Your credit is immensely important when you're applying for a small business loan. For the lenders you'll deal with, this factor is one of the primary barometers used to judge your financial standing and loan worthiness. If it appears problematic, your chances of getting a loan will diminish considerably, but may not entirely disappear.
When lenders ask about your credit, what are they looking at?
Many lenders who supply small business loans and franchise financing will look at personal and business credit.
Individual credit in the U.S. is typically measured by your credit score, largely determined by Fair Isaac Corporation (FICO) scoring standards. The FICO score ranges from 300 (the worst credit possible) to 850 (the best). A score of 700 or higher is perfectly respectable, while "bad credit" is considered to be 640 or less.
Business credit is often measured on the Duns & Bradstreet scale of 0 and 100. Good credit on this scale means 75 and up, while 20 and below designates bad credit.
How can you receive loans with bad credit?
Your approval or denial for a franchise loan depends entirely on your lender, but it's a fairly consistent rule of thumb that credit reasonably perceived as "bad" will not appear favorable to many institutions. However, this doesn't mean that you're entirely out of luck in getting a loan.
Certain lending institutions may offer specific loans intended for businesses with bad credit. If you meet certain standards, you might also be eligible for loans backed by the Small Business Administration (SBA) that favor businesses experiencing rough economic times. When seeking conventional bad credit business loans, be on the lookout for hidden fees or penalties resulting from late payments, and be sure you meet all applicable eligibility requirements.
Collateral, factoring and other solutions
If your business or personal credit are "bad" but not catastrophic by FICO and Duns & Bradstreet terms – for example, a 640 FICO and 50 Duns &Bradstreet score – you might be able to leverage a loan if you have excellent collateral. In this instance, be prepared to put your most valuable business and personal assets up for collateral, including property and liquid assets.
You might also be able to borrow money against the value of either your accounts receivable or stocks and bonds through factoring and stock-secured loans, respectively. For the former, your receivables must be quite valuable, while the latter requires adhering to regulations established by the Federal Deposit Insurance Corporation (FDIC).