How to Start a Business with Bad Personal Credit?

It should come as no surprise that it is not easy to obtain small business loans if you have bad personal credit. That can make starting up a business with bad personal credit a little more difficult, but it is not impossible.

Develop Your Business Credit

One way to make your loan applications more attractive is to build your business credit apart from your personal credit. While it is not the fastest method of obtaining small business loans, it may very well be the surest way to get the money you need for expansion or further development. 

The first thing you will need is a federal tax identification number. This is easy to obtain, and will replace your social security number when making financial transactions related to your business, and also when filing taxes for your business.

Once you have your federal tax identification number you can take the steps necessary to begin accumulating credit for your business:

• Open vendor accounts in your business name

• Open a bank account in your business name

• Apply for small business credit cards in your business name

Once you have established good credit in the name of your business, you can use that to apply for traditional small business loans from local lenders.

Getting Started Faster

If you don’t have the time or the resources to fund your own startup you can check out the many social lending possibilities available online. Social lending sites are appealing, because many times all you have to do is convince a potential private investor of the validity of your idea and your ability to make it work. Social lending sites are the internet connection to venture capitalists. 

If you are already in operation, but don’t have enough time invested in your business to have built up reasonable business credit, consider getting a cash advance against accounts receivable. These loans are like payday loans. You will need to provide the lender with a full account of your receivables, but it provides you with cash flow to buy new equipment, fund payroll or expand without waiting for the money you have coming in.

Is an Unsecured Loan Right for You?

Bank signature loans require favorable credit, payday cash advances do not, making it an attractive loan for folks with poor credit. Having troubled credit, instead of seeking a long term unsecured loan, consider alternatives.

Many types of loans exist to fit the various needs of people in different financial situations. If you want to understand the qualifications for a loan approval, you need to examine the various types of loans available to you. The variety includes secured and unsecured loans and short term and long term repayment loans. These are not all that are available but they are the most common. Take a look at each.

Secured Loans

Collateral is the key word for secured loans. Collateral consists of value property put up to secure the amount of the loan. In other words, if you take out a secured loan, you will give the lender temporary ownership of your home, other real estate, stocks and bonds, or even a late model car. Should you default on the loan, the lender will have the right to seize the property and sell it to cover the cost of the loan. Since these loans are secured by valuable property, interest rates are usually lower and repayment terms can be more comfortable. Also, these loans can be rather large. These loans can have long or short term repayment terms, depending on the size of the loan and perhaps other factors.

Unsecured Loans

These loans usually have short repayment terms ranging from 15-30 days dependent on the size of the loan and other factors. They are usually for amounts ranging from $100-$1,500 depending on salary and debt to income ratios. Since no security or collateral is pledged, these loans tend to have higher interest rates.

Bank Signature Loans

An unsecured loan from a bank, usually called a signature loan or personal loan, generally will have a repayment plan of around one year. If credit is good, interest rates will be low. Federal regulations direct lenders to figure and present an interest computation so borrowers can easily compare rates among various lenders.

Pay Day or Cash Advance Unsecured Loans

Rather than offering an interest rate, pay day or cash advance lenders simply charge a fee. Once computed, you will see that it amounts to interest well above that which a bank would charge. However, these loans are more accessible to folks with bad credit. A bank signature loan has higher qualification standards thereby excluding bad credit borrowers. These loans are usually gotten off the internet or from storefront businesses. They have quick turnaround times, repayment due within 15-30 days. They can be extended, but this is where a lot of borrowers start to get in trouble. With extension fees and more interest paid, a loan repayment may end up to be twice what the borrower originally received.

You Must Decide and Have a Goal

The determination as to what sort of loan you ultimately get depends on your credit history, whether or not you want to offer collateral, the zeal of the lender, and other factors. Folks with good credit should first consult with traditional lenders such as banks or credit unions because their interest rates are rather low. What if you are seeking a cash infusion for your business? You should start your search with a consultation with you r local Small Business Administration agency.

Folks with poor credit histories may want to seek out smaller loans from a pay day or cash advance lenders rather than a long term unsecured loan. Or, if they do want a long term loan, consider offering a home or auto as collateral. No matter which type of loan you choos, it can be a great help to your poor credit scores or it could end in disaster. Be sure to read the fine print before you sign on the dotted line. Make your payments in a timely manner as dictated by your contract.

Are There Alternatives to Pay Day or Cash Advance Loans?

Consumer advocates may criticize pay day or cash advance lenders, but they offer no alternative. If lenders who make these loans are banned, what follows could be worse.

Negative government reports, consumer advocate studies, and investigative journalists for newspapers and television, have all taken pay day and cash advance lenders to task for their so-called loan shark activities. These protectors of the common good do have their points, but they offer few alternatives. When folks are in desperate need of cash, when they need the money quickly, there are no viable alternatives. Credit card companies, banks, and other traditional financial institutions are not too interested in loaning $500 to $1,000 to folks in dire need and often with less than stellar credit ratings.

Banning Pay Day or Cash Advance Loans

A market exists for lending money to people who need cash fast, and a legal market is the best answer. What would happen if pay day or cash advance lenders were banned? Law enforcement authorities would soon discover that back alley lenders, organized crime lenders, and other loan sharks will have stepped in to fill the void, exposing otherwise law-abiding citizens to the world of crime. And the enforcement wings of these loan sharks do not just break legs when a borrower cannot repay them on time. Whole families could be practically held hostage for a $500 loan.

Loans Are Interest Rate Heavy

Indeed, pay day and cash advance loans to carry substantial interest rates, far higher than those from traditional lenders with credit scores and collateral to underwrite the loans. But many of these folks do not have valuable property or acceptable credit histories. The fact is, the alternative to not being able to come up with cast in an expedient manner, could cause the borrower a lot more than just footing a high interest loan for a short period of time.

Interest Rates Vs. Financial Relief and Peace of Mind

Lack of cash can mean utility services being interrupted, going without medications or medical treatments, inability to purchase equipment for a business, job, or home necessity,and late payments along with further blemishes on credit reports. The interest rates, while high, are probably a small price to pay for financial relief and peace of mind. Because of the great risks a lender assumes offering these loans, the interest rates may be somewhat justified.

Improvements Needed

Perhaps the biggest problem, next to the high interest rates, is the short term requirements regarding repayment. Often, the very next pay check the borrower receives is eaten up by the repayment. One pay period is often not enough for a borrower to regain their financial bearings. They may have to keep extending the loan and that is where the real interest rates start to go into the loan shark realm. Often, a borrower can get so overwhelmed that they soon are making payments only on the interest.

Last Word on Pay Day or Cash Advance Loans

Many companies, in the onslaught of borrowers needing pay day or cash advance loans, are starting to change the terms of their loans so that they allow up to three months for repayment. They are responsibly addressing the needs of folks in these recessionary times. Three months is often long enough for people to get back on track financially. Unless someone can come up with a better legal alternative, a market exists for pay day and cash advance loans. That market, of courseHealth Fitness Articles, should be carefully monitored.