Every year, an average of 1.5 million people file for bankruptcy in the US alone. Bankruptcy severely hinders finding employment, even after the bankruptcy period is over.
However, many people look at a small business or personal venture to make a fresh start. In such a case, bad credit business loans can be advantageous. Banks levy certain conditions and accept collaterals as a way to allow a person to secure loans.
Read on for more on the different bad credit business loans offered by banks.
Collateralised Loans
Suppose a person obtains a bad credit business loan with collateral. If the individual fails to repay the loan, they allow the lender the right to seize the collateral to offset their losses. These are also referred to as secured business loans.
Merchant Cash Advance
Typically, they are backed by invoice or equipment financing. If a small business owner requires quick capital, a merchant cash advance offers a lump sum loan for a share of future credit and debit card receivables.
While a merchant cash advance is often simple to obtain, it may not suit every company. Merchant cash advances usually have higher interest rates, making them one of the more expensive financing options throughout the loan term.
Short-Term Small Business Loan
A short-term small business loan provides a lump sum of cash that the borrower agrees to return over a specific time period on a predetermined payment schedule. Every payment made by the borrower to the lender includes the principal amount and any interest due for the period.
Short-Term Business Line of Credit
When a lender issues a short-term business line of credit, the borrower has ongoing access to funds up to a specified approved amount. Like a credit card, the borrower is charged interest on the available balance.
Working Capital Loans
Working capital loans are used to fund day-to-day business operations such as wages, inventory, taxes, and other expenses that keep the company operational. They are not used to fund investments or other long-term assets, as are other types of loans.
How to Improve Chances of Obtaining a Bad Credit Business Loan
Obtaining a company loan with poor credit is a complex undertaking. There are, however, two ways to establish that an individual still has a chance of receiving one.
Co-signing
In this case, another individual agrees to take on some of the risks of a small business loan by “co-signing” the deal. A co-signer is often someone with a good credit score or a stable source of income who can make loan payments if the principal borrower is unable to.
Providing Collateral
Providing collateral is one approach for increasing the likelihood of acquiring the funds required to start a business. There are two options:
- With invoice financing, unpaid invoices act as security for the loan. The finance company advances a percentage of each invoice and charges a service fee.
- If the goal of the loan is to obtain financing for new equipment, look into equipment financing. The equipment is regarded as collateral for the loan and may be confiscated in the event of a default.
As stated through this article, acquiring business loans on bad credit is not entirely impossible. Bad credit business loans are a blessing in disguise. It allows a person to improve their prospects by attempting to change their lives for the better.
Author Name: Hannah Gilbert