While running your own business, you might try securing a business loan from a big bank. There are at least a handful of reasons why you may need a small business loan, from purchasing additional inventory, to buying new equipment, to hiring more staff. You probably can’t cover these expenses with your own personal savings, but business financing can help you overcome cash flow gaps. Securing funding for your business is beneficial, but a major obstacle that could prevent you from getting a business loan is bad credit.
Now, you might be thinking, “Wait, can my personal credit and spending habits impact my chances of getting a business loan in Canada?” The answer: absolutely. What you do with your personal finances can have a major impact on whether you qualify for a business term loan, business line of credit, or other loan options from a bank. In fact, one of the first things that a bank does is to check if you have a bad personal credit score. If you do have poor credit, then they probably won’t give you the amount of small business financing that you’re looking for. At least, not in your current situation.
But don’t fear: if you’re worried that you might have bad credit, here are 3 steps you can take to secure bad credit business financing.
Step 1: Check your credit score, and understand what it means
Before you even start looking for business financing, you should check your personal credit score and history before shopping around for loan options. But where do you start? Two companies that can help you are Equifax Canada and TransUnion Canada. They are a “financial archive” when it comes to recording the credit history of Canadian consumers. Banks will go to companies like Equifax Canada to find information on your credit score. You can also contact companies like Equifax directly to find out your credit score.
Once you’ve found out what your credit score is, you’ll need to understand what it means. Here’s a quick breakdown of how the credit score scaling system works. A credit score typically runs between 300 and 900. When you sign up for your very first credit card, with no credit transactions, your credit score begins at 300. Making credit purchases and paying your credit card bills on time will increase your credit score, while paying bills late or missing them entirely can decrease your credit score. A good credit score is anything in the area of 650 and above. So, if you’re below that, especially significantly, then you’ve got bad credit.
Step 2: Improve your bad credit score in the long-term
If you check your credit score and find that it’s not great, don’t despair, because you still have options. One area you should focus on is improving your credit score in the long-term. There are many steps you can take to improve your credit score. Build out some best practices, like paying your bills on time, paying off delinquent bills, and not opening new credit card accounts.
These steps can improve your credit score. Ultimately, this will help you qualify for larger loan amounts in the future at better interest rates. Remember, though, that improving your bad credit score is like losing weight or learning a new skill: it takes time and there’s no quick fix.
If you’re worried that you won’t be able to secure business funding while working on your bad credit, don’t sweat. There are alternative business financing options that you can consider while improving your credit score, including a merchant cash advance.
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Step 3: Consider alternative solutions in the short-term
Improving your credit score takes time, and you may not have time to spare. If you need to quickly stock up on inventory or replace broken equipment, you don’t have the luxury of waiting for your credit score to improve. Luckily, bad credit business loan options exist.
If you’re slowly improving your credit score but need financing quickly, a merchant cash advance (MCA) may be the right option for you. Unlike traditional bank loans, an MCA is not impacted by your business credit or your credit score. It’s a special lump sum payment that can help business owners like you get quick and convenient financing.
If you qualify for an MCA, here’s what typically happens. You will receive a lump sum cash advance from your lender, deposited straight into your business bank account. Every time your business makes a credit card sale, a percentage of that profit is automatically deducted and put towards paying off your advance. You’ll need to pay back your lender a percentage of your business’s daily credit card sales until the terms of the advance have been met. This is a fast and simple setup for most small business owners that can be much easier to secure and manage than a traditional business loan.
So if you check your credit score and find out that you have low credit, remember that you still have ways to secure business financing while working on your credit score. There are a number of small business loan terms available, such as short-term loans and merchant cash advances. A merchant cash advance can provide you with the business cash flow you need so that you can focus on improving your credit score!