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Could Bad Debt Help You Get a Small Business Loan?

Jennifer Williams

If you’re like any small business owner or entrepreneur, you’re probably pretty impatient to bring in more cash flow. But the problem with earning more is that it takes money to make money… and what happens if you don’t have the working capital to get started? Well, a small business loan could be in order. While you might think qualifying for a loan could be more difficult with bad credit or debt, that’s not always the case. Here are 6 tips on getting a small business loan, including how bad debt could actually HELP you get a loan.

1. Make Your Bad Debt Work for You

Because of recent changes to FICO credit score calculations, you can actually now be rewarded for paying off outstanding debts. After just a few months of paying off bad debt you could improve your credit score enough to qualify for a bigger or better small business loan.

2. Your Other Bills can Work for You too!

Any bills that you have been paying regularly on time and in full, such as rent/mortgage, utilities, payroll, etc., can be used to negotiate. Let potential lenders know about all of your financial responsibilities when applying for a small business loan (especially if your bad debt is older than the new bills you have been paying).

3. Develop a Flawless Business Plan

When applying for a small business loan, most lenders will look at your company’s business plan before deciding whether to approve a loan. You should have a business plan anyway, so be sure to create one (or edit your old one) that is strong, makes sense to someone outside of the industry, and is credible. It’s also a good idea to take a look at how you’ve been spending your money and how you’ll use your loan. You can ensure that you’ll be using the extra money to make significant and positive changes to your business (as opposed to continuing with an unfeasible business model or bad financial habits).

4. If You don’t Have a Credit Card – Get One!

Just like paying off your bad debt, starting a history of making purchases with a credit card AND paying off the balance will offset negative marks on your credit score. Also remember, if you do pay off a card completely – don’t close the account. The more available credit you have the better when applying for a small business loan.

5. Don’t Accept a Loan from just Anyone

Unfortunately, so-called “easy credit” is not so trustworthy nowadays. You should run far and wide from tax refund loans, car title loans, and/or payday loans. Most of these hide nearly illegal levels of interest behind fees and charges, and they are purposefully designed to trap you in a cycle of increasing debt. Additionally, when looking for any type of loan you should always research the loan company through the Better Business Bureau and/or RipOffReport before signing any contracts.

6. Check out Other Methods of Financing

If you’ve been turned down for a traditional small business loan, there are other avenues to consider. Many small business owners are fortunate enough to be able to borrow from friends or family (sometimes interest free!), or consider a grant. There are numerous grants available from local government or schools, and few look at your credit rating or ask you to pay the money back. A secured loan could also be a possibility. Secured loans require collateral, (which most small businesses have), such as vehicles, fixtures, furniture, or inventory.

Just because you don’t have good enough credit for a small business loan, doesn’t mean you should put your plans on hold. If you’ve found a good business opportunity – go for it! And remember, this is not just solid advice for finding a small business loan, but for all your business ideas in general. Good luck in finding funding for your small business!