If you’re a business owner, you’ve likely resigned yourself to the fact that having a low credit score equals being disqualified from access to the capital you need to grow. Unfortunately, this sentiment costs thousands of businesses the ability to capitalize on opportunities, postpone expansions, or muddle through cash flow crises that might otherwise be resolved.
But the truth is that there’s more to financing than a numerical cut-off. Instead, giving yourself the opportunity to learn how lenders assess your business despite a low credit score can unlock doors that previously felt stuck shut.
What Lenders Look at Beyond Credit Scores
The reality is that conventional banks pay too much attention to credit scores as they’re beholden to regulations and blanket underwriting parameters. But in the larger financing market, there are many ways to assess risk, and personal or business credit history is only a part of the equation.
For instance, revenue patterns are crucial. A business bringing in $10k monthly consistently shows the ability to repay more than a credit score derived from three years ago. It’s much more important for a lender to see cash flow than understand a previous blip that caused someone’s credit to drop. Whether the owner took a hit due to outside cash flow or within doesn’t matter; what matters is consistent cash flow. Thus, a company doing $50k in sales a month with a 580 credit score is a lesser risk than a company with an 800 but no revenue history just starting.
Lender approval also factors significantly during business time in operation. Companies that have been operational for twelve months or longer have proved they can survive the most vulnerable period for small businesses. Thus, their time in business provides enough substantiation that operations make sense and management knows what they’re doing, regardless of what their credit report says about prior missteps.
Not All Credit Issues Are Viewed Equally
Another important factor to keep in mind is that financing companies do not treat all credit issues the same. For example, a medical bankruptcy from four years ago doesn’t carry the same weight as maxing out a credit card last month. Lenders who take a deeper approach than simply reviewing a credit score can often distinguish between poor financial decisions and situations caused by personal hardship or timing.
For example, a business owner who has proven they’ve turned things around after their credit took a hit is precisely the type of entrepreneur who lenders want to partner with – problem-solvers who have risen above challenges. Someone who restructured their business, lowered costs and increased profits after sinking has proven they can weather the storm. Thus, for businesses confronted with such equity problems, various bad credit business loans exist through lenders willing to provide working capital based on current functioning capacity, not previous ones.
But that’s not even the problem; it’s when business owners don’t apply because they’ve predetermined denial. The act of rejecting themselves first ensures they never discover which lenders might genuinely work with them.
When Revenue Matters More Than Credit History
Revenue-based financing options matter more than personal debt histories with banks. For instance, revenue-based financing ties repayment directly to daily revenue. Daily or weekly sales dictate payment plans, meaning when sales increase, payments increase, and when cash flow shuts down, payments decrease proportionally.
This is less risky for lenders as they don’t extend loans without any contingency, they know they’re not dealing with an absolute dollar amount where someone may fail at repayment, thus, reducing risk for everyone involved. The same is true for purchase order financing or invoice financing, which takes cash flow from clients and makes them collateral for purchases, as long as the customers are solid, the lender needn’t care about the owner’s credit history.
Daily cash flow shows stable sales hours where revenue can pick up, and it matters more than worrying about numbers from three years ago on a credit score, which mean reduced risk because equity challenges fail to translate into manageable day-to-day concerns.
For those businesses with established clientele but less than stellar credit histories, as long as the customers have excellent credit with documented transactions, companies can access working capital even if they don’t have it themselves.
Cost Is an Important Question – But So Is Waiting For Capital
Let’s get real about this: financing for bad-credit businesses costs more than ideal, no matter what. Interest rates are higher than they should be; fees pile on and terms become shorter. That’s how it works, this is how access is enabled when conventional banks deny applications.
But what’s the cost of waiting? If you need $30k to stock up on an Amazon shipment for holiday sales, but you think waiting until your credit score improves is ideal, is it worth losing out on $100k of sales over two months? If it means expending $5k in financing costs instead of missing out on potential income, it’s worth it. Or if you know a piece of machinery can increase output by 40% per day, it’s better to finance expensively than risk losing customers ever again.
The issue isn’t whether financing makes sense; it’s whether financing makes sense when expenses seem unreasonable. Sometimes money that’s expensive is better than no money at all; business owners need to run this math realistically.
What Improves Future Financing Options Over Time?
Financing at levels less than perfect doesn’t mean your company has to languish there forever. Companies that use capital properly and secure payments evolve their personal brand, each payment made gets reported and starts rebuilding equity profiles along with new revenue growth and time in business.
Once certain capital levels are no longer available, business owners should take whatever they can get now and use it as momentum going forward for better terms later on down the line. There comes a time when the payment reliability makes rebuilding equity possible, even when one starts at ground zero.
Operating history with time helps; cleaned-up documentation helps even more, for the clearer books an owner has on their balance sheet and accounting systems and documentation through professional channels mean great assets in lenders’ eyes than mixed-use personal cash with shoddy bookkeeping.
If owners want unrealistic equity expectations overnight when down the road their credit scores will improve overnight as well, they live in a dream world, and it’s essential to take small steps now that will make all the difference later.
When Credit Matters Little to Nothing
Certain financing options barely matter at all. For instance, equipment financing means that if it goes wrong in terms of business financing, the lender can take its equipment back. Thus, unless it needs servicing that doesn’t pay for itself, they’re likely getting more cash out of it than what’s on the line.
Merchant cash advances involve spending based primarily on credit cards. If businesses provide cash cards and get paid from daily percent transactions, then regardless of equity, I need this amount now, is attractive enough so that if people have spikes but no credit scores, they still gain access.
Even other business credit cards target bad-credit companies, especially if businesses have revenue but there’s a personal guarantee from owners lending a hand, albeit with lower limits and tighter interest rates, but there’s still some capital there that helps rebuild credit over time.
The Strategic Approach That Makes Sense
The best thing you can do as an owner with low credit is not hide your facts and get discouraged never to apply, but instead face reality and find what’s available instead of creating unicorns backed by good intentions that may never materialize again.
Knowing how much to apply for based upon how much truly deserves it instead of what they wish they only had, from selective lenders who work best with certain crises builds confidence because what one lender denies another may approve, and it’s ultimately worthwhile to apply with honesty instead of hiding what will inevitably show up.
Have plans for how things will pan out and where investments will yield positives even when bad levels sit higher than ideal, those are winners every time.
Businesses who succeed don’t care about past equity problems, they find financing at respectable levels now, and graduate financing options down the road through responsible decision-making.
