Qualifying for the 504 Loan Program with Bad Credit

When applying for an SBA 504 Loan, which can be for substantial amounts, will bad credit hurt? Business owners are encouraged to take risks in order to be more successful, but sometimes those risks do not pay off and end in failure. The results at times can be a disaster, leaving a business owner with bad credit.

It is possible that a lender will work with a borrower who has had past failure and poor credit. Many SBA lenders are more aggressive than others, and willing to work with those that have credit scores in the 500's, or lower levels of cash flow.

Qualifying with Bad Credit

While it should be known that around 80% of SBA 504 loans with bad credit will be declined, it is possible to be approved.  There are a few things a borrower can do to try to qualify.

  • If possible, separate the existing business from bad credit by forming a corporation or LLC. This business can then have a separate EIN.
  • The new EIN will help to establish a new business credit profile, as long as the borrower is working to repair the damaged credit.
  • Uphold full disclosure about how and why the failure resulted and the bad credit created. Even with a separate business name, a borrower cannot escape the bad credit, and will not want to create a bad relationship by not disclosing.
  • Apply for the 504 loan with a group of investors, owners, or other majority shareholders that do have good credit. Members of the group are analyzed individually, but a strong credit showing by the other members will be beneficial.

The SBA 504 loan programs require a large amount of documentation, so skirting the bad credit issue will be nearly impossible. Today's economy also makes it harder to qualify for any type of loan with bad credit.

There are many banks that specialize in lending to those with bad credit, or are willing to take risks with them. It is best to shop around to see what the various rates or additional fees that may be associated with having bad credit are. Some may require additional co-signers or upfront collateral to ensure that the loan will be covered if it goes into default.

The bank issuing the loan is the one with the final decision on whether or not the borrower is good risk. The SBA loan program partners with lenders and CDC offices, who review the applications and interviewing the borrowers. By providing detailed information about why the 504 loan will result in success, the chances are better for receiving. Don't be discouraged is one declines the loan, there may be another lender willing to take the chance.