenders more apt to issue a loan. The SBA also maintains a list of business-friendly banks. You can also call your local SBA office for more information. You can also consult the AllBusiness Practical Guide to SBA Loans for more information.