Obtaining a Bad Credit Small Business Loan Through a Traditional Bank

Obtaining a bad credit small business loan through a traditional bank is expensive because businesses with bad credit are considered very risky. Particularly in a down business cycle, lenders will be very tight with the lines extended to small businesses in trouble. This does not mean it is impossible to get a bad credit loan, however, just that it will cost more. There are a few key options you can use to reduce the overall cost of the loan to your business and ultimately increase your profit.

Look for a Secured Loan

One of the guaranteed ways to obtain a loan with bad credit is to post significant collateral. This is called a secured loan because you offer the bank something in case of default. You assume the risk as the borrower, making the bank more willing to post the funds and at a lower interest rate than with an unsecured loan. With a bad credit small business loan, you will likely be posting your business or a portion of its assets as collateral. Depending on the liquidity of your assets, your loan to value ratio will vary. For example, a gold mine is an easy asset to monetize because it can quickly be converted into cash in the case you default on a loan. Real estate will not fetch as high of a loan to value because there is no guarantee the lender can sell it to recoup the funds lost on a bad loan.

Look for a Short-Term Loan

Short-term loans typically come with higher monthly payments but lower interest rates. Seeking a short-term loan can allow you more leverage when you approach a bank. The bank assumes less risk in a short-term loan because they will not hold on to the debt over a greater period of time. Typically, the less risky the loan is for the bank the more likely they will extend it. You may still face high interest rates if your business has bad credit. However, they will likely be lower than if you approached the bank asking for a long-term loan. You need to make sure you can make the monthly payments. Short-term loans are best for businesses that have bad credit because of a single unfortunate circumstance but remain profitable. A new business is not a good candidate because profits are not likely to be high in the start of any new venture.

Consider an Adjustable Rate

Adjustable rate loans can lead to tremendous debt if not handled appropriately. However, they may be good options for a new venture without high profits in the beginning. This will keep your monthly payments low at the beginning of your small business loan when you are just starting out. As your business succeeds over the course of a few years, the amount you owe per month will increase. Seek a cap on the highest interest rate you can potentially be charged. You may also seek a cap on the amount an interest rate can increase over standard interest rates in a given market.