Like with car loans, mortgages and credit cards, applying for a business loan requires a credit check. Lenders want to see that you’re financially responsible before taking on the risk of letting you borrow cash. If you have fair, or average, credit, getting approved for an affordable loan is difficult, but there are alternative funding methods to help people with fair credit get business financing.
As a business owner, you have two types of credit: personal and business.
If you’re just starting a company and are applying for your first loan, you likely won’t have business credit yet. In this case, a lender could check your personal FICO score to determine whether you’re eligible for the business loan, but not all lenders will do this. For access to all types of business financing options, you’ll need a business credit score.
If your business is established and you’ve had previous business loans and credit cards, your business has credit. Like your personal credit score, a business credit score represents your company’s credit worthiness.
The Paydex score, from Dun & Bradstreet Credibility Corp., is the most common business credit scoring method and runs on a scale from 0 to 100. It measures how diligently you make loan payments and how much of a risk you pose to lenders. A score of 80 to 100 is considered good, a score in the 50 to 79 range is fair, and anything under 49 is bad.
Whether it’s a personal credit score or a business one, your credit will determine whether you’re approved for the loan and the interest rate you’ll pay. Generally, the higher your credit score, the lower your interest rate. If you have a fair credit score or lower, you’ll likely have to pay a higher interest rate.
Traditional business loans come from banks and credit unions and are backed by the U.S. Small Business Administration. But if you’re denied a business loan from these institutions, there are other ways to get funding, even with fair credit.
- Merchant cash advance (MCA): This option gives you access to quick capital if you pledge a portion of your future credit and debit sales to the lender. MCAs are much more expensive than traditional loans – they can carry the equivalent of a 70% to 350% annual percentage rate (APR).
- Non-profit micro lenders: Organizations such as Accion and the Business Center for New Americans give small loans to companies that can’t get traditional bank loans.
The Takeaway: A business loan can provide the capital you need to hire employees, create a website, pay rent and market your product or service. But securing funding is one of the most difficult parts of running a business, and it can be especially difficult if you have fair credit. Work on building your business credit score and consider other funding options if you ultimately can’t get a business loan.
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