How small business owners can get a loan despite having bad credit
There’s no shortage business owners whose credit was destroyed in the great recession. I’ll bet all small business lenders see folk who have been affected. It happened to a lot of people; a lot of small businesses went under.
What differentiates lenders is their reaction to an applicant with poor credit.
Traditional banks often don’t have the ability to give their small business borrowers much latitude as they have to achieve consistency across a lot of small loans, sometimes working with their least experienced commercial lenders. They have a box and if you don’t fit you are out of luck.
However, the market is full of new small business loan products. We are in the midst of a revolution driven by technology, capital markets, and regulation. Some of these products, such as merchant cash advances, are quick to access, require little disclosure of information, and don’t ask for owners’ personal guarantees, but they tend to be short term and charge high rates of interest. So, small business owners with bad credit can get a loan by paying more to certain short-term lenders, but I’m not sure this is a truly satisfactory answer from the businesses perspective, especially when the rates can exceed 100 percent APR.
There are also some lenders whose mission is to figure out how to help potential borrowers who have trouble accessing “regular” loans at a reasonable price. That is the policy intent of the Small Business Administration’s flagship 7(a) loan guarantee program which has several thousand participating lenders throughout the US.
Community Development Financial Institutions (CDFIs) are another group of organizations with missions aimed at helping disadvantaged individuals and groups. Many CDFIs engage in small business lending.
There is a small, specialized subset of small business lenders who are both 7(a) lenders and CDFIs.
CDFI’s see more than their fair share of borrowers with credit issues. They serve minority and low-income populations that were disproportionately impacted by the recession. Short sales of homes, bankruptcies, and low credit scores are everyday occurrences on their loan applications. This blend of cultures makes it more willing to consider small business loan applications from businesses whose owners have bad credit.
Take for example a recent loan to two Laotian restauranteurs, a married couple who had been forced into a short sale of a residence when their business was battered by the great recession. They were forced to resort to high-interest-rate short-term loans to finance their award winning restaurant.
Because in this case, the owners are competent and the business is solid, we took a look at why their credit was bad. They acted responsibly despite adverse circumstances so we were prepared to give them the benefit of the doubt. Borrowers have to be open and forthright about their past credit issues, though.
The sad fact is that businesses owned by racial and ethnic minorities and low-income individuals were hit particularly hard by the recession, as these businesses generally had fewer financial and other resources to fall back on that when they encounter difficulties.
It’s not uncommon to hear from loan applicants with bankruptcies in their past who filed bankruptcy on the advice of financial advisors or lawyers and, with hindsight, wish they had not done so and taken other routes. The same goes for short sales of properties.
However in all social groups, serious health emergencies are one of the leading cause of bankruptcies and divorce can wreak havoc on an individual’s credit. Every now and again there are borrowers who have fallen victim to criminal activity by staff or outsiders. If someone was impacted by a factor outside their control that they could not have reasonably anticipated or prepared for and they acted responsibly, there’s a path forward beyond that problem on their credit report.
If you are a loan applicant with a credit problem and are looking for a loan it is important to be open and honest about the circumstances, provide documents to support your explanation, and show how you have worked, and will keep working, to mend your credit. That’s the path to getting the financing you need.
