The conflicts between lending institutions and small businesses are not novel when it comes to borrowing money. Small business firms are, in particular, forced to jump through hoops and, despite that, fail to get financial support. The post-pandemic lending firms raised the bar for entrepreneurs with bad credit scores. Ever since, according to a survey by the Federation of Small Businesses, the approved applications have hit a record low.

One of the most common reasons for lenders to withdraw from being involved in lending to small businesses is that most of them plan to sell, wind down, and downsize in years to come. In addition, 60% of them struggle to get their invoices cleared and struggle with payments.

While borrowing money as a start-up, you are to ensure that your business plan is extremely efficacious. Despite excellent offerings, lenders cannot be completely confident of your repaying capacity, and a poor credit score intensifies their doubts. Does that mean you cannot qualify for a business loan just because your credit report is not up to scratch? It is not so.

How to improve your chances of getting approval for bad credit business loans

With the following tips you can improve your chances of getting the nod for a bad credit business loan:

Decide why you need funds

Your credit score is not the be-all and end-all when it comes to deciding on whether or not to sign off on you. This three-digit number just indicates your past payment behaviour but cannot project your future repaying capability.

Therefore, lenders would like to see how the loan will impact your business's ability to earn revenues. This is especially true for small businesses and start-ups with bad credit scores. Here are the questions you should ask yourself before taking out bad credit business loans:

  • Do you think the funds will increase the efficiency of your business? It is a good sign if it helps increase production and sales.
  • Is there a way to continue operations without a hitch after securing a loan?
  • Will you be able to keep up with payments for all unexpected scenarios?
  • Is it possible to seek other, more affordable alternatives?

Check your eligibility

Undoubtedly, bad credit scores negatively impact your borrowing potential, but that is not the only factor lenders will consider. Even though a lender accepts applications from bad credit borrowers, it does not mean that there is no possibility of being turned down.

  • First off, you should see what score a lender is the bare minimum for a lender to accept your application. Find out your score, and then see if you can apply to that lender. Credit score requirements can be found on the websites of lenders. If not, contact them and ask them about it straight away.
  • Check your personal credit score. Self-employed will need it to get the green light for these loans. Personal credit scores serve as the basis for those who are start-ups.
  • Lenders will show their interest in knowing your business credit score if it is at least a year old. Try to maintain it at 60, even if your credit rating is poor.
  • If you have been operating your business for a long time, odds are you will get the nod. A long business history implies that you will not shut down in the coming years.
  • Annual revenue is another crucial thing to look at. Some lenders already specify how much revenue you must be making. Lenders particularly want to see whether you will be able to pay back the debt. If you are a start-up, lenders want to know a backup plan in case your business fails to generate enough revenue.
  • Cash flow and revenues are two different aspects of the same spectrum. Payments are to be made every month, so your cash flow should be smooth enough.
  • Current debt conditions can affect your borrowing capacity. A high debt-to-income ratio will call your credibility into question. Chances are bleak for start-ups.

Write a concise business plan

A business plan is a formal document to be presented by start-up companies that outlines your business goals and how you will achieve them. Here is what your business plan should look like:

  • Describe your offerings and how they can benefit your customers. Disclose how your product or service is better than your competitors and how it will hook your audience to increase sales.
  • Let lenders know about your target audience and how you will reach out to them.
  • Discuss marketing strategies you will use to sell your products or services. Provide your marketing budget details, too. Lenders want to see how you will push the envelope to achieve your goals, so reflect your creativity.
  • Let your lenders know how you will make money and how you will utilise revenues for the growth of your business.

Consult a professional

Business loans could be long term loans for bad credit, so before using these loans, you should consult a professional. Of late, the Federation of Small Businesses has received a barrage of complaints from small entrepreneurs about harsh banking practices. Most of the banks are laying too much emphasis on personal guarantees.

These personal guarantees are putting the personal assets of owners, including their homes, at risk even if their businesses have limited liability. Such practices are deterring entrepreneurs from borrowing money for the growth of their businesses.

A hasty decision can throw you into the deep end of the water, so it is advisable to consult a professional. They will assess your financial condition and your purpose of borrowing money. This will help them understand if it is the right time for you to apply for a business loan.

Instead of directly applying to a lender for these loans, you should consult a whole market broker. As they have a large panel of lenders, they will introduce you to the one that thinks of you as a suitable borrower.

Further, lenders are more lenient than banks. No personal guarantee is sought, especially if your business has a limited liability. As far as it is about the self-employed, they may have a few other alternatives that you can choose.

The bottom line

The current market trends suggest that financial institutions have raised the drawbridge for small entrepreneurs to qualify for business loans. As lenders are unable to trust your repaying capacity, they are seeking personal guarantees, putting your personal assets at stake.

Well, nonetheless, you can qualify for a business loan despite a bad credit score. Make sure your personal and business credit reports are not abysmal. You should carefully assess your repaying capacity and have a solid business plan.

If you have been intending to apply for a business loan, you should always try to ameliorate your credit score status. The higher your credit score, the higher the approval rate. Combining it with other factors, if your overall situation sounds good, your lender will charge lower interest rates.